ITAT Bangalore Rules Free Testing Equipment Not Taxable; Deletes 12% Mark-Up and Sustains Comparable Exclusions in AMD India Case

Background of the Dispute

The Income Tax Appellate Tribunal, Bangalore, addressed cross-appeals filed by both AMD India Private Ltd. and the Department of Revenue concerning Assessment Year 2013-14. The appellate order dated 31st July 2024 was challenged by both parties before the Tribunal.

AMD India Private Ltd. operates in the semiconductor industry, providing software development services for semiconductor design and application solutions. Additionally, the entity renders marketing support services to its associated enterprises on a cost-plus reimbursement model.

Scrutiny Assessment and Transfer Pricing Issues

The assessee filed its return declaring total income of Rs.22,88,94,050 on 22nd November 2023. The return was selected for detailed scrutiny proceedings. Since international transactions were reported in Form 3CEB, the case was referred to the Transfer Pricing Officer for determination of Arm's Length Price.

Revenue from International Transactions

The company reported revenue from two distinct segments:

  • Software Development Services: Rs.158,98,14,128
  • Marketing Support Services: Rs.30,59,28,640

The assessee applied the Transactional Net Margin Method (TNMM) as the most appropriate method for benchmarking. For software development activities, six comparables were selected, while four comparables were chosen for marketing support operations. The assessee demonstrated margins of 11.98% in software development and 10% in marketing support services, claiming that these margins satisfied the arm's length standard.

Transfer Pricing Officer's Objections

The Transfer Pricing Officer examined the Transfer Pricing Study Report and raised objections regarding the filters applied by the assessee. Following a fresh search with different criteria, the TPO identified seven comparables for the software development segment, arriving at an average margin of 20.90%. After granting working capital adjustment of 1.86%, the adjusted margin was computed at 19.04%, resulting in a proposed adjustment of Rs.10,26,57,682.

For marketing support services, the TPO rejected the four comparables selected by the assessee and finalized six comparables with an average margin of 11.87%, leading to an adjustment of Rs.1,46,40,497. The total transfer pricing adjustment proposed under Section 92CA amounted to Rs.11,72,98,179.

Addition Under Section 28(iv) for Free-of-Cost Assets

During the assessment proceedings, the Assessing Officer noticed that the assessee had received equipment valued at Rs.3,86,66,110 without any cost from Advanced Micro Devices Inc., its holding company. These assets were imported for testing purposes.

Assessee's Explanation

The assessee clarified that these equipments were:

  • Received for testing software products
  • Not owned by the assessee
  • Valued at nil in the books
  • No depreciation claimed on them
  • Valuation done only for customs import purposes
  • Either sold or re-exported after testing completion

The assessee contended that no taxable benefit was received that could be subjected to taxation.

Assessing Officer's Stand

The Assessing Officer invoked Section 28(iv) of the Income Tax Act 1961 and treated the entire value of Rs.3,86,66,110 as a benefit received from the associated enterprise. Relying on the decision in CIT v. Ramniyam Home Pvt. Ltd., 384 ITR 530, the Assessing Officer brought the full value to tax. The assessment order under Section 143(3) read with Section 144C was completed on 3rd December 2017, determining total income at Rs.38,48,58,339.

First Appellate Proceedings

The assessee challenged the assessment order before the Commissioner (Appeals). The Commissioner granted substantial relief on transfer pricing matters, allowing exclusion of several comparables and reducing the transfer pricing adjustment.

However, regarding the taxation of free-of-cost assets, the Commissioner (Appeals) adopted a middle path. Instead of confirming the addition of the entire value of Rs.3,86,66,110, the Commissioner directed that only a 12% mark-up on the value of these assets should be treated as taxable income. This 12% represented the standard cost-plus margin applied in the assessee's business model.

Proceedings Before the Tribunal

Both the assessee and the Revenue filed appeals before the ITAT Bangalore challenging different aspects of the first appellate order.

Position After Effect Order

The authorized representative for the assessee submitted the order giving effect to the appellate order dated 5th March 2025, demonstrating that the transfer pricing adjustment had been reduced to nil. Consequently, in the assessee's appeal, the sole surviving issue was the deletion of the 12% addition retained by the Commissioner (Appeals) on the free-of-cost assets.

Assessee's Contentions on Section 28(iv) Addition

The assessee's counsel argued that: