The Income Tax Appellate Tribunal ( ITAT ), Bangalore in a recent matter held that no addition may be made by an Assessing Officer ( AO ) under Section 28(iv) of the Income Tax Act, 1961 in the event that imported assets were provided to the Assessee free of cost, exclusively for the purpose of testing which were either returned or destroyed post-testing, and where the pricing of the assets were determined by means of the Mutual Agreement Procedure ( MAP ).
The Income Tax Appeal was filed by Samsung R&D Institute India (Samsung) against the order of the Commissioner of Income Tax (Appeals)-10 Bangalore ( CIT(A) ) with regards to the financials of the Assessee for the Assessment Year (A.Y.) 2015-16.
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The Appellant-Assessee is a wholly owned subsidiary of Samsung Electronics Company Ltd. ( SECL ), Korea, and provides software development services to its parent company and allied entities. The Assessee provides services to SECL on the specific requirements raised by them and is compensated on a cost plus mark up basis for the same.
Samsung filed their returns of income for A.Y. 2015-16 declaring a total income of Rs. 238,85,10,090. The AO made a reference to the Transfer Pricing Officer ( TPO ) to determine the Arm’s Length Pricing (ALP) of the international transactions between the Assessee and its allied entities.
TPO order proposed a Transfer Pricing adjustment of of Rs. 1,86,94,215/- towards software development services rendered by the assessee, which was taken into consideration by the AO while making disallowance of Rs. 18,20,990/- under section 40(a)(i) of the Income Tax Act, 1961, citing that Assessee failed to deduct Tax Deducted at Source ( TDS ) on the “purchase of software”.
Furthermore, the AO made an addition of Rs. 7,37,33,056/- u/s. 28(iv) towards equipment given by the allied entities to the Assessee, free of cost, for the purpose of software development and testing.
The two-member Bench of the Bangalore ITAT presided over by Vice President George George K., and Accountant Member Padmavathy S., referred to Section 28(iv) of the Income Tax Act, 1961 to observe that the value of a rendered benefit should be irretrievable and that the benefit is received with an intention to circumvent income.
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Here, it is an indisputable fact that the equipment received free of cost by the Assessee are either returned or destroyed once the testing is completed, hence not rendering any commercial benefit to the Assessee. Observing that the Assessee is involved in rendering services to its allied entities only, and that the ALP has already been resolved through MAP by the competent authorities of India and Korea; any indirect benefits would have been considered while adjusting the Margin for pricing.
In light of the observations, the Tribunal held that there is no justification deduced by the Revenue in maintaining that cost paid towards import of the test assets would result in increased income to the Assessee, warranting addition under Section 28(iv) of the Act.
Citing such observations, the Bench proceeded to allow Samsung’s appeal while dismissing the cross-appeal by the Revenue.
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