DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1(1)(1), BANGALORE vs. AMD INDIA PRIVATE LIMITED, BANGALORE

1. “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.

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.

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 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. Ramniyam Home Pvt. Ltd., 384 ITR 530. 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.

The assessee aggrieved with the assessment order preferred an appeal before the ld. CIT(A) wherein the assessee challenged the comparables

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.

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 PCIT v. Sony India Software Centre Pvt. Ltd. in of 2015 wherein in para 16 the Hon’ble High Court upheld the order of the coordinate Bench.

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.

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.

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.

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 ACIT v. Sony India Software Centre P. Ltd. identical issue was decided by coordinate bench wherein following the decision of the coordinate Bench in the case of Tesco Bengaluru Pvt. Ltd. in 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 vs. Mahindra And Mahindra Ltd. [2018] 93 taxmann.com 32 (SC)/[2018] 255 Taxman 305 (SC)/[2018] 404 ITR 1 (SC)/[2018] 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.

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.

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.

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).

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.

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

Accordingly ground Nos.2 to 10 of the appeal of the ld. AO are dismissed.

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.

No other grounds are pressed before us by both the parties.

In the result, the appeal filed by the assessee is partly allowed and the appeal filed by the ld. AO is dismissed.