2024 (3) TMI 877 - AT - Income Tax

Tribunal allows partial appeal, sets aside working capital adjustment for fresh consideration, accepts ECB interest benchmarking at LIBOR+275 basis points

ITAT Hyderabad allowed the appeal partially. The tribunal set aside the working capital adjustment issue to the Assessing Officer/TPO for fresh ... Working capital adjustment - comparability adjustment under Rule 10B - arm's length price (ALP) under TNMM - benchmarking of interest on External Commercial Borrowing (ECB) - acceptance of LIBOR+275 basis points as arm's lengthWorking capital adjustment - comparability adjustment under Rule 10B - arm's length price (ALP) under TNMM - Allowability of working capital adjustment claimed by the assessee while determining ALP under TNMM - HELD THAT: - The assessee had furnished detailed computations of working capital adjustment in the paper book (pages 325-337) which were not considered by the Revenue. The DRP rejected the claim on grounds that year end receivables/payables do not demonstrate the impact on price, cost or profits and that various factors (business cycle, segmental disclosures, trade vs non trade classification, and differing cost of capital) prevent a reasonably accurate adjustment. The Tribunal examined precedents where identical DRP observations were considered and led to directions that the TPO/Assessing Officer decide the issue afresh after considering the information furnished by the assessee. Following those Co ordinate Bench decisions and noting that the assessee had placed the working papers before the authorities, the Tribunal set aside the issue to the file of the Assessing Officer/TPO for fresh adjudication, directing consideration of the material already furnished and any further relevant information the authorities may require. The Tribunal did not finally adjudicate the quantum of adjustment but remitted the matter for fresh decision in light of the submissions and computations on record. [Paras 6, 8]Issue set aside to the Assessing Officer/Transfer Pricing Officer to decide afresh after considering the working capital computations and relevant information furnished by the assessee.Benchmarking of interest on External Commercial Borrowing (ECB) - acceptance of LIBOR+275 basis points as arm's length - arm's length price (ALP) under TNMM - Whether interest paid on the assessee's ECB at LIBOR+275 basis points is at arm's length - HELD THAT: - The Revenue disputed the interest rate, contending that an arm's length spread would be LIBOR+200 bps (or below LIBOR+200 bps for a four year term). The assessee established that the ECB term was for five years, for which a spread of 300 bps is permissible under the DRP's own reasoning, and produced earlier orders where LIBOR+2.75% had been accepted for prior assessment years. On recording that the loan term is five years and noting prior acceptance of LIBOR+2.75% in contemporaneous proceedings under section 92CA(3), the Tribunal found no reason to interfere with the assessee's benchmarked interest rate and allowed the ground. [Paras 12]Payment of interest on ECB at LIBOR+275 basis points accepted as arm's length; ground allowed.Final Conclusion: Appeal partly allowed: the working capital adjustment issue is remitted to the Assessing Officer/Transfer Pricing Officer for fresh consideration of the computations and information furnished by the assessee; the benchmarking of interest on the ECB at LIBOR+275 basis points is accepted as arm's length and upheld. Issues Involved:1. Working Capital Adjustment2. Benchmarking of Interest on External Commercial Borrowing (ECB)Summary:Issue 1: Working Capital AdjustmentThe Revenue authorities denied the working capital adjustment on the grounds that the assessee did not demonstrate the impact of working capital differences on profits, and segmental working capital was not disclosed in the annual reports of comparable companies. The AR argued that the issue had been considered by Co-ordinate Benches of the Tribunal under identical circumstances and was granted. The AR pointed out that the assessee had furnished all relevant information and computations to the TPO, which were overlooked by the Revenue authorities. The DR relied on the DRP's observations that the accounts payables and receivables shown in the balance sheet only reflect the year-end position and do not capture the impact on costs, price, or profits. The Tribunal, following the decisions in Parexel International Clinical Research (P.) Ltd. and Parexel International (India) Private Limited, set aside the issue to the file of the AO/TPO to decide afresh after considering the information furnished by the assessee.Issue 2: Benchmarking of Interest on External Commercial Borrowing (ECB)The Revenue authorities recorded that the taxpayer paid interest on ECB loan at 11.75%, which was considered excessive as it worked out to LIBOR+275 points. The TPO and DRP concluded that the interest rate should be LIBOR+200 points based on previous Tribunal decisions and RBI guidelines. The AR contended that the loan term was five years, not four, and thus a spread of 300 basis points was permissible. The Tribunal found that the term of the loan was indeed five years and noted that the interest rate at LIBOR+2.75% was accepted for previous assessment years. Consequently, the Tribunal allowed the payment of interest on ECB by the assessee at LIBOR+275 basis points.Conclusion:The appeal of the assessee was partly allowed for statistical purposes, with the working capital adjustment issue remanded for fresh consideration and the interest on ECB issue resolved in favor of the assessee.