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Judgment
PER MANISH AGARWAL, AM :
The captioned appeal is filed by the assessee against the direction of Dispute Resolution Panel-1 (“DRP”) dated 22.12.2023 arising from the assessment order dated 28.01.2024 passed u/s 143(3) r.w.s. 254 r.w.s. 144B of the Income Tax Act, 1961 (“the Act”) pertaining to assessment year 2012-13.
Brief facts of the case are that the assessee company is engaged in the business of supply of spare parts and other equipment used by engine-based power plants and oil and gas pumping systems. The assessee during the previous year, has operated for only Two months from 04.02.2012 to 31.03.2012. It is the second round of proceedings wherein in first round, amortization of goodwill of INR 1,99,27,211/-being the extra-ordinary expenses whether is to be taken as operating expenses or not was considered by the Tribunal and matter was remand back to the file of AO/TPO for fresh verification of the claim of the assessee. Thereafter, TPO vide order dated 27.01.2023 has again worked out the amount of adjustment towards purchase of trading goods wherein as against the adjustment of INR 70,61,839/-made in first round, it is reduced to INR 64,14,301/-. Thereafter, the AO has passed the draft assessment dated 26.03.2023 u/s 144C(1) of the Act wherein adjustment proposed by the TPO is proposed to be added in the hands of the assessee.
Against this draft order, assessee filed objections before ld. Dispute Resolution Panel (“ld. DRP”) who vide order dated 22.12.2023 rejected the claim of the assessee by wrongly observed that the Tribunal in its order has held that depreciation should not be allowed on goodwill and thus rejected the objections raised by the assessee.
Aggrieved by the said order, the assessee is in appeal before the Tribunal by raising following grounds of appeal:-
1.“That the order of Assessment including order of the Ld. TPO and the DRP Directions are bad in law and erroneous on the facts of the appellant.
2.That the Ld. AO/TPO and consequently the DRP have grossly erred in law and on facts and circumstances of the appellant's case in not treating the amount of amortization debited to P&L account of Rs.1,99,27,211/- on Goodwill acquired by way of Slump Sale, as an extra ordinary/non-operating expense for PLI Computation under Transactional Net Margin Method (TNMM) for arm's length determination of the purchase of traded goods from the Associated Enterprise (AE) of the assessee.
3.That the Ld. AO/TPO and consequently the DRP have grossly erred in law and on facts of the appellant's case in not properly following the directions of the Hon'ble ITAT with respect to treatment of amortization of goodwill while re-computing the PLI of the assessee at an entity level, under Transactional Net Margin Method (TNMM) for arm's length determination of the purchase of traded goods from the Associated Enterprise (AE) of the assessee, which is against the principles of judicial hierarchy.
4.That the directions given by the Ld. DRP in Para 8.4 of its order are contrary to the issue under consideration specially when the issue was to be explained as per the directions of Hon'ble ITAT in the first round of appeal, which is erroneous and bad in law.
5.Without prejudice to above, the Ld. AO/TPO and consequently the DRP have grossly erred in law and on facts of the appellant's case by not allowing the depreciation adjustment it being a reasonable accurate adjustment admissible under Rule 10B(3) of IT Rules.
6.That the Ld. AO have erred in law and in the circumstances of the appellant's case by initiation of penalty proceedings u/s 271(1)(c) of the Act as there was no concealment of any income nor submission of inaccurate particulars of income, nor any default according to law by the appellant.
7.That each ground of appeal is independent and without prejudice to other grounds of appeal raised herein.”
Since all Grounds of appeal are with respect to the claim that amortization of goodwill of INR 1,99,27,211/- being acquired by assessee by way of slump sale should be treated as extraordinary/non-operative item and should be treated as the exceptional item for the purpose of PLI computation under TNMM for determination of Arm’s Length Price (“ALP”) for purchase of goods traded from its Associated Enterprises (“AEs”).
Before us, Ld.AR drew our attention to the observations made by the Co-ordinate Bench in assessee’s own case in first round in ITA No.5543/Del/2016, where the Co-ordinate vide its order dated 05.02.2021 has given following directions:-
26.“We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the TPO has treated goodwill written off as operating in nature for computing operating PLI as per TNMM. The assessee while claiming of depreciation on Goodwill (intangibles) accounted the same for due to a Business purchase under Sec 32 of the Income Tax Act and submitted that the same cannot change the extra ordinary nature of Goodwill amortized in the Audited Financials as per the Companies Act, which is used for the computation of ALP (including PLI) under Chapter-X of the Act, as these are mutually exclusive. The Ld. AR submitted that the assessee had also objected the treatment of goodwill as operating before the ITAT in AY 2013-14 wherein the Tribunal did not adjudicate this ground since the assessee had got the entire relief of TP adjustment without adjudicating this. But the TPO has rightly pointed out that in assessee’s FAR analysis, assessee has not depicted ‘goodwill’ in assets employed. The reason given by the Ld. AR that because ‘goodwill’ may result in increase in sales over the years but it certainly does not affect the operations which are required to be examined for the purposes of determining PLI of tested party for comparisons for TP analysis does not have any bearing to support the case of the assessee. Therefore, this contention of the assessee fails. As regards to without prejudice argument of the Ld. AR has submitted the calculation of PLI of the assessee after treating the amortization of goodwill as non-operating as well as operating in nature. As against the average PLI of the comparables of 10.09%, assessee PLI of the assessee is 9.08% which is within +/-5% range as per the proviso to Sec 92C of the Act. Thus these submissions of the Ld. AR are more practical in nature and are accepted and it appears that the goodwill written off of Rs.1,99,27,211/- is an extraordinary expense which affects the normal profitability for the period in which it is amortized and should be adjusted for computing the PLI of the assessee company after taking into account whether the assessee claimed for depreciation or not on the goodwill. Therefore, we remand back this issue to the file of the TPO/AO for proper verification in light of the above findings. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Thus, Ground No.6 is partly allowed for statistical purposes.”
Ld.AR for the assessee submits that though the Co-ordinate Bench has held that the assessee is not entitled for depreciation on the goodwill however, has very clearly accepted the alternate contention of the assessee that goodwill should be treated as extraordinary item which effect the normal profitability for the years on which it is amortized and should be adjusted for computing the PLI. By observing so, only for the purpose of verification whether assessee had claimed depreciation and not on goodwill, the matter was remanded back to the file of AO. However, AS per the ld. AR, in the remand order, the TPO has not followed the directions of Tribunal and wrongly observed that the assessee’s claim was of excluding the depreciation on goodwill as non-operative expenses. Thereafter, ld. DRP also went on observing that assessee has claimed depreciation on goodwill and therefore, the same should be excluded from the operating expenses for working out PLI. Ld.AR thus, submits that AO be directed that the amortization of goodwill to be treated as an extraordinary expense and should be adjusted for computing the PLI of the assessee company. He prayed accordingly.
On the other hand, Ld. CIT DR for the Revenue supported the orders of the lower authorities and submits that AO has not taken the goodwill as extraordinary item and ld. DRP has already given the directions in this regard. He, therefore, placed heavy reliance on the order of AO/TPO/DRP and requested for the confirmation of the same.
Heard the contentions of both the parties at length and perused the material available on record. It is observed that ld. DRP in its order in para 8.4(iv) has observed that the Tribunal has not allowed the claim of the assessee of treating the Goodwill as non-operative expenses and not adjudicated the relevant objection of the assessee. As observed above, the Tribunal vide its order dated 05.02.2021 in ITA No.5543/Del/2016 has made specific observations that amortization of goodwill at INR 1,99,27,211/- be treated as extraordinary item and non-operative expenses and for the limited purpose of verification whether the assessee has claimed deprecation on goodwill, matter was remanded back. However, it appears that the lower authorizes has failed to understand the directions given by the Tribunal properly and wrongly observed that the Tribunal has refused to grant depreciation on the ground and amortization of goodwill was not treated as extraordinary item and not adjusted for computing the PLI of the assessee. Accordingly, we direct the AO/TPO to treat the goodwill as non-operative expenses and adjust the same while computing the PLI of the assessee. Thus, Grounds of appeal Nos. 1 to 5 raised by the assessee are allowed for statistical purposes.
Ground of appeal 6 raised by the assessee is with respect to penalty levied u/s 271(1)(c) of the Act which is pre-mature hence, dismissed.
In the result, the appeal of the assessee is partly allowed.