Transfer pricing adjustments must reflect verifiable comparables, working capital differences, net receivables, and the true purpose of borrowing.

Transfer pricing adjustments require verifiable comparability data before any basic customs duty correction is allowed, and an unsupported claim will fail. Working capital differences are economically relevant under TNMM, so a reasonable adjustment may be granted where material differences exist. Notional interest on receivables should be assessed holistically, and benchmarking only receivables is inappropriate where substantial interest-free payables to the same associated enterprises exist. For external commercial borrowing, the loan's actual purpose must govern benchmarking; a borrowing for capital goods or facility expansion cannot be treated as a working capital loan without proper basis.

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Issues: (i) whether adjustment on account of basic customs duty was allowable in transfer pricing computation, (ii) whether working capital adjustment was to be granted while determining the arm's length price, (iii) whether notional interest on outstanding receivables from associated enterprises was sustainable where substantial interest-free payables to the same associated enterprises existed, and (iv) whether interest on external commercial borrowing was correctly benchmarked by treating the loan as a working capital loan instead of a capital expansion loan.

Issue (i): whether adjustment on account of basic customs duty was allowable in transfer pricing computation.

Analysis: The assessee was required to demonstrate, with verifiable data, that higher import dependence and non-cenvatable customs duty materially distorted comparability with the selected comparables. The material on record showed incomplete data for most comparables and a computation based only on a limited subset, which was found insufficient to support a reliable adjustment. The claim was also treated as too general to justify a comparability correction.

Conclusion: The claim for basic customs duty adjustment was rejected and the issue was decided against the assessee.

Issue (ii): whether working capital adjustment was to be granted while determining the arm's length price.

Analysis: Working capital differences were accepted as an economically relevant factor under the transactional net margin method, and reasonable adjustment was required to neutralise material differences between the tested party and comparables. The assessee's computation based on opening and closing balances was treated as a reasonable method in the absence of daily data. The Tribunal followed coordinate bench precedent and accepted the adjustment principle.

Conclusion: Working capital adjustment was held allowable, and the issue was decided in favour of the assessee.

Issue (iii): whether notional interest on outstanding receivables from associated enterprises was sustainable where substantial interest-free payables to the same associated enterprises existed.

Analysis: The receivables were much lower than the outstanding payables, and it was an admitted fact that no interest had been charged on the payables. In these circumstances, benchmarking only the receivables was found to be artificial and one-sided, because the commercial arrangement had to be viewed holistically. The Tribunal applied the principle of netting and relied on precedent holding that only net receivables, if any, could be benchmarked.

Conclusion: The notional interest adjustment on receivables was deleted, and the issue was decided in favour of the assessee.

Issue (iv): whether interest on external commercial borrowing was correctly benchmarked by treating the loan as a working capital loan instead of a capital expansion loan.

Analysis: The loan agreement showed that the borrowing was taken for purchase of capital goods and expansion of existing facilities. The transfer pricing adjustment proceeded on the contrary assumption that the borrowing was for working capital, which was found inconsistent with the record. The matter was therefore required to be re-examined by applying the correct purpose of borrowing and the relevant regulatory framework for external commercial borrowings.

Conclusion: The adjustment on ECB interest was set aside for fresh examination, and the issue was restored for reconsideration in favour of the assessee for statistical purposes.

Final Conclusion: The appeal succeeded on the working capital, receivables, and ECB issues, while the customs duty claim failed, resulting in partial relief to the assessee with one issue remanded for fresh adjudication.

Ratio Decidendi: In transfer pricing matters, adjustments must be supported by verifiable comparability data, working capital differences require reasonable neutralisation under the TNMM, receivables may be benchmarked only after considering connected payables in the same commercial arrangement, and the nature and purpose of a borrowing must govern its benchmarking.

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