ORDER
Sanjay Awasthi, Accountant Member.- This appeal arises from order u/s 250 of the Income Tax Act, 1961 (hereafter as “the Act”), dated 10.03.2015, passed by Ld. CIT(A)-44, New Delhi. In this case, evidently, there are broadly two issues for adjudication which have been continuing controversies over the past several assessment years. The assessee is a domestic company and is in the business of supplying equipment and products related to material analysis. The assessee also provides installation and commissioning services, followed by after sales services, to its clients. The first issue pertains to the aspect of segregation of services and goods provided by the assessee in terms of providing AMC Services and secondly, providing Agency & Marketing Support Service. The Ld. AO/TPO have treated these two segments as part of the broad umbrella of services provided by the assessee and have treated them as one for the purposes of working out Arm’s Length Price (ALP). The second issue pertains to the treatment given to non-compete fees which has been held to be capital in nature and also the depreciation amounting to Rs.3,75,831/- being disallowed on the same.
1.1 The Ld. CIT(A) upheld the action of Ld. AO after following earlier years orders of Ld. CIT(A)s.
1.2 The assessee has approached the ITAT for the present year with the following grounds: –
“1. That on the facts and circumstances of the case and in law, the order passed by the Hon’ble Commissioner of Income-tax (Appeals) New Delhi (“Hon’ble CIT(A)”) is bad in law.
2. That on the facts and circumstances of the case and in law the Hon’ble CIT(A) erred in upholding the addition of INR 2,87,42,095/- to the returned income of the Appellant made by the Ld. AO / TPO by re-computing the arm’s length price of the international transactions under section 92 of the Act.
3. Hon’ble CIT(A) erred in facts and in law by upholding the rejection of the transfer pricing methodology adopted by the Appellant in its transfer pricing report and in allowing the unjustified approach of the Ld. TPO by :
3.1 Disregarding the segmental analysis carried out by the Appellant in its transfer pricing documentation and instead, considering entity wide approach by treating Indenting / Marketing support segment and Trading of spare parts (AMC) segment as single business segment.
3.2 Rejecting the Resale Price Method adopted by the Appellant and instead adopting Transaction Net Margin Method (TNMM) as the most appropriate method for benchmarking the international transactions under Trading of spare parts (AMC) segment.
3.3 Not accepting comparable companies selected by the Appellant in its TP documentation even when such companies were functionally comparable to the Appellant;
3.4 Conducting a fresh search for companies by not accepting the quantitative filters selected by the Appellant in its transfer pricing documentation and instead applying his own additional / quantitative filters which lacked valid and sufficient reasoning.
3.5 S electing inappropriate comparable set in application of the transfer pricingmethodology adopted by him.
4. Hon’ble CIT(A) erred in facts and in law by not providing the benefit of economic adjustment on account of difference in working capital in arriving at the arm’s length mean margin under TNMM.
5. The Ld. CIT(A) erred in facts and in law in making a disallowance of Rs.3,75,831/- on account of depreciation on NonCompete Fee.
5.1 The Hon’ble CIT(A) has erred in disallowing depreciation on Non-Compete Fee holding the same to be capital in nature without appreciating that the appellant has itself treated the same as capital expenditure and thus claimed depreciation on the same and not claimed the entire non-compete fee as revenue expenditure.
5.2 The Ld. CIT(A) has erred in disallowing depreciation on NonCompete Fee holding the same to be purely personal in nature.
5.3 That the Ld. CIT(A) erred in not following the binding orders of the jurisdictional Hon’ble Income Tax Appellate Tribunal (“ITAT”) and also Ld. Commissioner of Income Tax (Appeals) [CIT(A)] in Appellant’s case for previous years on this issue.
6. The Ld. CIT(A) erred in law and on facts in not allowing the benefit of brought forwarddepreciation of Rs. 1,08,61,406/- as claimed by the Appellant and further erred in notallowing the carry forward of unabsorbed depreciation of Rs.2,52,06,777/- as claimed by the Appellant in the return of income filed.
6.1 That the Ld. CIT(A) has erred in arbitrarily remanding the matter to the AO forverification while treating the Appellant’s claim for brought forward andunabsorbed depreciation as brought forward losses.
That the above grounds are independent and without prejudice to each other.
The Appellant craves leave to add, amend, alter, delete, rescind, forgo or withdraw any of the above grounds of objection either before or during the course of proceedings in the interest of the natural justice.”
1.3 The Ld. AR made a statement at the Bar that the assessee was not pressing grounds 6 & 6.1. These grounds are accordingly dismissed as not pressed.
2. The Ld. AR argued with the help of written submissions and a plethora of case laws, including the orders of ITAT, presented in the shape of paper books and written submissions. The Ld. AR relied on the finding given in the assessee’s own case for AY 2007-08 [Spectris Technologies (P.) Ltd. v. Deputy Commissioner of Income-tax (Delhi – Trib.)/ITA No.1818/Del/2013, order dated 07.03.2024]. The Ld. AR read paragraphs 11 to 18 on pages 8 to 15 of this order to canvass the point that segmental division of business activity was not approved, as against the TPO’s stand. Thereafter, the Ld. AR also pointed out order in the assessee’s own case for AY 2008-09 Spectris Technologies (P.) Ltd. v. ACIT [IT Appeal No. 3563 (Delhi) of 2014, dated 17-12-2025], wherein the finding given for AY 2007-08 by the ITAT has been relied upon to remand the issue on a limited matter to the Ld.TPO. Regarding the issue of non-compete feesthe Ld. AR pointed out the finding of Ld. CIT(A) at pages 22 & 23, paras 6.4 to 6.6 thereon. In the impugned order, it has been held that while the amount paid on account of non-compete fees is capital in nature but it is also of a personal nature and hence it does not qualify for any depreciation u/s 32(1)(ii) of the Act. In arriving at this conclusion, the Ld. CIT(A) relied on the case of Sharp Business System v. CIT CTR 233 (Delhi). The Ld. AR fairly placed on record the recent judgment delivered by the Hon’ble Apex Court in the case of this very same Sharp Business System v. CIT (SC), order dated 19.12.2025], and stated that the judgment of the Hon’ble Delhi High Court (supra) has been overturned to the extent that non-compete fees is held to be a revenue expenditure allowable u/s 37(1) of the Act. It was also pointed out that the issue of depreciation has not specifically been adjudicated since the outgoing has been held to be revenue in nature. It was the submission that the assessee has subsumed the expenditure on account of non-compete fees in the block of assets and thereafter has been charging depreciation on the same. It was the submission that following the judgment in the case of Bharat Aluminum Company Ltd. reported in (Delhi), especially para 31 thereon, once an asset is subsumed in a block of assets then for the purposes of depreciation the whole block of assets becomes one single asset. In light of this judgment, it was averred that it would be difficult to segregate the value of non-compete fee as an asset from this block. However, the Ld. AR left it to the Bench to decide on appropriate directions to be given to the Ld. AO in this regard, especially in light of the latest judgment of the Hon’ble Supreme Court (supra).
2.1 Some relevant portions from the written submissions with regard to the TP issues may be extracted for record and reference: –
“1. Appellant is a domestic company and is engaged in the business of supplying equipment and products relating to material analysis. It also provides installation and commissioning services and after sales services to its clients in India. Product list includes material, analytical instruments like x-rays analytical equipment.
2. In the return of income appellant had disclosed following international transactions: –
| S.No. | Nature of Transaction | Method used by assessee | Amount |
| 1. | Purchase of spare parts for normal business | (RPM) Segment 1 | Rs.53,45,830/- |
| 2. | Purchase of Traded goods | Annual maintenance services | Rs.60,95,100/- |
| 3. | Commission on sale of equipment and spare parts | (TNMM) Segment 2 Agency and Marketing Support Services | Rs.4,64,95,142/- |
| 4. | Sub-contracting expenses | Rs. 14,20,048/- |
| 5. | Service income | Rs.52,15,601/- |
| 6. | Marketing and Administrative support services | Rs.1,46,08,247/- |
| 7. | Communication Charge | Rs.51,36,611/- |
| 8. | Seminar & training | Rs.3,34,296/- |
3. For benchmarking the above international transactions, appellant prepared segmental accounts. For international transactions relating to Segment 2 i.e., Agency and Marketing Support Services the most appropriate method used was TNMM and PLI selected was OP/OC. As per reported benchmarking analysis the results of tested party as per segmental accounts was 4.51% as against average result of comparable companies of 5.69%.
As regards Segment 1 i.e., Annual Maintenance Services the most appropriate method selected was RPM and PLI of gross margin/selling price. The tested party margin calculated was 16.33% as against average comparable margin of 17.55%.
4. TPO, however, has disregarded the above benchmarking analysis. It is alleged by him that FAR of segment relating to “Provision for AMC Services” was inextricably linked to the other functions performed by the appellant in Segment 2. TPO has therefore aggregated the income and expenditure with respect to AE and non-AE segments alleging that the segmental accounts have been artificially created for transfer pricing purposes showing profitability in AE related services and losses in the AMC business. He has therefore, aggregated the two segments and determined profitability of the applicant applying TNMM at an entity as a whole level..
6. It is submitted that the appeal for AY 2007-08 has been decided by Hon’ble ITATvide order dated 7th March, 2024 in ITA No.1818/Del/2013 (copy enclosed at pages 1 to 16of PB). Hon’ble ITAT has approved the correctness of segmental accounts reported by the appellant and has negated the case made out by TPO aggregating segments 1 and 2 and thereby applying TNMM on an entity level. In this regard, it has been held by the Hon’ble ITAT as under:-
“10. We have given thoughtful consideration to the TP study report of theassessee, purchase of spare parts for normal business, AMC. We find thatResearch and Development are undertaken by the AE of the assessee. All the equipments and spare parts supplied to the assessee by its AE are manufactured by its group companies. The assessee is responsible for all functions relating to inventory management and the assessee enters into a contract with the customers for providing AMC services and accordingly, it is responsible for delivery of services to the customer.
11. Regarding sale of spare parts and equipments, the assessee is responsible for making sale of spare parts and equipment imported by it from its AE. Sale of spare parts under AMC business can be broadly categorized into three types:
| (i) | | Over the counter sale wherein the customer has not taken anyAMC and he purchases only spare parts or equipment from the assessee. |
| (ii) | | Sale to AMC customer wherein the customer has taken AMC from the assessee. |
| (iii) | | Replacement under AMC wherein the customer has taken AMC from the assessee and spare part required to be replaced is covered under AMC. |
12. For contracts entered into between the assessee and its customers, the assessee is responsible for delivery of equipment and spare parts and services and, accordingly, it is also responsible for invoicing and collection of charges relating to it. The assessee deploys necessary assets for performing its business. It does not own any manufacturing facilities, research and development facilities or other significant assets for this activity. Employees of the assessee possess technical knowledge especially those who are involved in providing AMC services.
13. However, under provision of Agency and Marketing support services, R & D are undertaken by the AE of the assessee. All the spare parts and equipment supplied to the assessee are manufactured by its AE. The AE of the assessee is responsible for maintaining the requisite inventory levels of all the spare parts and equipment. The assessee does not employ any specific assets, tangible asset for providing agency and administrative services to its AEs or intangible including human resources and does not bear any inventory risk. The assessee does not bear any credit risk.
14. Based on the facts mentioned in the TP Study Report, it can be safely concluded that the assessee’s business can be divided into two business segments:
| (i) | | AMC service provider, and |
| (ii) | | Agency and marketing support service provider |
15. During the course of TP assessment proceedings, the assessee has explained that for the purpose of TP analysis, it has divided its revenue and expenditure broadly into two segments based on functional, asset and risk analysis and providing AMC services including sale of goods. The assessee has also given basis of allocation/apportionment of revenue and expenses which is as under:
……………………
16. From the above charts, it can be seen that the assessee has allocated common expenses and has also given basis of apportionment. We find that the Id. CIT(A) has put a doubt on whether segmental accounts are to be accepted and the only reason given by the authorities, as we understand from the respective cross is that it is not audited.
17. Merely because segmental accounts are not audited cannot make them untrustworthy without pointing out any specific defect/error/fallacy in them. Observations of the Id. CIT(A) that non-compete fee and good will has not been allocated is not accepted as the TPO himself has not allocated these expenses.
18. As mentioned elsewhere, the assessee has not only provided segmental account but has also allocated expenses and has given basis of allocation. Considering the facts of the case in totality, we do not find any merit in the stand taken by the TPO/Assessing Officer as confirmed by the Ld. CIT(A). We, accordingly, direct the Assessing Officer to delete the impugned adjustment.
7. Recently vide order dated 17th December 2025 passed in ITA No. 3563/Del/2014 in appeal for AY 2008-09 (copy enclosed at pages 56 to 72 of PB) the Hon’ble ITAT followed its previous order for AY 2007-08 and has directed the TPO to benchmark the international transactions of the appellant separately under different segments and the FAR of segment 1 differs from FAR of segment 2. It is therefore submitted that for the year under consideration i.e. AY 2009-10 also the directions given by Hon’ble ITAT in AYs 2007-08 and 2008-09 be followed and TPO be directed to do separate benchmarking segment wise in accordance with law.”
3. Per contra, the Ld. DR argued with the help of written submissions, some portions from which may be extracted as under: –
“After perusal of facts of the instant case and decisions relied upon, reliance is placed upon decision of 5 Member Special Bench of Hon’ble ITAT in the case of Aztec Software and Technology Services Limited v. ACIT (2007), 107 ITD 141 (Bang.) (SB) (copy of relevant part enclosed), wherein it has been held that………
Thus, as per above mentioned binding decision of Special Bench of ITAT, adjustments made by the TPO on account of ALP in the instant case can be deleted in present proceedings only if the Hon’ble Bench is satisfied and records a finding fault with the transfer price determined by the AO/TPO, addition on account of Transfer Pricing adjustment made in this case cannot be deleted. As held by the Hon’ble Special Bench, this is because mandate of section 92(1) is that in every case of international transaction, income has to be determined having regard to ALP. Therefore, unless ALP furnished by the taxpayer is specifically accepted, the Hon’ble Bench on the basis of material available on record has to determine ALP itself. Alternatively, this exercise can direct to be carried out by the TPO.
In this regard, it is noted that in AY 2007-08 and 2008-09, while deleting the adjustment made by the TPO by way of rejecting the combined benchmarking of both segments, Hon’ble Tribunal did not examine on merit the benchmarking carried out by the assessee in TPSR and did not give any finding that such benchmarking was fair and reasonable. Therefore, aforesaid order of Hon’ble Tribunal, being contrary to decision of Special Bench in the case of Aztec Software, cannot be considered as having any precedent value.”
3.1 The Ld. DR argued that in the order for AY 2005-06, the ITAT had remanded the matter back for consideration by the Ld. AO/TPO. The Ld. DR also supported the action of authorities below in this regard. With respect to the issue of non-compete fees, it was pointed out by the Ld. DR that the Hon’ble Apex Court has not adjudicated on whether noncompete fees can be subjected to any depreciation at all or not. It was pointed out that if paragraphs 5.1 & 31 were to be read conjointly in the Hon’ble Apex Court’s order in the case of Sharp Business System (supra) then it was clear that there was no directive regarding the charging of depreciation on non-compete fees, which has been held to be a revenue expenditure. The Ld. DR also requested the Bench to give necessary directions to the Ld. AO for dealing with this issue appropriately.
4. We have considered the rival submissions and have gone through the documents before us. Right at the outset, it deserves to be mentioned that the issue of TP Adjustment on the impugned services is now settled through the findings given for two previous years by the ITAT. In this regard, the finding given for AY 2008-09 (supra) deserves to be extracted: –
“5. Since the Tribunal had accepted that the assessee is into two different business segments i.e. AMC service provider and agency market and support services provider the transfer pricing adjustment made by the TPO by considering both the segments as a single segment for the year under consideration is to be revisited. In the light of the order of the Tribunal for the AY 2007-08 and the submissions of the Ld. Counsel for the Assessee, in principle we agree that the assessee s having two segments are observed by the Tribunal in assessee’s own case for the immediately preceding assessment year and, therefore, since the assessee is having segmental account the benchmarking has to be done segment wise separately and thus we direct the TPO to analyze the submissions of the assessee viz-a-viz the segmental accounts and the comparables and pass appropriate order after providing opportunities to the Assessee.
6. In case the PLI of the assessee as tested party as per the segmental accounts is 17.95% and average result of comparable companies is 19.63% and is within permissible tolerance range as per proviso to 92C(2), then no transfer pricing adjustment is called for by the TPO. With these observations we restore this issue to TPO for limited purpose of verification in the light of our above observations.”
4.1 Following this finding, we direct the Ld. AO/TPO to consider the two segments of the business as presented by the assessee. Thereafter, the Bench marking has to be done with respect to the two segments of business. The TPO would analyze and consider the submissions of the assessee, including the details of comparables provided by him, and thereafter pass an appropriate order on the segmental aspects of the assessee’s business. Secondly, the TPO would also test his conclusions on the parameters and conclusions arrived at by the assessee and see if the same are within the tolerance level provided in the proviso to section 92C(2) of the Act. Accordingly, with these directions the issue of working out ALP is restored to the file of the Ld.TPO/AO. Needless to say, adequate opportunity of being heard would be given to the assessee and the comparables etc. provided by him will be fairly examined in the light of extant provisions.
5. Regarding the issue of treatment being given to non-compete fees, we find that the Ld. CIT(A) was right at that point in time to follow the Hon’ble Delhi High Court in the Sharp Business System case (supra). However, with the latest judgment of the Hon’ble Supreme Court the issue is now settled regarding the treatment to be given to non-compete fees and respectfully following the same, we direct the Ld. AO as under:
| 1. | | The AO must follow the said judgment in treating noncompete fees as a revenue expenditure. |
| 2. | | The Ld. AO must, with the help of the assessee, work out the treatment to be given to the said asset now in the light of the Apex Court’s judgment, with regard to the depreciation already claimed by the assessee. In this regard the portion pertaining to depreciation issue in the Delhi High Court’s Judgment (supra) can also be utilized for giving effect to the Hon’ble Apex Court’s order. |
6. In the result, this appeal is partly allowed.