TNMM transfer pricing: consistent operating classification and reasonable working capital approximations govern comparability adjustments.

In TNMM transfer pricing benchmarking, items intrinsically linked to operating receipts must be classified consistently: the article states that SEIS reversal and foreign exchange fluctuation connected to export receivables were treated as operating or non-operating only to the extent justified by their factual nexus, and the resulting margin remained within arm's length range. It also explains that working capital adjustment is a recognised comparability adjustment and cannot be refused merely because daily working capital data is unavailable, where reasonably reliable approximations from balance-sheet figures can be used. The discussion concludes that such adjustments are computation issues, not grounds for outright denial, when the record supports a reasonable estimate.

---

---

Issues: (i) Whether the transfer pricing adjustment made by reclassifying SEIS reversal as operating expense and foreign exchange fluctuation as non-operating income was sustainable; (ii) Whether working capital adjustment under TNMM could be denied for want of daily working capital data.

Issue (i): Whether the transfer pricing adjustment made by reclassifying SEIS reversal as operating expense and foreign exchange fluctuation as non-operating income was sustainable.

Analysis: The adjustment was based on a recomputation of the assessee's operating margin by treating the SEIS reversal differently from the assessee's consistent treatment of SEIS items as non-operating, and by excluding foreign exchange gains arising from realization of export receivables from operating results. The record showed that the SEIS reversal arose from earlier accrual of incentive income that later stood reduced by revised rates and market conditions, while the foreign exchange fluctuation was directly connected with operating receivables from the service transaction. The resulting operating margin, once these items were correctly classified, remained within the arm's length range determined in the transfer pricing exercise.

Conclusion: The transfer pricing adjustment on this issue was not sustainable and was deleted in favour of the assessee.

Issue (ii): Whether working capital adjustment under TNMM could be denied for want of daily working capital data.

Analysis: Working capital adjustment is a recognised comparability adjustment under TNMM intended to neutralise differences in receivables, payables, and inventory that affect profitability. The absence of daily data was held not to be a valid reason to refuse the adjustment, because reasonably reliable approximations based on available balance-sheet figures may be used where they reasonably reflect the working capital position. The objections based on intra-year movements and differences in cost of capital were treated as matters relating to computation, not grounds to deny the adjustment altogether. On the computation placed on record, the adjusted comparable margin was below the assessee's margin.

Conclusion: Working capital adjustment was allowable and the assessee succeeded on this issue.

Final Conclusion: The substantive transfer pricing additions did not survive, and the assessee obtained relief on the core disputed adjustments, while the appeal was otherwise disposed of accordingly.

Ratio Decidendi: In TNMM benchmarking, items intrinsically linked to operating receipts must be classified consistently, and working capital adjustment cannot be denied merely because daily data is unavailable if a reasonable and reliable approximation can be made from the material on record.

---