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CA Final · Direct Tax Laws & International Taxation · Profits and Gains of Business or Profession

Ruby Gem Traders Ltd validly opted for safe harbour for its raw diamond selling business for the relevant tax year. The WDV of a block of machinery at the start of the year was ₹10,00,000 and depreciation at the applicable rate would be ₹1,50,000. Gross receipts were ₹2,00,00,000 and profit declared is ₹8,00,000. The company also enters into an international transaction with an associated enterprise in the course of this business. Which statement is correct under Rule 100?

The WDV is deemed to be ₹8,50,000, as if depreciation of ₹1,50,000 had been allowed, and no further deduction is permitted. Sections 171 and 172 continue to apply to the international transaction under Rule 100(4), so safe harbour does not exclude transfer pricing provisions.

  1. AWDV is taken as ₹10,00,000 because no depreciation is allowed separately, and transfer pricing provisions are excluded
  2. BWDV is deemed computed as if depreciation of ₹1,50,000 was allowed, giving ₹8,50,000, and sections 171 and 172 still apply to the international transactionCorrect
  3. CWDV is ₹8,50,000 and additional depreciation of ₹1,50,000 is allowed over the declared profit
  4. DWDV is deemed ₹8,50,000 and transfer pricing provisions are excluded because profit meets 4%

Explanation

Rule 100(3)(b) deems WDV calculated as if depreciation for the year was claimed and allowed, so ₹10,00,000 − ₹1,50,000 = ₹8,50,000; 3(a) bars any further deduction. Rule 100(4) keeps sections 171 and 172 applicable to international and specified domestic transactions. Profit of ₹8,00,000 is exactly 4%, which is acceptable.

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