Assessee’s Contentions

Revenue’s Contentions

Tribunal’s Judgment

The assessee contended that the working capital adjustment was not a general or ad hoc claim and that detailed computations of the comparable companies, along with supporting material, had already been furnished. It argued that the authorities had rejected the claim without examining the computation and supporting data.

The Revenue argued that working capital adjustment cannot be allowed as a matter of course and that the assessee must first establish the existence of material differences in working capital between itself and the comparable companies.

The ITAT held that working capital adjustment is intended to neutralise differences in inventory, trade receivables and trade payables, as such differences may affect operating margins due to the time value of funds. The claim cannot be rejected merely in principle, but requires verification of reliable data and computation.

It submitted that differences in inventory, trade receivables and trade payables directly affect operating margins and, therefore, an appropriate working capital adjustment was required under Rule 10B(3).

It   It submitted that the assessee must furnish reliable and sufficient data demonstrating the impact of such differences and enabling a reasonably accurate computation of the adjustment.

The ITAT restored the matter to the AO/TPO to verify the computation and supporting material and grant the adjustment under Rule 10B(3) if found factually correct and capable of reasonably accurate computation.