2026 (3) TMI 331 - AT - Income Tax

Amortization of Goodwill treated as extraordinary item and adjusted in TNMM PLI, and remitted for verification; penalty proceedings premature.

Amortization of goodwill that materially reduced the tested party's profitability is to be treated as an extraordinary/non operating item and adjusted in ... TP Adjustment - Treatment of amortisation of goodwill as extraordinary/non-operating expense for PLI computation under TNMM - penalty proceedings u/s 271(1)(c) Treatment of amortisation of goodwill as extraordinary/non-operating expense for PLI computation under TNMM - determination of ALP of purchases from Associated Enterprises. - HELD THAT: - The Tribunal examined its earlier directions [2021 (2) TMI 327 - ITAT DELHI] where it had observed that the goodwill written off ought to be treated as an extraordinary expense affecting normal profitability for the period of amortisation and remanded the matter to the TPO/AO for verification limited to whether depreciation was claimed. Tribunal found that the lower authorities misconstrued the earlier order by treating that depreciation was disallowed and thereby refusing the extraordinary-item treatment. Applying the earlier finding that goodwill amortisation is an extraordinary/non operating item for PLI computation, the Tribunal held that the AO/TPO must treat the amortisation as non operating and adjust the PLI accordingly, giving the assessee opportunity of hearing as required by the remand directions. [Paras 9] AO/TPO directed to treat the goodwill amortisation as a non operating/extraordinary item and adjust the PLI of the assessee while computing ALP. Penalty proceedings under section 271(1)(c) to be treated as premature and are dismissed. Final Conclusion: The appeal is partly allowed: the goodwill amortisation is to be treated as an extraordinary/non operating item and adjusted in computing the PLI under TNMM for AY 2012 13 (AO/TPO so directed) and initiation of penalty proceedings under section 271(1)(c) is dismissed as premature. Issues: (i) Whether the amortization of goodwill of INR 1,99,27,211/- should be treated as an extraordinary/non-operating item and adjusted while computing the profit level indicator (PLI) under the Transactional Net Margin Method (TNMM) for determination of arm's length price; (ii) Whether the penalty proceedings initiated under Section 271(1)(c) of the Income-tax Act, 1961 are maintainable at this stage.Issue (i): Treatment of amortization of goodwill for PLI computation under TNMM.Analysis: The Tribunal in the earlier round had remanded the matter for verification and observed that the amortization of goodwill affected normal profitability and ought to be treated as an extraordinary item for PLI computation, with verification limited to whether depreciation on goodwill was claimed. The assessing authorities (AO/TPO) and the Dispute Resolution Panel misread that direction and treated goodwill amortization as operating expense or proceeded on the premise that depreciation was claimed. The Tribunal directs verification and adjustment consistent with its earlier observation that goodwill amortization is an extraordinary/non-operating item for the limited purpose of PLI computation under TNMM.Conclusion: Amortization of goodwill of INR 1,99,27,211/- is to be treated as an extraordinary/non-operating item and adjusted while computing the PLI under TNMM; matter remitted to AO/TPO for verification and computation in accordance with this direction. Conclusion in favour of the assessee.Issue (ii): Validity of penalty proceedings under Section 271(1)(c) of the Income-tax Act, 1961.Analysis: The penalty issue is premature at this stage and has not been warranted for adjudication in the present proceedings.Conclusion: Penalty proceedings under Section 271(1)(c) of the Income-tax Act, 1961 are dismissed as premature. Conclusion in favour of the assessee on procedural ground.Final Conclusion: The appeal is partly allowed by treating goodwill amortization as an extraordinary/non-operating adjustment for PLI computation and remanding for verification, while the penalty contention is dismissed as premature.Ratio Decidendi: Amortization of goodwill that materially affects the tested party's profitability for the year in which it is amortized qualifies as an extraordinary/non-operating item and must be adjusted in computing the profit level indicator under the Transactional Net Margin Method for arm's length price determination, subject to verification whether depreciation was claimed.