Working capital adjustment in transfer pricing may defeat separate receivables interest adjustment if margins stay within arm's length.

In transfer pricing proceedings under the TNMM, working capital adjustment must be examined on the basis of material and data, and the Transfer Pricing Officer cannot deny it by mere theoretical assertion, especially where the comparables were selected by the Revenue. The Tribunal indicated that the separate adjustment for interest on overdue receivables cannot stand independently if a working capital adjustment brings the assessee's margins within the arm's length range. The matter was remitted for fresh examination by the Assessing Officer/Transfer Pricing Officer, with the consequence that no separate receivables adjustment is warranted if working capital adjustment is allowed.

---

---

Issues: Whether, in transfer pricing proceedings, the assessee was entitled to working capital adjustment and whether a separate adjustment on account of interest on overdue receivables from associated enterprises could survive without first determining the impact of such adjustment.

Analysis: The assessee's business transactions were benchmarked under the Transactional Net Margin Method. The adjustment was rejected by the Transfer Pricing Officer and the Dispute Resolution Panel on the ground that the assessee had not furnished working capital computations showing its impact on profitability. The Tribunal held that where the comparable companies are selected by the Revenue, the onus lies on the Transfer Pricing Officer to demonstrate, with material and data, why working capital adjustment is not required and why the resulting arm's length price remains reliable without such adjustment. Mere theoretical assertions were insufficient. Since no working capital computation was available before the Tribunal, and because the separate overdue receivable adjustment would not survive if the working capital adjustment brought the margins within the arm's length range, the matter required fresh examination.

Conclusion: The issue was restored to the Assessing Officer / Transfer Pricing Officer for fresh decision. If the assessee is found eligible for working capital adjustment, no separate adjustment on interest on overdue receivables is warranted.

---