Assessee’s Contentions

Revenue’s Contentions

Tribunal’s Judgment

The assessee contended that it was a debt-free entity, with its working capital requirements entirely funded by its Head Office, and therefore did not incur any borrowing costs or opportunity cost despite the delayed recovery of receivables from its AEs.

The Revenue contended that the assessee had allowed an extended credit period to its AEs, resulting in substantial receivables and blocking of funds, which affected the profitability of the international transactions.

The Tribunal held that   a working capital adjustment is intended to neutralise actual differences in financing costs, and cannot be made where the taxpayer is a debt-free entity with no borrowing or interest expenditure.

 It further argued that the TPO's working capital adjustment was purely notional and contrary to established judicial precedents, as no actual financing cost was incurred that could justify an adjustment to the arm's length price.

Accordingly, the TPO, considered that a working capital adjustment was necessary to align the assessee's margins with those of comparable companies and determine the arm's length price.

Relying on judicial precedents, the Tribunal upheld the deletion of the TP adjustment, observing that delayed receivables alone do not justify a notional working capital adjustment in the absence of actual financing costs.