TaxTMI 
TaxTMI 
2022 (2) TMI 1530
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....e international transactions of the assessee and forms part of the operating costs for the purpose of computing margins for transfer pricing analysis. 2.2 The learned CIT(A) failed to appreciate that depreciation/amortization expenditure of both the tangible and intangible assets forms part of the cost base of the assessee company and to get a true picture of the operating margins of the assessee, the cost base of the assessee in its entirety, is required to be considered. 2.3 The learned CIT(A) failed to appreciate the fact that the assessee itself has claimed amortization of goodwill over a period of 5 years which indicates that it has a bearing on cash flow of the company and hence cannot be an item of extra-ordinary nature so as to be excluded from computation of ALP. 2.4 The learned CIT(A) failed to appreciate that since goodwill has an impact on yield of revenue, amortization of goodwill needs to be considered as an operative item. 3. The learned CIT(A) erred in upholding that working capital adjust sought by the assessee was required to be granted for making transfer pricing analysis more equitable. 3.1 The learned CIT(A) failed t....
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....ade by the Assessing Officer towards disallowance of depreciation on non-compete fee by following order of the ITAT., Chennai in the assessee's own case for earlier years. Aggrieved by the learned CIT(A) order, the Revenue is in appeal before us. 4. The first issue that came up for our consideration from grounds No.2 to 2.4 of the revenue appeal is deletion of additions made towards TP adjustment of Rs.1,92,00,000/- in respect of international transactions of the assessee by re- computing operating margin. 4.1 The facts with regard to impugned dispute are that the assessee has derived goodwill on account of acquisition of certain undertakings and same has been treated as intangible assets, as defined u/s.32(1) of the Act, and claimed depreciation. However, for the purpose of computing operating margin of the assessee, to test its international transactions, the assessee has excluded amortization of goodwill as non- operating expenditure on the ground that goodwill does not have any bearing on the operations of the assessee. The TPO did not accept arguments of the assessee and according to him, amortization of goodwill is operating expenses which have direct bearing on day....
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....e purpose of computing margin of the assessee to determine arms' length price of international transactions. The learned CIT(A) after considering relevant facts and also by following decision of the ITAT., Chennai in the case of M/s. Motonic India Automotive Pvt. Ltd. in ITA No.741/Mds/2014, has rightly held that amortization of goodwill is an extraordinary item of expenditure which cannot be considered as operating expenses for the purpose of computing operating margin of the assessee. Hence, we are inclined to uphold order of the learned CIT(A) and reject grounds taken by the Revenue. 6. The next issue that came up for our consideration from grounds no.3 to 3.3 of the revenue appeal is working capital adjustment for the purpose of computing operating margin of the assessee. 6.1 The assessee has made suitable adjustment for working capital by considering working capital levels of comparable companies while testing its international transactions with AEs for the purpose of determination of arm's length price in light of Rule 10B(3) of the Income Tax Rules, 1962, which provides for comparability analysis for eliminating differences among comparable companies. The TPO d....
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....elied upon the decision of the ITAT., Chennai in the case of M/s. Foxteq Services India Pvt. Ltd. in ITA No.174/Mds/2016, where it was clearly held that working capital employed by the assessee and that of comparable companies needs to be taken into consideration and further, without making suitable adjustments there cannot be any transfer pricing adjustments to international transactions of the assessee. The relevant findings of the learned CIT(A) are as under :- 10. I have carefully' considered the facts in issue, order of the AO /TPO, submissions made by the Appellant and materiel on record, Alter taking into consideration detailed submissions made by the appellant, the following issues arise for consideration: (i) Rule 10B(3) of the Income-tax Rules provides that, in cases where any difference exists in a comparability analysis, the same needs to be eliminated by performing reasonably accurate adjustments to mitigate the effects of such differences. (ii) On perusal of detailed submission relating to working capital adjustment, it is pertinent to note that working capital of the company have direct bearing in the profitability of the appellant and ....
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.... that of the assessee, this Tribunal is of the considered opinion that there cannot be any transfer pricing adjustment .. 12. Hence, I am of the considered view that for the purposes of transfer pricing analysis any difference arising on account of working capital positions is required to be factored, so as to make the comparability analysis more equitable. Accordingly, the working capital adjustment sought for needs be granted to the appellant." 8. In this view of the matter and considering facts and circumstances of the case, we are of the considered view that there is no error in the reasons given by the learned CIT(A) to direct the TPO to provide working capital adjustments and thus, we are inclined to uphold findings of the learned CIT(A) and reject grounds taken by the revenue. 9. The next issue that came up for our consideration from grounds No.4 to 4.2 of the revenue appeal is disallowance of depreciation on non-compete fee. The assessee has claimed depreciation on non-compete fee in terms of section 32(1)(ii) of the Act, and argued that it is in the nature of 'any other business of commercial rights of similar nature' which qualifies to be intangible....
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....ercial right, falling within the scope of intangible asset falling under the scope of the Income-tax act. Further, past judicial precedents have laid down certain indicative criteria based on which such payments could be regarded capital in nature and accordingly, be construed as a capital asset Thus, non-compete payments satisfying the illustrative criteria, as mentioned in the below table, could be regarded as a capital asset: S. No. Illustrative criteria to regard a non compete payment as a capital asset Facts of the Appellant's case 1. Payment has been made in lump sum the appellant has made a lump sum payment of Rs.4,47,50,000/- as non- compete fee 2. Payment has been made toward off competition and not to protect or facilitate existing business Payment is madeto prevent KMP to carry on any competing business for a period of three years. 3. Payment has been identified separately towards non compete and does not form part of the consideration for acquisition of business Clause 3.1 of asset purchase agreement clearly bifurcates payment made for purchase of assets for non-compete fee 4 Payment has been made to seller and its promoters....