The question of the applicability of Chapter X (âtransfer pricing provisionsâ) of the Income Tax Act 1961 (âInformation Technology Actâ) in relation to the issue of shares had arisen in the past and in the Vodafone stop [See Endnote 1], the transfer pricing provisions have been held to come into force only when income is subject to tax under other provisions of the Information Technology Act. In this context, the question of whether the transfer pricing provisions (“TP”) apply when depreciable fixed assets are purchased from associated enterprises (“AE”) is a question to be answered by specific way. Likewise, one must also answer the question of whether the arm’s length price (âALPâ) should be calculated for each purchase of depreciable capital assets between EA on the basis of the facts.
Why this question?
Suppose an Indian company (“I. Co.”) purchases depreciable fixed assets from its AE being a foreign company (“F. Co.”) for 100,000 / -, I. Co. as appraised is- she has to calculate the ALP for this operation? It’s a well-established law [See Endnote 2] that, in its normal sense, the term âincomeâ will not include capital receipts, except as specified in Article 2 (24) of the Information Technology Law. Neither article 2 (24) (vi) read with article 45 nor clauses (vii), (ix) and (x) of paragraph (2) of article 56 define the purchase of fixed assets. depreciable as income. Such a question therefore arises.
Case law relating to such a situation
The ITAT judgment in the Honda Motorcycles & Scooters India (P) Ltd v. ACIT, Circle-1 (1), Gurgaon [See Endnote 3] (“Honda Motorcycle case ‘) has addressed the above question. This judgment ruled that:
- According to the explanation of subsection (2) of Article 92B, a purchase transaction of fixed assets is also an international transaction.
- Since Article 92 is not a tax section but a procedural provision for recalculating income, there must be some taxable income before applying the TP provisions.
- If it is an international transaction in the area of ââthe capital that does not give rise to any income per se, no adjustment can be made for the difference between the declared value and the ALP of this international transaction.
- Calculation of ALP is necessary due to the impact of such a transaction on the income branches, i.e. the depreciation expense that goes into the income calculation. In such cases, depreciation should be based on the ALP of those assets.
Does this mean that all fixed asset purchase transactions require an ALP calculation?
Case law on this issue has not yet evolved. The answer to this question is also very fact-specific. In the case of a block of assets, article 32 allows the deduction of depreciation on the depreciated value, which is defined in article 43 (6) with reference to the actual cost of the assets as defined by the Article 43 (1). An analysis of Article 43 (1) will reveal that in specific cases the explanations provide a presumed fiction to consider that the real cost is something other than the âreal costâ. The illustrations of such presumed cost are explanations 3, 4A, 6, 7 and so on. It is an established principle of law that an alleged fiction must be interpreted strictly. Therefore, when the actual cost is determined on the basis of a presumption of fiction, the ALP calculation would be irrelevant. The ALP calculation only becomes relevant when the actual cost is determined on the basis of the actual cost for the appraised. This brings us to a few additional questions.
When should the ALP be calculated?
In cases where the ALP calculation becomes relevant, further questions may arise as to whether the ALP calculation should be performed in the same year in which the international transaction is concluded, even though the request depreciation can only occur in subsequent years. It results from a reading of article 92 of the IT law with the Vodafone stop and Honda motorcycle suitcase this recalculation of income against ALP only takes place when there is taxable income under another provision of the Information Technology Act. Since this includes a provision for deductions, the obligation to determine the PMA in the case of the purchase of depreciable capital property only exists when depreciation is claimed. However, this will not relieve the person of their obligation to keep the information as stipulated in Section 92D and the relevant rules of the Income Tax Rules, 1962 because Section 92D obliges a person who enters into a transaction international to retain information with respect to such international transaction.
Should ALP be used to adjust asset values ââor should it be used to adjust depreciation expense? According to Honda motorcycle suitcase, no adjustment can be made for the difference between the declared value and the ALP as an international operation in the area of ââthe capital that does not generate any income in itself. In light of this, it is clear that only the value of the claimed damping charge needs to be adjusted according to the ALP, i.e. the TP adjustment is the difference between the calculated damping on the actual purchase price of the depreciable asset and its ALP.
In cases where the ALP calculation is irrelevant (assumed cost scenarios), what if the depreciable asset thus purchased in the international transaction is sold or transferred subsequently?
For example, when a depreciable asset is transferred between a holding company and its wholly-owned subsidiary, the actual cost in the hands of the transferee company will be considered as the depreciated value of the ceding company immediately before the transfer in terms of explanation. 6 in section 43 (1). As the assignee’s demand for depreciation will not be based on the price at which these assets are purchased from the assignor (AE), the issue of determining the ALP does not arise. In addition, even upon the sale or subsequent transfer of these assets by the transferee, the capital gain will be calculated on the basis of the depreciated value and not on the basis of the purchase price of the assets. Therefore, the requirement to calculate ALP of assets will not arise at this stage either.