Hitachi Solutions India Private Limited Vs DCIT (ITAT Chennai)
The Income Tax Appellate Tribunal (ITAT), Chennai, decided the cross appeals filed by Hitachi Solutions India Private Limited and the Revenue arising from the order of the Commissioner of Income Tax (Appeals) passed under Sections 143(3) read with 144C of the Income-tax Act, 1961 for Assessment Year 2018-19. The Tribunal condoned a delay of 23 days in filing the Revenue’s appeal, admitted it for adjudication, allowed the assessee’s appeal, and dismissed the Revenue’s appeal.
The assessee, a subsidiary of Hitachi Solutions America Limited, was engaged in providing IT services to its Associated Enterprises (AEs). A reference was made to the Transfer Pricing Officer (TPO) under Section 92CA(1), who proposed a transfer pricing adjustment of ₹9.63 crore. The Assessing Officer incorporated the adjustment in the final assessment order. On appeal, the CIT(A) partly accepted the assessee’s contentions, following which the TPO passed a giving-effect order reducing the adjustment to ₹2.87 crore after accepting the assessee’s segmental accounts, though amortization of goodwill continued to be treated as a non-operating item and certain computational issues remained unresolved.
One of the principal disputes before the Tribunal concerned whether amortization of goodwill arising from amalgamation should be treated as an operating expense while computing the assessee’s operating margin for transfer pricing purposes. The assessee submitted that the goodwill represented excess consideration paid on amalgamation, was a non-recurring accounting consequence, did not relate to the rendering of services to AEs, and constituted an extraordinary expenditure not ordinarily incurred by comparable companies. The Revenue supported the orders of the TPO and the CIT(A). Relying on earlier judicial precedents, the Tribunal held that amortization of goodwill arising from business acquisition is an abnormal and extraordinary item which does not form part of operating expenditure. It directed the Assessing Officer/TPO to exclude amortization of goodwill from operating expenditure while computing the operating margin.
