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No sec. 28(iv) additions if assets imported for testing were returned or destroyed by assessee: ITAT

Samsung R & D Institute India -Bangalore (P.) Ltd. vs. JCIT - [2024] 168 taxmann.com 106 (Bangalore - Trib.)[22-10-2024]

The assessee was a captive service provider providing software development services to its Associated Enterprises (AEs). For these services, certain articles such as network equipment, printers and accessories, SD cards, and data storage were given to the assessee by its AEs for testing and calibration of software onto actual hardware and to check the compatibility of software modules vis-a-vis existing hardware free of cost since software could not be tested on third-party equipment. Subsequently, these assets were either returned or destroyed.

The Assessing Officer (AO) held that these assets were used for the purpose of the business of the assessee and, thus, the assessee had received benefit in the nature of income arising from its business and made addition under section 28(iv).

On appeal, the CIT(A) upheld the addition made by the AO. Aggrieved by the order, the assessee filed an appeal before the Bangalore Tribunal.

The Tribunal held that it was clear from section 28(iv) that if a benefit in the nature of income is arising from business, the same shall be taxable under the head of profits and gains from business or profession. The test for a benefit to be taxed under section 28(iv) was that the benefit should be irretrievable and that the benefit was received with the intention to circumvent income. For example, if a person is selling a product at a discounted price and is getting a gift or other benefit from the purchaser, then the value of such gift or benefit is to be treated as business income under section 28(iv) since the benefit received has a direct nexus to the discounted price which is shown as the business income. Further, the benefit extended should be irretrievable in nature, i.e. the benefit should be made available to the recipient to be enjoyed/used permanently.

In the instant case, the assessee received certain equipment free of cost for the purpose of testing the compatibility of the software developed by the assessee in that equipment. It was an undisputed fact that this equipment was either returned or destroyed once the testing was completed. Accordingly, there was no dispute that the impugned assets were not made available to the assessee permanently to give any benefit of enduring nature as the assets were either returned or destroyed.

Considering the nature of the asset and the purpose for which it was imported, there was merit in the contention that these assets, in isolation, could not be used for any purpose to derive any benefit since these were testing equipment or prototypes. Further, the assessee was in the business of providing software development services to its AEs only. The arm's length pricing of the said services was tested by the TPO, wherein the cost of indirect benefits received by the assessee should have been embedded. Therefore, it cannot be alleged that the price charged towards the software development services was reduced or adjusted by the assessee against the benefit of assets imported free of cost to justify addition under section 28(iv). Even assuming that there is a nexus between the price charged towards rendering of services and import of assets free of cost, the addition could be done through a TP adjustment towards the price charged for software development and in the assessee's case, the price is already agreed under MAP.

Therefore, the AO was not correct in making an addition under section 28(iv).

CBDT notifies ‘Petroleum and Natural Gas Regulatory Board’ for Sec. 10(46A) exemption

Notification No. 118/2024, dated 12-11-2024

Section 10 of the Income Tax Act, 1961 provides an exclusive list of income which does not form part of the total income of the assessee. Clause 46A of section 10 relates to the exemption with respect to income arising to the notified body, authority, board, trust, or commission, not being a company if such person:

a) Has been established or constituted by or under a Central Act, or State Act with one or more of the following purposes:

• dealing with and satisfying the need for housing accommodation;
• planning, development, or improvement of cities, towns and villages;
• regulating, or regulating and developing, any activity for the benefit of the general public; or
• regulating any matter, for the benefit of general public, arising out of the object for which it has been created; and

b) Is notified by the Central Government.

In this respect, the Central Board of Direct Taxes (CBDT) has notified the "Petroleum and Natural Gas Regulatory Board" for the purposes of section 10(46A). This notification shall be effective from the assessment year 2024-25.

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