TPO Can't Treat Goodwill Amortisation As Operating Expense In Transfer Pricing: ITAT Delhi

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that amortisation of goodwill arising from acquisition of a business cannot be treated as an operating expenditure while computing the Profit Level Indicator (PLI) under the Transactional Net Margin Method (TNMM) for calcuating transfer pricing.

Observing that such amortisation is "an abnormal item arising out of acquisition of business and not a regular operating expenditure", the tribunal ruled that the Transfer Pricing Officer (TPO) could not include it in operating expenditure for determining the arm's length price.

A bench of Judicial Member Vimal Kumar and Accountant Member S. Rifaur Rahman allowed the appeal filed by Janes Defense India LLP against a transfer pricing adjustment made after the TPO treated amortisation of goodwill as an operating expense.

The tribunal observed, "Therefore, in our view, the amortization of goodwill is an abnormal item arising out of acquisition of business and not a regular operating expenditure, in our view the TPO cannot treat the amortisation of goodwill as operating expenditure for the purpose of TP adjustments."

The assessee provides IT-enabled services, consulting, advisory and business process outsourcing services. It acquired the support services business of IHS Global Private Limited through a slump sale. The transaction resulted in goodwill of ₹6.84 crore, which the assessee amortised in its books.

The TPO initially treated the amortisation as a non-operating expense in the show cause notice. In the final order, however, the TPO reversed that position and treated it as an operating expense, resulting in a transfer pricing adjustment. The Dispute Resolution Panel upheld the TPO's view on this issue while granting relief on other issues, prompting the appeal.

Before the tribunal, the assessee argued that the TPO had changed his stand without giving it an opportunity to respond. It also contended that amortisation of goodwill arose from the acquisition of a business and was not linked to its regular business operations. The assessee further submitted that it had already added back the amount while computing its taxable income.

Treating it as an operating expense for transfer pricing purposes therefore resulted in a double disallowance, it argued. The assessee also relied on earlier tribunal decisions holding that amortisation of goodwill is a non-operating item for computing the PLI under TNMM.

The Revenue argued that goodwill formed part of the assessee's intangible assets used in its business. It contended that its amortisation was a recurring operating cost and that transfer pricing provisions operate independently of the normal provisions of the Income Tax Act.

The tribunal observed that goodwill is not a functional asset and cannot be equated with other intangible assets used to generate profits. While other intangible assets are employed to generate profits, goodwill is created because another undertaking is acquired, the tribunal observed.

Relying on the Chennai Bench's decision in Hitachi Solutions India Private Limited and other precedents, the tribunal held that amortisation of goodwill arising from business acquisition is an abnormal item that does not form part of operating expenditure for determining the PLI under TNMM.

The tribunal further observed, "We observed that the goodwill is no functional asset and treating them similar to other intangible assets are not proper. The other intangible assets are being applied to generate the profit of the undertaking whereas the goodwill is created due to acquisition of other undertaking under merger schemes."

Allowing the appeal, the tribunal held that the authorities below had erred in treating amortisation of goodwill as an operating expenditure.

For Assessee: Advocates Shashi M. Kapila, Shri Pravesh Sharma and Shri Sushil Kumar, Advocates

For Revenue: Dharm Veer Singh, CIT-DR