ITAT Holds Goodwill Amortization from Slump Sale as Non-Operating for TP Margin

The assessee, Bergen Engines (India) (P) Ltd., supplies spare parts and equipment used in engine-based power plants and oil and gas systems. For AY 2012-13, the company operated only for a short period from 4 February to 31 March 2012. The dispute arose over a transfer pricing adjustment related to purchases of traded goods from its Associated Enterprises. In an earlier round, the Income Tax Appellate Tribunal had remanded the matter to verify whether goodwill amortization of Rs. 1.99 crore arising from a slump sale should be treated as an extraordinary item while computing the Profit Level Indicator (PLI) under the TNMM method.

During the fresh proceedings, the TPO recomputed the adjustment at Rs. 64.14 lakh (earlier Rs. 70.61 lakh). The Assessing Officer included this in the draft assessment order, and the Dispute Resolution Panel rejected the assessee’s objection, interpreting the earlier Tribunal order as disallowing the goodwill adjustment. The assessee therefore approached the ITAT again.

Main Issue: Whether amortization of goodwill arising from a slump sale should be treated as a non-operating or extraordinary expense while computing the PLI under TNMM.

Tribunal Held: The Income Tax Appellate Tribunal partly allowed the appeal, noting that the lower authorities had misunderstood its earlier directions. It clarified that the earlier order had already recognized goodwill amortization of Rs. 1.99 crore as an extraordinary expense affecting profitability and had only asked the AO/TPO to verify whether depreciation on such goodwill had been claimed.

The Tribunal therefore directed the AO/TPO to treat the goodwill amortization as a non-operating or extraordinary expense while computing the PLI for transfer pricing purposes. The transfer pricing grounds were allowed for statistical purposes, while the challenge to penalty proceedings under Section 271(1)(c) was dismissed as premature.

To Read Full Order, Download PDF Given Below