Working capital adjustment and section 14A computation require proper comparability analysis and fresh examination, not ad hoc treatment.

Working capital differences must be factored into transfer pricing comparability under rule 10B(3) of the Income-tax Rules, 1962, so an arm's length analysis should be recomputed after granting opportunity to the assessee. A section 14A disallowance cannot be sustained on an ad hoc basis without proper computation; it requires fresh examination by the Assessing Officer after hearing the assessee. The note states that both disputed additions were remitted for reconsideration, with the remaining grounds not surviving for substantive determination.

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Issues: (i) Whether working capital adjustment had to be granted while determining transfer pricing adjustment; (ii) Whether disallowance under section 14A could be sustained when made on an ad hoc basis without proper computation.

Issue (i): Whether working capital adjustment had to be granted while determining transfer pricing adjustment.

Analysis: The Tribunal followed its coordinate bench decision in the assessee's own case and noted that differences in working capital position affect comparability under rule 10B(3) of the Income-tax Rules, 1962. It accepted that working capital employed by the assessee and by comparable companies must be factored into the arm's length analysis, and that the TPO had to recompute the adjustment after granting due opportunity.

Conclusion: The issue was decided in favour of the assessee and the matter was remitted for fresh transfer pricing computation.

Issue (ii): Whether disallowance under section 14A could be sustained when made on an ad hoc basis without proper computation.

Analysis: The Tribunal found that the disallowance had been made casually and without proper calculation. It held that the matter required fresh examination by the Assessing Officer after giving the assessee an opportunity to be heard.

Conclusion: The issue was decided in favour of the assessee and the disallowance was set aside for de novo consideration.

Final Conclusion: The appeal succeeded only to the extent of remitting the two contested additions for fresh adjudication, with the remaining grounds not surviving for substantive determination.

Ratio Decidendi: For transfer pricing comparability, differences in working capital must be reasonably adjusted under rule 10B(3) of the Income-tax Rules, 1962, and a section 14A disallowance cannot rest on an ad hoc computation without proper examination and opportunity of hearing.

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