2024 (3) TMI 877 - AT - Income Tax

TP Adjustment - working capital adjustment - HELD THAT - Since the view taken in the cases of Parexel International Clinical Research (P.) Ltd. 2023 (3) TMI 1429 - ITAT BANGALORE and also Parexel International (India) Private Limited 2023 (12) TMI 633 - ITAT HYDERABAD 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. Benchmarking of the interest paid on ECBs - There is no denial of the fact that the term of the impugned ECB loan is not four years, but five years, and as observed by the learned DRP, such loan can have a spread of 300 bps. Also as perused the copies of the orders dated 29/01/2016 and 30/09/2016 under section 92CA(3) of the Act, evidencing the fact that the assessee paying interest on ECB loan at LIBOR 2.75% was accepted. We find that the payment of interest on ECB by the assessee at LIBOR 275 basis points need not be interfered with. Ground is accordingly allowed.

Summary

Issues Involved:
1. Working Capital Adjustment
2. Benchmarking of Interest on External Commercial Borrowing (ECB)

Summary:

Issue 1: Working Capital Adjustment

The 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.