TaxTMI 
TaxTMI 
2026 (8) TMI 389
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....en TNMM method is applied. This issue is raised in Grounds of appeal 2, 3 & 4. Ground 2: The Ld. TPO erred in treating the amortization of goodwill as operating expense for purposes of determination of transfer pricing margin computation. Ground 3: The Ld. TPO erred in ignoring the various to be judicial decisions which have ruled that goodwill being an extraordinary item, hence it must be excluded from operating costs for determining net profit margin. Ground 4: The Ld. TPO erred in making addition of Rs. 6,84,55,772/-on account of amortization of goodwill without considering the fact that the Assessee had already disallowed the said expense in its, computation of taxable income/ Return of income.' 3. Brief facts of the case are, Jane's Defense India (LLP) was established in November 2019 as a limited liability partnership engaged in providing IT-enabled services such as data collection, input services, consulting and advisory services, outsourcing services including back-office processing, business process outsourcing. The Assessee had acquired the support service business ('Jackal India') from IHS Global Private Limited through slump sa....
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....he last minute reversed his stand when passing the final order (see para 14.1 of the TPO's order) without advising or giving any opportunity to the Assessee to respond or rebut this stand of the TPO. The TPO simply states that an inadvertent error was made in the SCN dt. 6.10.2023 reads is as follows: as the item of 'amortization of goodwill' was considered as non-operating expense, which is now being treated as an operating expenses. No further reason was given. Para 14.1 of TPO Order dt. 28.10.2023 (Pg. 144 of AM) '14.1 While computing margin of the assessee, an inadvertent error was made in the show cause notice as the item 'amortization of goodwill' was considered a non-operating expense. It may be mentioned that operating expenses are expenses incurred in the normal course of business. Goodwill is an intangible asset used in the normal course of business, which is amortised by the assessee and thus, it is part of normal course of business. Thus, it is part of operating expenses.' iv) The above action of the TPO results in a breach of principles of natural justice. (Please refer to Para 14.1 of TPO Order at Pg. 144 of AM), in addition to making double....
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....ollowing manner, namely:- (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction or a specified domestic transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base;' 4. The issue as to whether amortization of goodwill constituted is an operating expenses for determination of PLI under TNMM for determination of net profit margin has been the subject matter of judicial examination by courts of law. The following judgments have consistently ruled that the amortization of goodwill is a non-operating expense for Transfer Pricing Purpose. 1. DHR Holding India Pvt Ltd [2021] 133 Taxmann.com 519 (Del. Trib) (See Pgs. 36, 37, 38 para 15 to 24) 2. ST-Ericsson India Pvt. Ltd. vs. DCIT (ITA No. 609/Del./2015) (See Pgs. 52 & 53) 3. Continental Automotive Components (India) Pvt. Ltd. vs. ACIT [2022] 139 Taxmannn.com 187 (Bang Trib) (See Pgs. 103 & 117, 118 Para 41 to 45) 4. TE Connectivity Serv....
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....erials Pvt. Ltd [ITA No.2176/Chny/2017] (page 60 & 62 of legal • Ametek Instruments India Pvt. Ltd [IT(TP)A No.398/Bang/2016] (page 76 of legal PB) 21. Per contra the Ld. DR relied on the orders of the AO and that of ld.CIT(A). 22. We have heard the rival contentions perused the material available on recordand gone through the orders of the authorities along with submissions and case laws relied upon by both the parties. The present dispute is covered by the various courts and tribunals by holding it as amortization of goodwill is an abnormal item arising out of business acquisition and therefore not part of operating expenditure. Considering the present facts and judicial precedents as discussed supra, we direct the AO/TPO to grant adjustment of amortization of goodwill by excluding from operating expenditure by allowing the related grounds of appeal of the assessee.' 5. Thus from all the judgments cited above it is obvious that the courts have uniformly held that amortization of goodwill does not constitute operational expenditure for determination of PLI. Once this plea of the Assessee is accepted the net profit operating margin f....
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.... 3. Contrary to claim of the assessee, depreciation on amortization of Goodwill is recurring in nature and hence, as per the OECD transfer pricing guideline too, the same should be considered as being operating in nature. Exclusion of amortization of Goodwill is not explicitly prescribed in such guidelines. 4. As depreciation is part of EBIT, the same should be considered as operating for the purpose of PLI computation. 5. Goodwill has been recognised as an Asset by the assessee in its Balance Sheet. Transfer Pricing Provisions under Indian Laws provide for taking into consideration FAR i.e. Functions, Assets deployed & Risk assumed in respect of the tested party and comparables for the purpose of benchmarking/determination of ALP. From perusal of summary of FAR analysis given on page 23 (Para 5.3, Table-9) of Transfer Pricing Study Report (TPSR) with regard to ITES (IT Enabled Services) and such FAR analysis with regard to BSS ( Business Support Services) given on page 29 (Para-5.5, Table-H) of TPSR, it is evident that the assessee itself has considered the 'Intangibles' as part of Assets employed for carrying out functions relating to ITES and BSS segm....
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..... On the Revenue side, intangible assets help in generation of higher revenue and profit, which has the effect of increase in PLI. On the expenditure side, intangible assets are cost to be business and accordingly, accounted for by way of depreciation or amortisation, which has the effect of reducing PLI. In such a scenario, excluding depreciation or amortisation in respect of an intangible like Goodwill just from expenditure side cannot be allowed as the impact of such intangible on revenue side is not getting excluded. As per assessee's submission, Goodwill had arisen as a result acquisition of a business on slump sale basis under Business Transfer Agreement. Such acquisitions, which lead to recognition of goodwill in the books of account, creates synergy and are undertaken when they are considered contributing positively to the existing business and benefits outweigh the cost. Thus, similar to any other tangible or intangible asset, intangible asset of Goodwill and its use for the business purposes will be having positive impact on revenue earned of an assessee leading to improved PLI. In other words, increase in expenditure on account of depreciation on Goodwill for a busin....
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....per Book and also from consequential Memo for approval of subvention and relevant e-mails and relevant documents thereto. The assessee received sum of (Rs.65,19,47,000/- towards subvention. The assessee had offered the said amount as taxable in its hands initially but before the DRP, it was pleaded that the same was not taxable in its hands. The issue vis-a-vis its taxability i. e. receipt of subvention from parent company now stands settled by recent decision of Hon'ble Supreme Court in Siemens Public Communication Network (P.) Ltd. Vs. CIT (supra). The Hon'ble Supreme Court had held that voluntary payments made by parent company to its loss making Indian company can also be understood to be payments made in order to protect the capital investment of assessee company. It was further held that if that is so, then the payment in question could not be held to be revenue receipts, hence they were capital receipts in the hands of assessee. Similar proposition has been laid down by the Hon'ble High Court of Kolkata and Hon'ble Delhi High Court in different decisions. 16. Applying the said proposition to the facts of present case, where the assessee had received the alle....
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....as since the subvention income had been offered to tax, then the same would be available to the assessee for set off against TP adjustment proposed by TPO. The said proposition will not be applicable to the issue raised before us since the Hon'ble Apex Court has decided the taxability of subvention income to be capital in nature and hence, the said income is not taxable in the hands of assessee and same would not be available as set off as against TP adjustment made by Assessing Officer/TPO. Accordingly, there is no merit in the directions of DRP in this regard. We in the final analysis hold that subvention income is capital receipt in the hands of assessee, hence not taxable. Further, we hold that the said subvention amount is operating in nature and has to be included as operating income while computing PLI in the hands of assessee restricted to the amount relatable to the instant assessment year. Thus, ground of appeal No.2 raised by assessee against taxability of subvention income is allowed and ground of appeal No.2 also stands allowed in favour of assessee. ' (Emphasis supplied) In above case of Nalco, Hon'ble Tribunal had held that subsidy amount/subvention ....
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....l be operating in nature. Moreover, Depreciation by its very nature is considered operating in nature. There is no justification for drawing any artificial difference between depreciation on Goodwill and depreciation on other assets, particularly when both kind of assets play their respective roles in business operations of an assessee. 10. The case laws relied upon by the assessee are not of any kind of help to the assessee as they are distinguishable on facts from the case of the assessee and findings of Hon'ble Tribunal in those cases are based on specific facts of those cases. These case laws do not lay down any preposition of law that the depreciation on/amortisation of Goodwill is a non-operating expense as findings are specific to facts of respective cases. Further, none of the decisions relied by the assessee is having fact similar to the case of the assessee on the point that in its TPSR, the assessee itself has categorically admitted that Goodwill in form of Intangible Asset is employed for business operations both in ITES and BSS segments. In particular, decisions of Hon'ble ITAT, Delhi relied upon by the assessee are discussed here in under in ....
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....dent finding of facts for the concerned case. Relevant part of both these decisions have been reproduced by hon'ble Tribunal in its order. It is noted that in the case of CH Robinson, while deciding the issue, the hon'ble Tribunal had noted that 'it cannot be said that amortisation of Goodwill does having bearing on operations of the assessee'. On this point, facts of the instant case of the assessee are distinguishable from that in case of CH Robinson as FAR analysis of ITES and BSS segments given in TPSR clearly mentioned that Goodwill had been employed as asset for operation in both segments. The assessee has also not made out any case of non-employment/non-use of Goodwill for its business purposes. Further, in case of Hospira Healthcare, the Hon'ble Tribunal has noted that 'The Ld AO/TPO in A.Y.2011-12 has allowed the assessee's claim of adjustment on account of amortisation.' Thus, the relief in case of Hospira Healthcare was allowed on the ground of AO/TPO accepting claim of the assessee in subsequent year. Thus, facts of the instant case of the assessee are distinguishable from those in case of CH Robinson and Hospira Healthcare as discussed above. There is n....
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....at 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. In this case, the assessee had generated the goodwill under the merger scheme. The assessee is allowed to amortise the above goodwill over the years. There was a dispute before amendment in the section 32 of the Act, whether the goodwill should be allowed as expenditure. However, the above aspect of the dispute was settled. 8. Coming to the issue of treating the amortisation of goodwill as operating expenditure in TP adjustment. This issue is squarely covered by the decision in the case of Hitachi Solutions India Private Limited (supra), the relevant findings of the ITAT Chennai are reproduced below: '14. The assessee has claimed amortization of goodwill as a deduction for the purpose of computation of total income for tax purposes which reduces the tax incidence on the assessee to that extent. Since it is amortized over 5 years, it has a bearing on the cash flow and is operating in na....
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....that of the Assessee, and wherein the Chennai ITAT has held amortization of goodwill to be a non-operating expense, despite being claimed as a deduction for tax purposes. Further, treatment of expenses as operating/nonoperating in nature differ for calculation of operating margins from a TP perspective, vis-à-vis return position. Relevant extracts are provided below (Page 39 and 42 of legal paper book): :- '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' '5. We have heard both the parties, perused material available on record and gone through orders of the authorities below. The goodwill is an intangible asset which arises to an assessee either by way of acquisition of any company or ....