Transfer pricing adjustments under TNMM must be quantified on available records, with fresh benchmarking where margins may be affected.

Under TNMM, working capital and capacity utilisation adjustments in transfer pricing benchmarking should be quantified on the available record rather than rejected merely for imperfect data. The Tribunal noted that the assessee's financials indicated capacity under-utilisation and held that the TPO could seek further information and adopt a suitable method for quantification instead of denying the claim for want of exact substantiation. It found that ignoring the effect of such adjustments on margins was inconsistent with Rule 10B(e) of the Income-tax Rules, 1962. The matter was restored to the TPO for fresh benchmarking and determination after giving due opportunity.

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Issues: Whether the assessee was entitled to economic adjustments in transfer pricing benchmarking, namely working capital adjustment and capacity utilisation adjustment, and whether the matter required restoration to the Transfer Pricing Officer for fresh consideration.

Analysis: The assessee had adopted TNMM and claimed economic adjustments while benchmarking its international transactions. The adjustments were denied on the ground that the data relied upon was not verifiable and that documentary substantiation was inadequate. The record showed that the assessee's financials indicated under-utilisation of capacity, and the Tribunal followed its view taken in the assessee's own later year that under TNMM economic adjustments ought to be quantified and granted. It was held that the Transfer Pricing Officer could call for necessary information and adopt an appropriate method for quantification instead of rejecting the claim for want of exact data, and that denial of adjustments without considering the effect on margins was not consistent with Rule 10B(e) of the Income-tax Rules, 1962.

Conclusion: The assessee was entitled to have the working capital and capacity utilisation adjustments reconsidered, and the matter was restored to the Transfer Pricing Officer for fresh benchmarking and determination in accordance with law after giving due opportunity.

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