Goodwill Amortization

Prepared by Khusbu M Kinger


Goodwill arising on business acquisition is recognized in the books of the acquirer as an Intangible asset as per the recognition criteria mentioned under IGAAP/IND AS. Subsequent to the amendment made in the Income Tax Act to exclude Goodwill from the Intangible asset definition, the depreciation pertaining to such Goodwill shall be disallowed for computation of PGBP. The Transfer Pricing impact on such amortization while computing the Operating margin shall be carefully examined.

 2.Treatment of Goodwill under various Regulations


  • AS – 26 Intangible Assets

The depreciable amount of an intangible asset should be allocated on a systematic basis over the best estimate of its useful life. There is a rebuttable presumption that the useful life of an intangible asset will not exceed 10 years from the date when the asset is available for use.

  • AS – 14 Accounting for Amalgamations

Goodwill arising on amalgamation represents a payment made in anticipation of future income and it is appropriate to treat it as an asset to be amortized to income on a systematic basis over its useful life. It is considered appropriate to amortize goodwill over a period not exceeding 5 years unless a somewhat longer period can be justified.

Goodwill arising on business acquisition or amalgamation shall be accounted for in accordance with AS-14.

 2.2 Indian Accounting Standards

· Ind AS – 103 Business Combinations

The acquirer shall recognize the goodwill as on the acquisition date measured as the excess of the aggregate of purchase consideration; non-controlling interest; and previously held equity interest and the fair value of net assets. The above goodwill cannot be amortized; however, impairment losses can be recognized.

2.3 Income Tax Perspective

As per Section 32 of Income Tax Act, 1961, depreciation is permissible on both the tangible and intangible goods.

However, after the amendment in Finance Act 2021, goodwill is not considered as a depreciable asset and has been excluded from the definition of intangible assets as per Explanation 3 to Section 32(1) of Income Tax Act, 1961.

As per Section 2(11) of Income Tax Act, 1961, goodwill has been specifically excluded from the block of assets and therefore depreciation is not allowed to be claimed.


3.Amortization of Goodwill – Operating Expense Vs Non-operating expense

3.1 Income Tax Perspective

As per Rule 10TA of Income Tax Rules, 1962, “Operating expense means the costs incurred in the previous year by the assessee in relation to the international transaction during the course of its normal operations including [costs relating to Employee Stock Option Plan or similar stock-based compensation provided for by the associated enterprises of the assessee to the employees of the assessee, reimbursement to associated enterprises of expenses incurred by the associated enterprises on behalf of the assessee, amounts recovered from associated enterprises on account of expenses incurred by the assessee on behalf of those associated enterprises and which relate to normal operations of the assessee and] depreciation and amortization expenses relating to the assets used by the assessee, but not including the following, namely:—

  • Interest expense;
  • Provision for unascertained liabilities;
  • Pre-operating expenses;
  • Loss arising on account of foreign currency fluctuations;
  • Extraordinary expenses;
  • Loss on transfer of assets or investments;
  • Expense on account of income-tax; and
  • Other expenses not relating to normal operations of the assessee.”

From the above definition we can understand that amortization expense of the assets used in relation to the international transaction are considered as operating expenses.

3.2 OECD Guidelines

As a matter of principle, only those items that (a) directly or indirectly relate to the controlled transaction at hand and (b) are of an operating nature should be taken into account in the determination of the net profit indicator for the application of the transactional net margin method.

Costs and revenues that are not related to the controlled transaction under review should be excluded where they materially affect comparability with uncontrolled transactions.

Exceptional and extraordinary items of a non-recurring nature should generally also be excluded. This however is not always the case as there may be situations where it would be appropriate to include them, depending on the circumstances of the case and on the functions being undertaken and risks assumed by the tested party.

3.3 Judicial Precedents

Case Reference Case Summary
TE Connectivity Services India Pvt Ltd [TS-330-ITAT-2022(Bang)-TP] ·       Assessee had recorded Goodwill on acquisition of shared service business via slump basis from a group company.

·       Assessee contended that such goodwill was a cost associated with the purchase of the business and it is not a tool deployed in business and hence amortization of such goodwill is non-operating in nature since it is the cost of acquisition and an extraordinary item.

·       The ITAT held that the amortization of goodwill, being an extraordinary item is non-operating in nature.

Continental Automotive Components (India) (P.) Ltd. [[2022] 139 187 (Bangalore – Trib.)], ·       The goodwill had resulted on account of an extra-ordinary circumstances involving merger of an automotive components business and amortization of goodwill is due to such extraordinary circumstances.

·       Hence, it was held that amortization of goodwill should not be considered as operating expenses and it would not pertain to regular operation of assessee.

DHR Holding India (P.) Ltd. [[2021] 133 519 (Delhi – Trib)] ·       It was held that amortization of goodwill and non-compete fees should be treated as abnormal and non-recurring expense as these did not pertain to provision of services to AEs and merited exclusion while computing TNMM operating margin.
ST Ericsson India Pvt. Ltd. (ITA No. 609 & 168/Del/2015) ·       The ITAT ruled in favor of the Assessee by stating that TPO has erred in treating amortization of goodwill as operating expense while calculating the operating margin on the ground that goodwill was acquired on account of acquisition of units through slump sale under Business Transfer Agreement which is an extraordinary item and is not pertaining to regular operation of the taxpayer thereby treating the goodwill amortization as non-operating in nature in computing the correct PLI.
Drug Company – A [TS-734-FC-2020(DEN)-TP] ·       Goodwill arose upon acquisition/merger of entities into the assessee which resulted in increase of goodwill thereby increasing the expectation in turnover of the assessee.

·       Accordingly, it was held that the goodwill in question and the depreciation thereof must be regarded as having had an indirect connection to the assessee’s turnover.

·       It was concluded that the amortization of goodwill when calculating net profit (net margin) according to the TNMM method, must be considered an operating expense:

4.Impact on Comparables

As Rule 10B(3) of the Income Tax Rules, 1962 (the Rules), reasonable adjustments should be made between comparable companies PLI vs tested party results.

In the event, the amortization of goodwill does not lead to a significant economic benefit or is related to unrelated business activity, such accounting expense items may be required to be carved out from the PLI computation of tested party.

Case Reference Case Summary
Citrix Systems India Private Limited [TS-255-ITAT-2020(Bang)-TP], ·       It was held that there should not be any doubt that, while computing Operating Cost, a uniform practice should be followed for all the comparable companies.

·       However, considering the lack of clarity as to whether the same method was followed in respect of the Assessee as well as of other comparables, the Tribunal in this case remitted the issue back to AO/TPO for examining the same.


5. Inter-play between Treatment of Amortization of Goodwill from a Corporate Tax Deductibility Perspective vs. TP Treatment

In Pole to Win India Private Limited [TS-361-ITAT-2015(Bang)-TP], it was held that the expenses disallowed in computation of taxable income should be excluded from operating cost. However, the allowance/ disallowance of expense while computing taxable income cannot be sole factor for considering certain expense item as operating and non-operating in nature for PLI computation.

In Nalco Water India Limited [TS-892-ITAT-2019(PUN)-TP], the ITAT ruled on treatment of subvention/ subsidy received from parent company by a lossmaking Indian subsidiary. It was held that, voluntary payments of subvention could be made in order to protect the capital investment of Assessee and hence treats it as capital receipts in the hands of Assessee, however, the subvention amount would be operating in nature for the purpose of computing Assessee’s PLI for TP-analysis. The Assessee’s loss during the year was converted into profit only due to the subvention receipt.  The item of receipt was undoubtedly, an exceptional item of income but was not an extraordinary item of income and hence operating in nature.


The treatment of amortization of goodwill in the TP analysis will depend on the details Functional, Assets and Risk (FAR) analysis including evaluation of the impact that such goodwill may have on the international transactions provided by the Assessee to its AEs.

Post amendment and based on some of the judicial precedents before amendment, we may interpret that goodwill on business acquisitions has been considered as extraordinary item and hence non-operating in nature.

Leave a Reply

Your email address will not be published. Required fields are marked *