2021 (11) TMI 401 - AT - Income Tax

TP Adjustment - computing TNMM operating margin earned from provision of services to AEs - amortization of goodwill and non-compete fees as non-operating expenses - HELD THAT - We find that in subsequent A.Ys, the TPO has considered amortization of goodwill and non-compete fees as non-operating expenses. Therefore, we do not find any merits in considering them as part of operating expenses for the year under consideration when the facts are same. We direct the Assessing Officer to treat amortization of goodwill and non-compete fees as abnormal and non recurring expense and exclude them while computing TNMM operating margin earned from provision of services to AEs. Adjustment on purchase of medical equipments - Assessee is also engaged in the business of trading of medical equipment i.e. blood gas analysers and consumables - HELD THAT - We find that the assessee Appellant follows a unique business model wherein the assessee buys analysers and sells them to third parties i.e. hospitals, medical institutions etc, books the revenue under the trading segment. On the other hand, if the customer is not willing to buy the analysers, such instruments were installed at the customer s premises and the consumables required by the customer in using these instruments were provided by the assessee. We find that the cost of such analysers imported from the AEs, were capitalized in the books of accounts of the assessee and its related operating cost, i.e. depreciation, has been charged to the profit and loss account while computing the profitability of the trading segment. We find that the assessee has used TNMM analysis to bench mark arm s length nature of international transaction of purchase of medical equipment. TPO has accepted the purchase price of such analysers for the trading segment as arm s length, but surprisingly, determined the arm s length price of purchase of fixed assets at Nil. The Assessing Officer, while framing the final assessment order, even went ahead one step further and disallowed the claim of depreciation considering the arm s length price determined by the TPO as NIL. The documents referred to by assessee during the course of arguments were considered from which we find that the import of goods was substantiated by furnishing the custom documentation which includes sample invoices along with corresponding bill of entries. Interestingly, we find that the custom s duty paid and cost of transportation were considered as the arm s length price by the lower authorities for computing the allowable depreciation whereas the cost of equipment has been taken at NIL. Equipment would not have been imported at NIL price even in an independent scenario. Moreover, we do not find that the TPO has applied any method to benchmark the said transaction, which action of the TPO is in violation of Rule 10B of the Income Tax Rules. We find that while treating the purchase of capital goods as NIL, the TPO failed to provide any comparable data which would have suggested that the arm s length price for the purchase of capital goods can be NIL. In our understanding, no third party would have sold such goods free of cost. In our considered opinion, arm s length price could be lower or higher but cannot be NIL, as the goods have been imported. Incidentally, the same products purchased from the same AE, for the same price, in the same year, cannot be held to be at arm s length for trading goods and not at arm s length for capitalised goods at the same time and in the same breath - we direct the Assessing Officer to allow the claim of depreciation on the purchase of fixed assets.

Issues Involved:
1. Transfer Pricing adjustments for business support and marketing support services.
2. Treatment of amortization of goodwill and non-compete fees.
3. Aggregation of international transactions.
4. Selection and rejection of comparable companies.
5. Use of multiple year/prior years’ data and risk adjustments.
6. Adjustment to the international transaction of purchase of medical equipment.
7. Adjustment on account of interest on outstanding receivables.
8. Granting of TDS credit and levy of interest under section 234B.
9. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Transfer Pricing Adjustments for Business Support and Marketing Support Services:
The assessee contested the addition of INR 9,15,19,446 to its taxable income on account of Transfer Pricing adjustments. The TPO aggregated business support services and marketing support services into a single segment, which the assessee argued against, stating these transactions are not inextricably linked and should be evaluated separately. The Tribunal directed the exclusion of amortization of goodwill and non-compete fees from the operating expenses while computing the TNMM operating margin, thus resolving this issue in favor of the assessee.

2. Treatment of Amortization of Goodwill and Non-compete Fees:
The assessee claimed that amortization of goodwill and non-compete fees are abnormal and non-recurring expenses and should be excluded from the TNMM operating margin. The Tribunal agreed, referencing Rule 10B(1)(e) of the ITAT Rules and OECD guidelines, which support excluding exceptional and extraordinary non-recurring items from the net profit indicator. The Tribunal also cited precedents where similar expenses were excluded in other cases, directing the AO to treat these expenses as non-operating.

3. Aggregation of International Transactions:
The TPO aggregated the international transactions of business support services and marketing support services, which the assessee argued against. As the Tribunal directed the exclusion of amortization of goodwill and non-compete fees, the issue of aggregation became moot, and Grounds 3, 4, and 5 were rendered otiose.

4. Selection and Rejection of Comparable Companies:
The TPO rejected certain comparable companies selected by the assessee and included others, which the assessee contested. However, due to the resolution of the amortization issue, the Tribunal did not find it necessary to address this issue further.

5. Use of Multiple Year/Prior Years’ Data and Risk Adjustments:
The assessee argued that the TPO disregarded the use of multiple year/prior years’ data and did not allow risk adjustments. This issue was not specifically addressed due to the resolution of the amortization issue, which rendered related grounds otiose.

6. Adjustment to the International Transaction of Purchase of Medical Equipment:
The TPO determined the arm’s length price of the purchase of fixed assets at Nil, which the assessee contested. The Tribunal found that the TPO did not apply any method to benchmark the transaction, violating Rule 10B. The Tribunal directed the AO to allow the claim of depreciation on the purchase of fixed assets, considering that the equipment could not have been imported at Nil price.

7. Adjustment on Account of Interest on Outstanding Receivables:
The assessee contested an adjustment of INR 80,416 on account of interest on outstanding receivables, arguing that these are not separate international transactions. Due to the smallness of the amount, this ground was dismissed.

8. Granting of TDS Credit and Levy of Interest under Section 234B:
The assessee claimed that the AO erred in not granting full credit of TDS and in levying interest under section 234B. This issue was deemed consequential and not specifically resolved in the judgment.

9. Initiation of Penalty Proceedings under Section 271(1)(c):
The assessee contested the initiation of penalty proceedings. The Tribunal found this ground premature and did not address it substantively.

Conclusion:
The appeal was partly allowed, with significant relief granted to the assessee on the treatment of amortization of goodwill and non-compete fees and the adjustment for the purchase of medical equipment. Other issues were either rendered moot or dismissed.

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