Equipment owned by an associated enterprise and provided for business use is not taxable under Section 28(iv).

AMD India filed its return for AY 2013–14, reporting international transactions with its associated enterprise. The Transfer Pricing Officer (TPO) made adjustments concerning software-development services and receivables; the Assessing Officer (AO) also added ₹7,73,50,917 under Section 28(iv) of the Income-tax Act, 1961, for equipment received from the associated enterprise without charge.

The Commissioner of Income-tax (Appeals) (CIT(A)) partly allowed the assessee’s appeal, including by applying a ₹200-crore turnover filter, directing that depreciation be excluded in computing the profit-level indicator (PLI), and treating bad-debt provision as operating expenditure. The CIT(A) also limited the Section 28(iv) addition to 12% of the equipment’s value.

The Income Tax Appellate Tribunal (ITAT) partly allowed the assessee’s appeal and dismissed the Revenue’s appeal. The Revenue challenged the ITAT’s order under Section 260A.

1. Whether the ITAT erred in excluding certain companies as comparables by applying a ₹200-crore upper turnover filter?

2. Whether the ITAT erred in directing that depreciation be excluded in computing the PLI, thereby adopting a “cash PLI”?

3. Whether provision for bad and doubtful debts should be treated as operating expenditure when computing the PLI?

4. Whether equipment provided by the associated enterprise without charge gave rise to taxable income under Section 28(iv)?

5. Whether any of these issues raised a substantial question of law warranting interference under Section 260A?

Section 260A of the Income-tax Act permits a High Court to hear an appeal only where a substantial question of law arises. Sections 92B and 92CA govern international transactions and their reference to the TPO; Rule 10B(1)(e) governs the transactional net margin method and computation of the net operating profit margin.

The Court applied the principle that, although the Act and Rules do not prescribe a turnover filter, company size may be relevant to comparability under the functions, assets and risks (FAR) analysis. It followed Sap Labs India Pvt. Ltd. v. Income Tax Officer on the turnover-filter issue and PCIT v. Novell Software Development India (P) Ltd. on excluding depreciation where differences in depreciation materially affect comparability.

It further relied on Principal CIT v. Business Process Outsourcing India Private Limited for treating ordinary bad-debt provision as operating expenditure, and Principal Commissioner of Income-tax v. Sony India Software Centre (P) Ltd. concerning equipment supplied by an associated enterprise.

The Court held that turnover is relevant to selecting comparable companies and found no error in excluding companies exceeding the ₹200-crore filter, an issue already covered against the Revenue by Sap Labs.

It rejected the Revenue’s challenge to excluding depreciation from the PLI because the ITAT had found material differences in depreciation costs attributable to asset types, technology and investment levels, and the issue was covered by Novell Software.

As there was no material showing that the bad-debt provision was extraordinary, the Court found no basis to disturb the ITAT’s treatment of it as a normal operating expense.

On the equipment, the assessee’s case was that it neither owned the assets nor claimed depreciation, and that they were used to test software for the associated enterprise; the Court considered the issue covered by Sony India Software Centre.

The Court accordingly found no substantial question of law on the issues raised.

It dismissed both appeals, leaving the ITAT’s order undisturbed, including its deletion of the 12% addition sustained by the CIT(A) in the assessee’s appeal.