Transfer Pricing Working-Capital Adjustments: Assemble the Inputs

Two comparable businesses have different receivable, inventory and payable positions. The useful result is a working that explains the facts, the calculation or classification, and the evidence behind the conclusion. This guide shows how to prepare that working and where a reviewer should investigate before accepting the result.

Scope and applicable period

Indian transfer-pricing documentation for FY 2025–26 / AY 2026–27, with legacy provision references. For Tax Year 2026–27, use the Income-tax Act, 2025 and Income-tax Rules, 2026; OECD guidance does not override Indian law.

Verification date: 11 October 2026. Figures and rates identified as assumptions are teaching examples; apply the stated conditions and the actual facts to a real assignment.

The key principle

A working-capital adjustment aims to address relevant differences in operating funding between the tested party and comparables. Assemble receivables, inventory and payables on a consistent basis and explain the interest-rate assumption and formula. The adjustment is not an automatic entitlement. Its appropriateness, data reliability and interaction with the chosen profit-level indicator need assessment.

Worked example

The 15% ratio is an input, not the adjustment itself. Suppose the comparable ratio is 10%: the difference is five percentage points. An assumed 8% financing rate would produce a simplified 0.4% of revenue illustration, before deciding the direction, margin conversion and suitability. Do not present this simplified arithmetic as a prescribed Indian formula. Use consistent average or other justified balances, exclude unrelated funding items, and show the effect on each comparable rather than adding a favourable lump sum to the tested margin.

A practical sequence

Collect comparable and tested-party balances on a consistent measurement basis. Separate trade items from funding or unrelated balances and align sales periods and currencies.

Document the proposed adjustment formula, interest-rate evidence and direction. Show its effect on each margin and assess reliability.

Do not present an adjustment as accepted merely because a spreadsheet produces it; demonstrate that it addresses a relevant comparability difference.

Separate the factual file from the pricing conclusion

Transfer pricing depends on reliable transaction facts and comparability. Contracts, actual conduct, segment accounts and external evidence should tell a consistent story. A margin calculation is only one part of the analysis: the method, tested party, profit indicator, comparable data and adjustments all need reasons. Keep assumptions visible, preserve original data and reconcile the study with reported transactions. OECD materials help analyse issues, but the applicable Indian provisions and rules govern the Indian compliance conclusion. Do not treat a sample percentage, a contractual charge or a favourable comparable as an automatic arm’s-length result.

Evidence checklist

Keep the following records linked to the same entity, period and working version. Identify missing items explicitly; a checked box should mean the document was examined and supports the stated conclusion.

• Comparable balance-sheet inputs
• Trade/non-trade classification
• Balance measurement policy
• Interest-rate evidence
• Adjustment formula and sensitivity

Common mistakes and how to avoid them

• Mixing closing and average balances. Compare the conclusion with the comparable balance-sheet inputs and resolve any conflicting facts.
• Using all creditors as trade payables. Trace the affected item to the balance measurement policy before finalising the working.
• Choosing adjustment direction to improve the result. Use the adjustment formula and sensitivity to make the final position and remaining exceptions clear.

Before you finalise

Recheck the example’s assumptions against the actual assignment, resolve the identified exceptions and make the final figure or conclusion traceable to its source. Preserve the reviewed version and the reason for material changes. For this task, the adjustment formula and sensitivity should agree with the conclusion presented to the client, reviewer or authority.

Frequently asked question

Is a negative working-capital adjustment impossible? No. Evaluate the economics and reliable data; do not assume only favourable adjustments are valid.

Sources and further reading

• Income Tax Department — transfer-pricing methods and Rule 10B
• OECD Transfer Pricing Guidelines, 2022

Related guide: Intercompany loans receivables transfer pricing data review.