Goodwill Amortisation Is a Non-Operating Expense for Transfer Pricing: Delhi ITAT Clarifies the Law
Background and Context
The Delhi Income Tax Appellate Tribunal recently delivered a significant ruling in Janes Defense India LLP Vs DCIT (ITAT Delhi) for Assessment Year 2021-22, settling a contested question in transfer pricing law — whether amortisation of goodwill arising from a business acquisition can be treated as an operating expense while computing the Profit Level Indicator (PLI) under the Transactional Net Margin Method (TNMM).
The Tribunal ruled firmly in favour of the assessee, holding that goodwill amortisation is an extraordinary, non-recurring accounting item stemming from business acquisition and therefore cannot be clubbed with routine operating expenditure for benchmarking international transactions.
Facts of the Case
Janes Defense India LLP was incorporated in November 2019 as a limited liability partnership carrying on IT-enabled services, including data collection, input services, consulting, advisory, outsourcing, back-office processing, and business process outsourcing activities.
During the financial year relevant to Assessment Year 2021-22, the assessee acquired the support service business of "Jackal India" from IHS Global Private Limited through a slump sale executed under a Business Transfer Agreement dated March 2, 2020. The total consideration paid amounted to INR 32,96,95,600, which included a premium of INR 6,84,55,772 attributable to goodwill. This goodwill was duly recorded in the assessee's books and amortised in accordance with the applicable accounting method.
The case was flagged for scrutiny under CASS due to the substantial value of international transactions involved, and thereafter referred to the Transfer Pricing Officer (TPO) for determination of the arm's length price.
Proceedings Before the TPO and DRP
Initial Position of the TPO
At the commencement of transfer pricing proceedings, the TPO issued a Show Cause Notice (SCN) dated 06.10.2023, wherein he treated the amortisation of goodwill as a non-operating expense — consistent with the position long recognised by judicial precedents. The TPO proceeded to examine comparable companies and determine the net profit margin under TNMM. After detailed scrutiny, the TPO computed the net profit margin of comparables at 14.89%, while the assessee's own margin was determined at 15% — suggesting no adverse adjustment was warranted at that stage.
Unexplained Reversal Without Notice
However, without issuing any fresh notice or providing the assessee any opportunity to respond, the TPO made a suo motu reversal of his earlier position in the final order at Paragraph 14.1. He now held that amortisation of goodwill was an operating expense, stating that goodwill is an intangible asset used in the normal course of business and hence its amortisation forms part of operating expenditure. This unilateral change resulted in a transfer pricing addition of Rs. 7,23,25,005 along with other adjustments.
The relevant extract from Paragraph 14.1 of the TPO's order dated 28.10.2023 reads:
"14.1 While computing margin of the assessee, an inadvertent error was made in the showcause 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."
Position of the DRP
Aggrieved, the assessee filed objections before the Dispute Resolution Panel (DRP). Two specific contentions were raised:
- Violation of Natural Justice: The TPO reversed his earlier stated position without affording any opportunity to the assessee, directly violating the audi alteram partem principle.
- Merits: Amortisation of goodwill being a non-routine, acquisition-related item cannot constitute operating expenditure under TNMM.