TaxTMI 
TaxTMI 
2024 (3) TMI 877
X X X X Extracts X X X X
X X X X Extracts X X X X
....dicated are these two grounds only. 3. Insofar as the working capital adjustment is concerned, it was denied by the Revenue authorities on the grounds that the assessee has not demonstrated that the working capital differences had impacted its profits; that the segmental working capital is not disclosed in the annual reports of the comparable companies; and that cost of capital is different for different companies. 4. Learned AR submitted that under identical circumstances, the issue of grant of working capital adjustment has been considered by the Co-ordinate Benches of the Tribunal and it is granted. He brought it to our notice that the assessee furnished all the relevant information and working before the learned Transfer Pricing Officer (learned TPO) at page No. 325 to 337 at paper book under the head 'computation of working capital adjustment', but it missed the attention of both the Revenue authorities. He placed reliance on the view taken by a Co-ordinate Bench of the Tribunal in the case of Parexel International Clinical Research (P.) Ltd. vs. ACIT [2023] 152 taxmann.com 355 (Bangalore - Trib.) and also Parexel International (India) Private Limited [2023] 156 taxmann.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l differences so as to warrant an adjustment. In these circumstances, we are inclined to uphold the TPO's reasoning and reject the assessee's claim for working capital adjustment." 6. We have gone through the record in the light of the submissions made on either side. In the paper book vide page Nos. 325 to 337, the assessee had given the computation of working capital adjustment and in the orders of the Revenue authorities, this material has not been referred to. As extracted supra, the learned DRP went on to say that it was not demonstrated with any data or information as to the impact of such difference on the price, cost or profits, and as to whether such difference materially affects the price, cost or profits. It further observed that the 'Accounts payables' and 'Receivables' shown in the balance sheet only reflects the position as at the end of the financial year, and as such it would not enable to measure the impact of working capital on the costs, price or profits, and the working capital requirements and impact depends on various factors such as business cycle the nature of business activity with its correlation on the general economic trends, t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ends, the fund and capital position of the company, its marketing strategies, its market share etc. all of which cannot be captured in the year end Receivable or Payable position. Besides, the 'Payable' and 'Receivable' position stated in the Balance Sheet may not exactly reflect as to whether it arises from transaction relating to Revenue Account or Capital Account as there is no uniformity in the accounting or reporting requirements, and an intermixing is generally possible. The cost ascribable to the working capital would be different to different enterprises depending on the cost of fund to the enterprise, the cost of money in the economy it operates etc. In view of these, a reasonable accurate adjustment is not possible, as the differences in working capital requirements itself is based on various assumptions. Besides, the assessee had failed to demonstrate such material differences so as to warrant an adjustment. In these circumstances, the ld. DRP inclined to uphold the TPO's reasoning and rejected the assessee's claim for working capital adjustment. Against this assessee is in appeal before us. 9. After hearing both the parties, we are of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction); (f) ** ** ** (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:-- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or ■ Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called "comparability adjustments. 13. In Paragraphs 13 to 16 of the aforesaid OECD guidelines, need for working capital adjustment has been explained as follows: "13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of acco....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is to improve the reliability of the comparables. 15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT (A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. (iii) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT (A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT (A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT (A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT (A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at pages 173 & 1....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng Officer/learned TPO was directed to grant working capital adjustment after obtaining and considering the relevant information from the assessee. 8. Since the view taken in the cases of Parexel International Clinical Research (P.) Ltd. and also Parexel International (India) Private Limited (supra) is directly and substantially on the issue of allowability of working capital adjustment under identical circumstances, while respectfully following the same, we set aside the issue to the file of the learned Assessing Officer/learned TPO to decide the issue afresh, after considering the information furnished by the assessee. 9. Coming to the other issue under contest, it relates to the benchmarking of the interest paid on ECBs. Revenue authorities recorded that the taxpayer paid interest on ECB loan at 11.75% on the average loan amount of Rs. 508,78,85,130/- during the financial year 2015-16, after taking into the foreign exchange fluctuation. According to the learned TPO, this rate of interest cannot be accepted, because it works out to the interest rate of LIBOR+275 points. Learned TPO placed reliance on the decisions of the Co-ordinate Bench of the Tribunal in the case of Dr. ....