The assessee challenged the inclusion of companies having substantially higher turnover for benchmarking its international transactions relating to manufacture of rigid and steering drive axles. The Tribunal held that companies having turnover exceeding Rs. 200 crores could not be regarded as comparable with the assessee, as huge turnover materially affects profitability and functional comparability. The matter was restored to the Transfer Pricing Officer for fresh determination of the arm’s length price after excluding such companies. While determining the arm’s length price, the Transfer Pricing Officer denied the assessee’s claim for working capital adjustment. The Tribunal held that, in accordance with the OECD Guidelines, reasonable adjustments must be made to eliminate material differences between controlled and uncontrolled transactions. Since differences in working capital materially influence profitability, the assessee was entitled to working capital adjustment. The issue was restored to the Transfer Pricing Officer for fresh determination after granting such adjustment. The Transfer Pricing Officer included purchases made by the assessee from local vendors as deemed international transactions on the ground that the purchases were under the overall supervision of the associated enterprise. The Tribunal held that section 92B applies only where there is evidence of a prior agreement or where the terms of the transaction are determined by the associated enterprise. In the absence of any supporting evidence, purchases from local vendors could not be regarded as deemed international transactions. Accordingly, only transactions with associated enterprises were directed to be considered for determination of the arm’s length price. (AY. 2017-18)