Working capital adjustment cannot rest on delayed receivables alone where a debt-free branch shows no borrowings or interest cost.

A working capital adjustment was not justified where the assessee was a debt-free branch office funded by its head office, with no borrowings or interest cost shown; delayed recovery of reimbursements from associated enterprises alone did not support a presumption of deployed borrowed funds or an opportunity-cost adjustment, so the transfer pricing adjustment on receivables was deleted. Interest under section 234D was treated as consequential and the Revenue's ground on that issue was allowed.

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Issues: (i) Whether a working capital adjustment was warranted on the facts of the case and whether the transfer pricing adjustment made on account of alleged delay in realization of receivables could be sustained. (ii) Whether interest under section 234D of the Income-tax Act, 1961 was leviable.

Issue (i): Whether a working capital adjustment was warranted on the facts of the case and whether the transfer pricing adjustment made on account of alleged delay in realization of receivables could be sustained.

Analysis: The Tribunal noted that the assessee was a branch office funded by its head office, had no borrowings, and was a debt-free entity. The delay in recovery of reimbursements from associated enterprises, by itself, did not justify a presumption that borrowed funds had been deployed or that there was an opportunity cost requiring a working capital adjustment. The Tribunal also placed reliance on the fact-specific finding accepted by the lower appellate authority and the judicial discipline flowing from the earlier Bechtel line of decisions.

Conclusion: The working capital adjustment was not justified and the deletion of the transfer pricing adjustment on this issue was upheld in favour of the assessee.

Issue (ii): Whether interest under section 234D of the Income-tax Act, 1961 was leviable.

Analysis: The issue was treated as consequential.

Conclusion: The ground of the Revenue on section 234D was allowed.

Final Conclusion: The Revenue's appeal succeeded only on the consequential interest issue, while the transfer pricing adjustment based on working capital was not sustained; the assessee's cross-objections became infructuous.

Ratio Decidendi: A working capital adjustment cannot be sustained merely on delayed receivables where the assessee is a debt-free branch entity funded by its head office and no borrowings or interest cost are shown.

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