2018 (6) TMI 467 - AT - Income Tax

Genuineness of international transaction - Held that - the learned AR did not press the ground challenging the hire purchase transaction treated as bogus - thus we proceed to treat the hire purchase transaction as not genuine. Disallowances of depreciation - Held that - since transaction of hire purchase of Rig was not genuine, as a corollary, no depreciation on Rig could have been allowed - entitlement of the assessee to depreciation on all assets falling within the block, other than the Rig , cannot be marred - thus the matter is set aside and restored to the file of AO for allowing depreciation on other assets of block A except Rig. Determination of Arm s Length Price - Held that - If an international transaction is proved to be not genuine, the transfer pricing provisions are not triggered - once we have treated hire purchase agreement as not genuine, it is but natural that the payment of interest made under such hire purchase agreement, cannot be allowed as deduction - hence the net effect is that neither an income can arise nor any deduction can be allowed on account of such a transaction - AO is directed not to allow the deduction on account of such Loss of Rig Repo in the computation of total income.

Issues Involved:

1. Genuineness of the hire purchase transaction of the drilling Rig.
2. Disallowance of depreciation on the Rig.
3. Transfer pricing adjustments on various international transactions.
4. Disallowance under Section 40(a)(i) of the Income-tax Act.
5. Deduction claimed under 'Loss on Rig Repo'.

Detailed Analysis:

1. Genuineness of the Hire Purchase Transaction:

The Assessing Officer (AO) and Transfer Pricing Officer (TPO) scrutinized the hire purchase transaction of a drilling Rig between the assessee and Mitchell Drilling Operations Pty. Ltd. The AO concluded that the hire purchase agreement was a sham transaction, designed to avoid tax liabilities. The AO's findings were based on the absence of penal clauses and the early repossession of the Rig, indicating a premeditated intention to return the Rig without financial liability. The assessee did not contest this finding, leading to the conclusion that the hire purchase transaction was not genuine.

2. Disallowance of Depreciation on the Rig:

The AO disallowed the depreciation claim of ?17,78,123/- on the Rig, as the transaction was deemed non-genuine. The Tribunal upheld this disallowance but noted that the AO's action resulted in disallowing depreciation on all assets under the 'Plant and Machinery' block. The Tribunal directed the AO to allow depreciation on other assets within this block, excluding the Rig.

3. Transfer Pricing Adjustments:

The TPO determined the arm's length price (ALP) of four international transactions as Nil, leading to a transfer pricing adjustment of ?3,58,67,002/-. The Tribunal addressed each transaction as follows:

- Purchase of Components and Accessories: The assessee did not contest the Nil ALP determination for ?43,015/-, and the Tribunal upheld this addition.

- Payment of Interest under Hire Purchase Agreement: The Tribunal noted that the AO had disallowed ?8,22,096/- twice—once as a transfer pricing adjustment and again under Section 40(a)(i). The Tribunal ordered the deletion of one instance of this amount to avoid double disallowance.

- Payment of Installments of Principal under Hire Purchase Agreement: The Tribunal remitted this issue back to the AO/TPO to verify whether the assessee claimed a deduction of ?47,31,600/-. If no deduction was claimed, the addition should be deleted.

- Repossession of Rig: The Tribunal found that determining the ALP of this transaction at Nil would increase depreciation claims and reduce taxable income, contrary to the purpose of transfer pricing provisions. Thus, the addition of ?3,02,70,291/- was deleted.

4. Disallowance under Section 40(a)(i):

The AO disallowed payments made to the non-resident entity under Section 40(a)(i) for non-deduction of tax at source. The Tribunal did not specifically address this issue separately but acknowledged the AO's action in the context of the overall assessment.

5. Deduction Claimed under 'Loss on Rig Repo':

The Tribunal noted that the assessee claimed a deduction of ?13,86,684/- under 'Loss on Rig Repo' in the profit and loss account. Given the transaction's non-genuine nature, the Tribunal directed the AO to disallow this deduction.

Conclusion:

The Tribunal partly allowed the appeal, upholding some disallowances and directing further verification or deletion of others. The judgment emphasized the importance of genuine transactions and proper application of transfer pricing provisions.

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