TNMM operating margins exclude acquisition-linked amortization; imported assets cannot be valued at nil without proper benchmarking.

Under TNMM, amortization of goodwill and non-compete fees linked to acquisition accounting was treated as an extraordinary, non-recurring item and excluded from operating expenses because it did not form part of the regular cost base for services to associated enterprises. The exclusion of those amounts from the operating margin was therefore justified. For imported medical equipment capitalised in the books, an arm's length price could not be fixed at nil without a proper benchmarking basis, and depreciation could not be denied on that footing. The nil valuation was unsustainable, so the depreciation disallowance was also rejected.

---

---

Issues: (i) Whether amortization of goodwill and non-compete fees was to be treated as an abnormal and non-recurring expense and excluded while computing TNMM operating margin for provision of services to associated enterprises; (ii) Whether the arm's length price of imported medical equipment capitalised in the books could be determined at nil and depreciation on such equipment could be disallowed.

Issue (i): Whether amortization of goodwill and non-compete fees was to be treated as an abnormal and non-recurring expense and excluded while computing TNMM operating margin for provision of services to associated enterprises.

Analysis: Under TNMM, the net profit margin is to be computed with reference to costs incurred for the international transaction, and extraordinary or non-recurring items are not to distort the operating result. The amortization in question arose from acquisition-related accounting treatment and did not pertain to the regular provision of services to associated enterprises. It was also not shown to be part of the cost base for the service transactions, and the same approach had been accepted in later years on similar facts.

Conclusion: The exclusion of amortization of goodwill and non-compete fees from operating expenses was warranted and the issue is decided in favour of the assessee.

Issue (ii): Whether the arm's length price of imported medical equipment capitalised in the books could be determined at nil and depreciation on such equipment could be disallowed.

Analysis: The equipment had admittedly been imported and could not realistically be treated as having a nil price. No benchmarking method or comparable material justified a nil valuation, and the same transaction could not be accepted as arm's length for trading purposes while being treated as nil for capitalised goods. The depreciation claim, which flowed from the actual cost of the imported assets, was therefore not liable to be denied on the basis of a nil arm's length price.

Conclusion: The nil valuation was unsustainable and the depreciation disallowance was not justified, so this issue is decided in favour of the assessee.

Final Conclusion: The transfer pricing adjustment was reduced in material part by granting relief on the operating-cost treatment of goodwill and non-compete amortization as well as on the capitalised medical equipment issue, while the remaining challenge did not alter the overall partial relief granted to the assessee.

Ratio Decidendi: For TNMM, only expenditure truly attributable to the tested international transaction and forming part of its normal operating cost is to be considered, while acquisition-linked extraordinary or non-recurring items may be excluded; likewise, an arm's length price cannot be fixed at nil for imported goods without a legally sustainable benchmarking basis.

---