Transfer pricing comparability turns on operating items, working capital adjustments and depreciation on non-compete fees.

Amortisation of goodwill was treated as a non-operating, extraordinary item and excluded from operating expenses for transfer pricing margin computation, because it did not affect ordinary day-to-day business operations. Working capital adjustment was upheld where material differences between the assessee and comparables could distort profitability, with Rule 10B(3) applied to require reasonably accurate adjustments. Depreciation on a non-compete fee was held allowable because the payment created a capital business right amounting to an intangible asset of a commercial nature. On all substantive issues, the revenue's challenge failed.

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Issues: (i) Whether amortisation of goodwill was to be treated as operating expenditure while computing operating margin for transfer pricing purposes; (ii) whether working capital adjustment was required in the comparability analysis under transfer pricing rules; (iii) whether depreciation was allowable on non-compete fee as an intangible asset.

Issue (i): Whether amortisation of goodwill was to be treated as operating expenditure while computing operating margin for transfer pricing purposes.

Analysis: Goodwill was held to be an extraordinary item arising only in limited situations and not an expenditure forming part of ordinary operating costs. It was found that amortisation of goodwill did not have a bearing on the day-to-day operations of the assessee and, therefore, should not be included in operating expenses for determining the arm's length price.

Conclusion: The exclusion of goodwill amortisation from operating costs was upheld, and the revenue's challenge failed.

Issue (ii): Whether working capital adjustment was required in the comparability analysis under transfer pricing rules.

Analysis: The adjustment was considered necessary where working capital positions of the assessee and comparables differed materially. Rule 10B(3) of the Income-tax Rules, 1962 was applied to hold that differences affecting profitability must be eliminated by reasonably accurate adjustments so that the comparison becomes equitable.

Conclusion: The direction to grant working capital adjustment was upheld.

Issue (iii): Whether depreciation was allowable on non-compete fee as an intangible asset.

Analysis: Non-compete fee was treated as a capital payment conferring a business right akin to a commercial right of similar nature. On that basis, it was held to fall within the category of intangible assets eligible for depreciation under the Act.

Conclusion: Depreciation on non-compete fee was held allowable, and the revenue's objection was rejected.

Final Conclusion: The revenue's appeal failed on all substantive issues, and the assessee's cross objection did not survive independently.

Ratio Decidendi: In transfer pricing comparability, only operating items that bear on ordinary business operations may be included in operating margin, material differences in working capital must be adjusted under the comparability rules, and a non-compete fee that creates a commercial right qualifies as an intangible asset for depreciation.

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