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TMI Blog2024 (3) TMI 877X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - Shri Rama Kanta Panda, Vice President And Shri K. Narasimha Chary, Judicial Member For the Assessee : Shri Aliasgar Rampurwala and Shri Pratik, ARs For the Revenue : Ms. TH. Vijaya Lakshmi, CIT-DR ORDER PER K. NARASIMHA CHARY, J.M: Aggrieved by the final assessment order dated 09/04/2021 passed consequent to the directions of Hon'ble Dispute Resolution Panel, Bengaluru ( DRP ), in the case of Medtronic Engineering and Innovation Centre Private Limited, ( the assessee ) for the assessment year 2016-17, under section 143(3) r.w.s. 144C(13) r.w.s. 143(3A) 143(3B) of the Income Tax Act, 1961 (for short the Act ), assessee filed this appeal. 2. Though this appeal has been filed on as many as 11 grounds, at the time of arguments, all the grounds except the grounds relating to working capital adjustment and interest on External Commercial Borrowing (ECB) are given up. Now what remains to be adjudicated are these two grounds only. 3. Insofar as the working capital adjustme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 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, we also note that the- assessee had failed to demonstrate such material differences so as to warrant an adjustment. In these circumstances, we are inclined to uphold the TPO's reasonin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... linical Research (P.) Ltd. (supra),- 8.1 The ld. DRP observed that Rule 10B provides for making reasonably accurate adjustment to the uncontrolled comparable transaction to eliminate the material effects of differences on the price, cost or profits. The assessee has argued for working capital adjustment contending that there exist differences in the payable and receivable position between the assessee and the comparables. However, 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 affect the price, cost or profits. 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. 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, the fund and capital position of the company, its marketing strategies, its market share etc. all of which cannot be captured in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely : (a) to (b)** ** ** (e) transactional net margin method, by which, (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the TPG ) contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: ■ None of the differences (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to be kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures, (ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The guidelines conclude by observing that the purpose of working capital adjustments 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ITAT in the case of ITO v. E Value Serve.com [2016] 75 taxmann.com 195 (Delhi - Trib.). has held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT (A)'s objection on 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly. 23. The aforesaid decision clearly lays down the proposition that working capital adjustment is to be given effect to while determining ALP while adopting TNMM method. Respectfully following the said decision, we allow this issue in favour of the assessee. The above view is followed by the Hyderabad Bench of the Tribunal in the case of Parexel International (India) Private Limited (supra) and the learned Assessing 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 afre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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