ITAT: Transfer Pricing Margin Must Exclude Goodwill Amortization From Slump Sale

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

During fresh proceedings, the TPO recomputed the adjustment at Rs. 64.14 lakh. The Dispute Resolution Panel rejected the assessee’s claim, interpreting the earlier Tribunal order as disallowing the goodwill adjustment. Aggrieved, the assessee again appealed before the Income Tax Appellate Tribunal.

Issue Raised: Whether amortization of goodwill arising from a slump sale should be treated as an extraordinary/non-operating expense while computing the Profit Level Indicator under TNMM.

Tribunal Held: The Income Tax Appellate Tribunal partly allowed the appeal. It held that the lower authorities had misinterpreted the earlier directions of the Tribunal. The Bench clarified that the earlier order had recognized goodwill amortization as an extraordinary expense affecting profitability and had remanded the matter only to verify whether depreciation had been claimed on such goodwill.

Accordingly, the Tribunal directed the AO/TPO to treat the goodwill amortization as a non-operating/extraordinary expense while computing the PLI for transfer pricing purposes. The issue of penalty initiation under Section 271(1)(c) was held to be premature and was dismissed.

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