Testing Assets Not a Business Benefit: ITAT Deletes Section 28(iv) Addition
The Issue
Whether high-value equipment (₹3.86 crores) received free of cost from a foreign parent company (AE) solely for testing and calibration of software—and which is subsequently returned or destroyed—can be taxed as a “business benefit” under Section 28(iv).
The Decision
Not a Permanent Benefit: The Tribunal held that a “benefit” under Section 28(iv) must be irretrievable and intended to circumvent income. Since the assets were prototypes provided temporarily for testing and then returned/destroyed, the assessee did not receive any enduring commercial advantage.
No Nexus with Price: The Assessing Officer’s attempt to tax a 12% “markup” as an indirect reimbursement was rejected. If any benefit existed, it should have been addressed through Transfer Pricing (TP) adjustments, not Section 28(iv). Since the software service pricing was already settled via the Mutual Agreement Procedure (MAP), no further addition was permissible.
Outcome: The entire addition was deleted. In favour of assessee.
Transfer Pricing (TP) Rulings: Refining the Comparability Filters
The Tribunal also passed several critical directions regarding the selection of “comparable” companies for a captive software service provider:
| Filter Type | Tribunal’s Ruling | Impact |
| Related Party Transaction (RPT) | Companies with RPT exceeding 25% must be excluded. A company at 25.37% was ordered to be removed. | Matter Remanded |
| Turnover Filter | Companies with turnover 22 to 37 times higher than the assessee (and having high brand value) are not comparable to small/captive service providers. | In favour of assessee |
| Functional Similarity | Companies involved in R&D, onsite operations, or selling “products/platforms” (e.g., Persistent Systems) cannot be compared to pure “service” providers. | In favour of assessee |
| Operating Cost Treatment | Provision for Bad & Doubtful Debts arising from normal sales cycles must be treated as an Operating Cost when calculating margins. | In favour of assessee |
Key Takeaways for Software Firms
Documentation is Shield: Ensure your records clearly state that hardware received from AEs is for “Testing/Calibration” only. Maintain Return/Destruction Certificates to prove you haven’t retained the asset.
TP Filter Precision: The 25% RPT filter is strict. Even a fractional excess (like 25.37%) is sufficient grounds for excluding a company from your benchmarking set.
Bad Debt Treatment: Treating bad debt provisions as “Operating” usually lowers the profit margin of comparables, helping taxpayers justify their own margins in TP audits.
IN THE ITAT BANGALORE BENCH ‘C’
AMD India (P.) Ltd.
v.
Deputy Commissioner of Income-tax*
Prashant Maharishi, Vice President
and SOUNDARARAJAN K., Judicial Member
and SOUNDARARAJAN K., Judicial Member
IT (TP) Appeal Nos.1859 and 2032 (Bang) of 2024
[Assessment years 2013-14]
[Assessment years 2013-14]
DECEMBER 11, 2025
Padam Chand Khincha, CA for the Appellant. Shashi Saklani, CIT (DR) for the Respondent.
ORDER
Prashant Maharishi, Vice President.- IT(TP)A No.1859/Bang/2024 is filed by AMD India Private Ltd. (the assessee/appellant) for the assessment year 2013-14 against the appellate order passed by the CIT(Appeals), Bengaluru-12 [ld. CIT(A)] dated 31.7.2024 [ld. CIT(A)]wherein the appeal filed by the assessee against the assessment order passed u/s. 143(3) r.w.s. 144C of the Income-tax Act, 1961 [the Act] dated 3.1.2016 by the DCIT, Circle 1(1)(1), Bangalore was partly allowed.
2. We also find that the Revenue is also aggrieved with the appellate order wherein it challenges the deletion of the Transfer pricing adjustment in IT(TP)A No.2032/Bang/2024 has raised the following grounds:-
| “1. | Whether in the facts and circumstances of the case, the Id. CIT(A) is right in law in restricting the addition to 12% of total addition made u/s. 28(iv) of the Income Tax Act by applying the mark-up on impugned assets received free of cost by assessee from its AEs. |
| 2) | Whether the CIT (A) is correct in adopting an overly narrow interpretation of functional similarity by excluding companies that are reasonably comparable in terms of primary business functions. It is a well-established principle in transfer pricing that the comparables should reflect similar core business functions, even if there are minor variations or ancillary services. |
| 3) | Whether the exclusion of comparables such as ICRA Techno Analytics Limited, 1ST Infotech Limited, Tech Mahindra Limited and Persistent Systems Limited on the grounds of functional dissimilarity does not adequately consider the fact that these companies’ core operations involve software development services, which is the primary function of AMD India. |
| 4) | Whether the CIT (A) is correct in excluding companies such as 1CRA Techno Analytics Limited and Tech Mahindra Limited based on the fact that they operated In multiple segments. The core activities of these companies, including software development, are highly comparable to the tested entity (AMD India), and the presence of additional segments should not lead to automatic exclusion. |
| 5) | Whether the CIT (A) is correct in demanding comparability standards that may itself defeat the purpose of law relating to determination of ALP under the income tax Act. |
| 6) | Whether the CIT (A) is correct in imposing conditions is beyond the scope of law and business reality by rejecting all close comparables on one or the other ground, without appreciating that not two companies can ever be same. |
| 7) | Whether the CIT (A) is correct in trying to find out exact replica of the assessee for determining the Arm’s length price based on such replica, even when the law and the international jurisprudence itself recognize that there cannot be an exact comparable to a given situation, especially with TNMM as the most appropriate method. |
| 8) | Whether the CIT (A) is correct in not following the decision of ITAT, Bangalore rendered in the case of M/s Societe Generale Global Solution Centre Pvt Ltd. in IT (TP) A No. 1188/BANG/2011 and M/s. Vmoksha Technologies Pvt. Ltd. in IT (7?) A No. 595/BANG/2013 dated 26.08.2016 for AY 2005-06 where the Tribunal has held that turnover is not a relevant criteria for deciding the comparability. |
| 9) | Whether the CIT (A) is correct in holding that there exists a corelation between turnover and operating margin of an entity. |
| 10) | Whether the transfer pricing guidelines do not mandate the exclusion of comparables purely based on turnover differences unless the turnover has a direct impact on profitability (e.g., economies of scale). In the case of Mindtree Limited, no evidence has been provided to suggest that turnover affects its software development margins to the extent that it becomes incomparable with AMD India. |
| 11) | Whether the CIT (A) is correct in classifying the provisions for bad and doubtful debts was wrongly classified as an operating expense for the purpose of determining the Profit Level Indicator (PLI) under transfer pricing rules, when such provisions are contingent liabilities arising from financial risk rather than routine operational activities? |
| 12) | Whether the CIT (A) is correct in the inclusion of provisions for bad and doubtful debts as operating expenses distorts the comparability analysis in determining the Arm’s Length Price (ALP) under Section 92CA of the Income Tax Act, given that these provisions reflect financial risks rather than core business operations? |
| 13) | Whether the decision of the CIT (A) to treat provisions for bad debts as operating expenses is consistent with global accounting practices and judicial precedents in transfer pricing cases, where such provisions are typically classified as non-operating expenses? |
| 14) | Whether the CIT (A) is correct in treating provisions for bad and doubtful debts as operating expenses without making corresponding adjustments for financial risks, particularly when the taxpayer (AMD India) operates as a cost-plus entity and is not exposed to significant financial risks from bad debts? |
| 15) | Whether depreciation, being a legitimate operating expense that reflects the usage and wear of business assets, should be included in the Profit Level Indicator (PLI) when determining the Arm’s Length Price (ALP) under Section 92CA of the Income Tax Act? |
| 16) | Whether the exclusion of depreciation from the Profit Level Indicator (PLI) in transfer pricing analyses distorts the comparability between companies by ignoring the cost of capital investment required for business operations? |
| 17) | Whether depreciation, as a non-cash expense, is integral to the operating costs of a business, and therefore must be considered in the computation of the PLI, in line with global accounting standards and the principles of transfer pricing? |
| 18) | The Appellant craves to add, alter, delete, modify or withdraw any of the above grounds of appeal.” |
3. The assessee is in appeal raising the following grounds of appeal :-
“GENERAL GROUND
| 1. | The Order passed by learned Commissioner of Income Tax (Appeals), Bangalore – 12 (hereinafter referred as “CIT(A)” for brevity) to the extent prejudicial to Appellant is bad in law and liable to be quashed. |
GROUNDS RELATING TO TP ADJUSTMENT IN SOFTWARE DEVELOPMENT SEGMENT
| 2. | The learned CIT(A) has erred in not adjudicating the inclusion of following comparables for the software development segment: |
| (i) | Akshay Software Technologies Ltd. |
| (ii) | Sasken Communication Ltd. |
| (iii) | Cigniti Technologies Ltd |
| (iv) | Evoke Technologies Pvt Ltd. |
| (v) | Celstream Technologies Pvt Ltd. |
| (vi) | CTIL Ltd. |
| (vii) | E-zest Solutions Ltd. |
| (viii) | Harbinger Systems Pvt Ltd. |
| (ix) | Sankhya Infotech Ltd. |
GROUND RELATING TO TP ADJUSTMENT IN MARKETING SUPPORT SERVICES SEGMENT
| 3. | The learned CIT(A) has erred in not adjudicating inclusion of following comparables for the sales and marketing segment: |
| (i) | ICRA Management Consulting Services Ltd. |
| (ii) | Spectrum Business Solution Ltd. |
GROUND RELATING TO FIXED ASSET RECEIVED FREE OF COST
| 4. | The learned CIT(A) has erred in: |
| (i) | Directing the AO to make addition of 12% on the value of asset received free of cost from AMD Inc, USA for testing purposes u/s 28(iv) of the Act on the ground that it is benefit received by the Appellant; |
| (ii) | Not appreciating that the assets received are for testing purposes and the Appellant has no ownership over the assets and the Appellant has not received any benefit that is taxable u/s 28(iv) of the Act; and |
| (iii) | Not appreciating that if the assets were purchased by the Appellant, then only depreciation on such assets would form part of the operating cost for purpose of ALP mark-up and not the entire cost of fixed assets. |
The Appellant submits that each of the above grounds/ sub-grounds are independent and without prejudice to one another.
The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Income-tax Appellate Tribunal to decide the appeal according to law.”
4. The only grievance is with respect to the taxation u/s. 28(iv) of the Act on the assets received free of cost from AMD Inc. USA for testing purposes and issues on transfer pricing adjustments.
5. Briefly stated the facts show that assessee is engaged in the business of providing Software Development Services in connection with design of semi-conductor products and application solutions to its Associated Enterprise [AE]. It is also engaged in providing marketing support services to its AE. The assessee provides such services and remunerated on cost plus basis. The assessee company filed its return of income on 22.11.2023 at a total income of Rs.22,88,94,050. The return was picked up for scrutiny. The assessee has entered into international transaction as per Form 3CEB and therefore reference was made to the ld. TPO for determination of the ALP. The assessee has Software Development Services revenue of Rs.158,98,14,128 and marketing support services of Rs.30,59,28,640. The assessee benchmarked the above transaction computing the margin of the assessee in Software Development Services at 11.98% and marketing support services at 10%. The assessee selected TNMM as the most appropriate method choosing a set of 6 comparables for Software Development Services activity and 4 comparables in marketing support services segment. As the margin of the assessee is comparable with the set of comparables, in the TP Study Report the assessee submits that it is at arm’s length. The ld. TPO examined the TPSR and issued a show cause notice in respect of Software Development Services segment objecting to the filters adopted by the assessee. Subsequently the ld. TPO carried out a fresh search, applied different filters and reached at a set of 7 comparables. The assessee objected to them and ultimately 7 set of comparables were arrived at having average margin of 20.90%. The working capital adjustment was also granted at 1.86% and adjusted margin was derived at 19.04%. Accordingly a shortfall adjustment was worked out at Rs.10,26,57,682.
6. In the case of marketing support services, the ld. TPO rejected 4 comparables selected by the assessee and after the objection of the assessee, reached at a set of 6 comparables whose margin was 11.87% and consequently shortfall was determined at Rs.1,46,40,497. Thus, the order u/s. 92CA of the Act was passed on 24.10.2016 determining the total ALP adjustment of Rs.11,72,98,179. Consequently the assessment order incorporated the same.
7. The ld. AO further noted that as per footnote to item 2.21 to the financial statement, the assessee has received goods worth Rs.3,86,66,110 free of cost from Advanced Micro Devices Inc., being holding company of the assessee. Therefore the ld. AO questioned that why the above amount should not be taxed as income. The assessee submitted that this free of cost assets are received in the nature of equipments to be used for the purpose of testing the software. These have been received at Rs.Nil. No depreciation is claimed and the value is merely adopted for the custom authority valuation for import of the goods. On completion of the testing, these equipments are either sold or re-exported. The assessee has not received any benefit which could be taxed. The ld. AO invoked the provisions of section 28(iv) of the Act and held that the assessee has received the benefit in the nature of receipt of assets free of cost and hence the same is chargeable to tax u/s. 28(iv) of the Act based on the decision of the Hon’ble Madras High Court in the case of CIT v. Ramaniyam Homes (P.) Ltd. ITR 530 (Mad). Accordingly the assessment order was passed u/s. 143(3) r.w.s. 144C of the Act on 3.12.2017 determining the total income of the assessee at Rs.38,48,58,339.
8. The assessee aggrieved with the assessment order preferred an appeal before the ld. CIT(A) wherein the assessee challenged the comparables which are excluded by the ld. TPO in the case of Software Development Services. Further in marketing support services also the assessee succeeded. However, with respect to taxability of fixed assets received free of cost, the ld. CIT(A) confirmed the reimbursement with mark-up of 12% and not the value of the asset received free of cost. He directed the ld. AO to restrict the addition to the extent of 12% of Rs.3.86 crores. Therefore the appellate order passed on 31.7.2024 is challenged before us.
9. The ld. AR, Shri Padam Chand Khincha, CA, submitted the order giving effect to the appellate order of the ld CIT (A) dated 5.3.2025 wherein the TP adjustment was reduced to Nil. Thus he submitted that the only issue that survives in assessee’s appeal is with respect to the addition of 12% retained by the ld. CIT(A) while deleting the adjustment of Rs.3,86,66,110.
10. With respect to the appeal of the assessee, the ld. AR submitted that the addition made by the ld. AO is towards capital asset received by the assessee free of cost from its AE for testing purposes. These machines are required to be returned for their use and further there is no benefit derived by the assessee. He submits that had the AE not provided the assets free of cost to the assessee, the assessee would have purchased the same from the AE and subsequently claimed reimbursement with a mark-up of 12%. The finding of the ld. CIT(A) is to hold that 12% of the same is required to be added as income of the assessee. The assessee does not have any ownership of the asset, these assets are received only for testing purposes and the value is determined only for customs purposes. He submits that there is no question of adjudicating the mark-up of 12% thereon. He relied on the several judicial precedents of the coordinate Benches along with the decision of Hon’ble Karnataka High Court in the case of Pr. CIT v. Sony India Software Centre (P.) Ltd (Kar)/ITA No.129 of 2015 wherein in para 16 the Hon’ble High Court upheld the order of the coordinate Bench.
11. With respect to the appeal of the Revenue, he submits that exclusion of comparables such as Persistent Systems Ltd., L&T Infotech Ltd. and Mindtree Ltd. are because of the reason that they have huge turnover compared with the Software Development Services activities of the assessee. Even otherwise, all these 3 companies have huge brand value and also some of them have products and also functionally different. With respect to the challenge to ground Nos.11 to 14, he submitted that the ld. CIT(A) has correctly held that provision of doubtful debts is operating expenditure in nature and therefore there cannot be any issue on the same.
12. With respect to the interest on overdue receivable, he submits that no separate adjustment can be made in the hands of the assessee as working capital adjustment has been granted by the ld. TPO and it is subsumed in the TNMM and no addition could have been made on that basis. Thus he submitted that the appeal of the assessee to the extent of deletion of 12% margin on free cost of assets deserves to be allowed as well as the appeal of the AO deserves to be dismissed.
13. The ld. CIT(DR), Shri Shashi Saklani, vehemently supported the order of the ld. AO. He submitted that the upper turnover filter is rightly rejected for the reason that higher turnover does not have any impact on the margin in the software industry. He further submitted that as the assessee has received assets free of cost, the whole of the assets is the benefit received by the assessee from its holding company and therefore same is correctly charged to tax u/s. 28(iv) of the Act. He accordingly submitted that the appeal of the assessee deserves to be dismissed and appeal of the AO should be allowed.
14. We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. Firstly coming to the appeal of the assessee where the only challenge pressed before us is with respect to addition made by the ld. CIT(A) to the extent of 12% of the free of cost equipment received. Briefly stated the facts show that assessee has received the fixed assets amounting to Rs.3,86,66,110 of the custom value from its holding company. These products were provided by the holding company to the assessee for testing purposes. The value was also derived for the purpose of import duty payable thereon. The ld. AO has considered the same as benefit received. According to the provisions of section 28(iv) of the Act, the above amount was taxed by the AO. However, we find that in the case of Sony India Software Centre (P.) Ltd (supra) identical issue was decided by coordinate bench wherein following the decision of the coordinate Bench in the case of Tesco Bengaluru (P) Ltd v. JCIT [IT Appeal No. 2387 (Bang) of 2019, dated 4-8-2022] identical addition was deleted. The above decision of the coordinate Benches was challenged before the Hon’ble Karnataka High Court, the above decision is upheld. Further the decision relied up on by the ld AO Commissioner v. Mahindra And Mahindra Ltd. ITR 1/302 CTR 213 (SC)[24-04-2018] is reversed by the Honourable supreme court in above stated decision. Therefore, this issue is squarely covered in favour of the assessee and we hold the ld. AO is not correct in making addition of Rs.3,86,66,110. Further the ld. CIT(A) has imputed the cost of 12% on the above sum and retained the addition to that extent. We find that when the original addition is not found to be of any benefit chargeable to tax, the consequent mark-up thereon also could not have been charged to tax in this case. Accordingly we find that the ld. CIT(A) is not correct in directing the AO to restrict the addition of 12% of Rs.3.87 crores. Accordingly the ground No.4 of the appeal of the assessee is allowed and ground No.1 of the appeal of the AO is dismissed.
15. Now we come to the appeal of the ld. AO wherein the challenge is to the exclusion of ICRA Techno Analytics Ltd., L&T Infotech Ltd., Tech Mahindra Ltd. and Persistent Systems Ltd.
16. We find that ICRA Techno Analytics Ltd has RPT ratio of 25.37% as submitted by the ld. AR. The assessee has submitted the working at page 379 to 380 of the PB. The assessee has also challenged the same that company is engaged in Software Development Services which are functionally different. The ld. CIT(A) has categorically held that it is functionally different than the case of GXS India Technology Centre P. Ltd., however we restore the whole issue back to the ld. AO/TPO to examine that if it fails the RPT filter of 25% where it is stated that related party transactions are 25.37%, then there is no need to examine the functionality of this comparable. The ld. AO/TPO may verify the RPT percentage and if it exceeds 25% filter, this deserves to be excluded.
17. Further coming to L&T Infotech ld., we find that the turnover of this company is Rs.3613 crores whereas the turnover of the assessee in Software Development Services segment is 158 crores. Therefore the turnover of the comparable company is 22 times higher than the assessee company. Similarly the turnover of Tech Mahindra Ltd. is 6001 crores being 37 times of the turnover of the assessee. Therefore we find that both these comparables are different in size and have huge brand value and hence they are not comparable with the captive service provider like the assessee. The ld. TPO has been rightly directed to exclude these by the ld. CIT(A).
18. With respect to Mindtree Ltd., the turnover of the segment of that comparable is Rs.1640 crores and for similar reasons, the ld. CIT(A) has correctly directed to be excluded.
19. The ld. CIT(A) has also excluded Persistent Systems Ltd. where the turnover of the that company is Rs. 996 crores, however the turnover is comparable, but it was sated that the company is engaged in 3 different business lines, such as product engineering services, platform solution and IT related business. It is also incurred R&D expenditure and it has substantial onsite operations. We find that the ld. TPO has rejected the same stating that the R&D activity in software development does not create any intangible. We do not find the same backed up with any empirical study. There is basic different between R&D expenditure incurred by the assessee to the core business of software development. Higher the R&D activity in software development, the higher capability of earning profit is possible. Further the ld. TPO himself has stated that this company has developed certain applications which relate to the group as a whole. Accordingly we find that this company could not be said to be comparable with the assessee company. The ld. CIT(A) though as excluded the above company on the basis of certain decisions, but however, we find that this company is not functionally comparable due to the above facts and hence correctly excluded by the ld. CIT(A).
20. Accordingly ground Nos.2 to 10 of the appeal of the ld. AO are dismissed.
21. Ground Nos.11 to 14 are with respect to the computation of margin with respect to CG Vak Software & Exports Ltd. directing the TPO to recompute the margin of the said company treating the provision for bad & doubtful debts as part of the operating expenses. The ld. AO is aggrieved with the same. Though we find that bad & doubtful debts arises out of the sales cycle and therefore these are normal provisions which are required to be considered as operating cost. It is not the claim of the AO that provision of doubtful debts raised by the comparable company was not based on data but is hypothetical or unsupported. No such findings are given and therefore we do not find any infirmity in the order of the ld. CIT(A). Thus ground Nos.11 to 14 are dismissed.
22. No other grounds are pressed before us by both the parties.
23. In the result, the appeal filed by the assessee is partly allowed and the appeal filed by the ld. AO is dismissed.