Hitachi Solutions India had excluded the amortization of goodwill from operating costs when conducting its comparability study, claiming it was an extraordinary, non-operating item unrelated to its normal service functions.
The tax authorities disagreed, arguing that since the goodwill arose from the acquisition of the taxpayer’s business, the related amortization was a recurring cost reflected in the profit and loss account and should be considered part of the operating expenses. They included it in the operating cost base, which reduced the taxpayer’s profit level indicator and affected the arm’s length analysis.
An appeal was then filed by Hitachi with the Income Tax Appellate Tribunal.
Decision
The Income Tax Appellate Tribunal held that amortization of goodwill stems from a capital transaction, not routine operations, and including it would distort comparability with independent companies performing similar services. It concluded that such costs must be excluded from operating expenses and treated as non-operating for transfer pricing purposes.
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