Working-capital-adjusted TNMM benchmarking determines arm's-length status, while tax-interest and employee provident-fund claims require statutory verification.
Under the transactional net margin method, audited comparable data must be adjusted for material working-capital differences under Rule 10B(1)(e)(iii); a tested margin within the adjusted arm's-length range does not warrant a transfer-pricing adjustment. A claimed duplicate disallowance of income-tax interest requires verification against return and assessment records to prevent repeated disallowance. Employees' provident-fund contributions are deductible only if deposited by the due date prescribed under the relevant provident-fund law; payment by the income-tax-return filing due date is insufficient, and factual compliance requires verification.
Issues: (i) Whether a transfer-pricing adjustment was sustainable where audited three-year weighted-average comparable margins, after a verified working-capital adjustment, placed the assessee's margin within the arm's-length range; (ii) Whether an alleged duplicate disallowance of income-tax interest under Section 37(1), after voluntary disallowance under Section 40(a)(ii), required deletion; (iii) Whether delayed employees' provident-fund contribution was deductible under Section 36(1)(va) merely because it was paid before the due date for filing the income-tax return.
Issue (i): Whether a transfer-pricing adjustment was sustainable where audited three-year weighted-average comparable margins, after a verified working-capital adjustment, placed the assessee's margin within the arm's-length range.
Analysis: Audited annual-report data provides a reliable basis for comparability analysis. The verified weighted-average margins and working-capital adjustment showed that the assessee's margin of 4.11% fell within the working-capital-adjusted arm's-length range of 3.08% to 5.81%. Under Rule 10B(1)(e)(iii), net margins must be adjusted for differences between the controlled and comparable uncontrolled transactions, including working-capital differences.
Conclusion: No transfer-pricing adjustment was called for; this issue was decided in favour of the assessee.
Issue (ii): Whether an alleged duplicate disallowance of income-tax interest under Section 37(1), after voluntary disallowance under Section 40(a)(ii), required deletion.
Analysis: The claim was that the same interest amount had already been voluntarily disallowed in the return under Section 40(a)(ii) and was again disallowed under Section 37(1). Verification of the return and assessment records was necessary to determine whether a duplicate disallowance occurred.
Conclusion: The matter was remitted for verification, with a direction to delete the further disallowance if the voluntary disallowance is established.
Issue (iii): Whether delayed employees' provident-fund contribution was deductible under Section 36(1)(va) merely because it was paid before the due date for filing the income-tax return.
Analysis: The governing test is deposit of employees' contribution within the due date prescribed under the relevant provident-fund statute, rather than the due date for filing the income-tax return. The factual compliance with that statutory due date required verification.
Conclusion: Payment before the income-tax-return due date alone does not establish deductibility; the issue was remitted for determination under the applicable provident-fund due-date test.
Final Conclusion: The arm's-length determination is governed by the verified adjusted comparable range, while the two non-transfer-pricing claims require verification under the stated statutory standards.
Ratio Decidendi: Under TNMM, audited comparable data and adjustments for material working-capital differences must be used to determine whether the tested party's margin falls within the arm's-length range.