Transfer pricing treatment of receivables clarified: delayed AE balances may need benchmarking, while working capital adjustment limits double counting.

Outstanding receivables from associated enterprises were treated as a separate international transaction only prospectively from assessment year 2013-14, following the amendment to section 92B; accordingly, no notional interest adjustment was permissible for assessment years 2010-11 to 2012-13, while delayed receivables for 2013-14 and 2014-15 required benchmarking as indirect funding. Working capital adjustment excluded a separate interest adjustment on year-end receivables already covered by that adjustment, but interest was to be imputed invoice-wise on delayed realisations for the later years at LIBOR plus 200 basis points, and netting of payables against receivables was rejected. The reimbursement mark-up was sustained for lack of proof of pure cost-to-cost reimbursement, and TDS credit was directed to be verified and granted according to law.

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Issues: (i) Whether outstanding receivables from associated enterprises constituted a separate international transaction and whether notional interest could be imputed for the relevant assessment years; (ii) whether working capital adjustment barred a separate adjustment on outstanding receivables and the applicable rate and method of computation for the later years; (iii) whether mark-up on reimbursement expenses from associated enterprises was liable to be sustained; and (iv) whether TDS credit was to be verified and granted.

Issue (i): Whether outstanding receivables from associated enterprises constituted a separate international transaction and whether notional interest could be imputed for the relevant assessment years.

Analysis: The relevant amendment to the definition of international transaction in section 92B by insertion of clause (c) in the Explanation was held applicable prospectively from assessment year 2013-14. On that basis, deferred receivables for assessment years 2010-11, 2011-12 and 2012-13 were held not to fall within the ambit of an international transaction. For assessment years 2013-14 and 2014-15, however, delayed receivables beyond the agreed credit period were treated as indirect funding and therefore as a separate international transaction.

Conclusion: No separate transfer pricing adjustment on outstanding receivables was permissible for assessment years 2010-11 to 2012-13, but the receivables for assessment years 2013-14 and 2014-15 were liable to be benchmarked as an international transaction.

Issue (ii): Whether working capital adjustment barred a separate adjustment on outstanding receivables and the applicable rate and method of computation for the later years.

Analysis: Working capital adjustment had been granted, and for closing-year outstanding receivables no separate interest adjustment was warranted. At the same time, where invoices were realised during the year beyond the agreed credit period, interest was directed to be imputed on an invoice-wise basis. Since the receivables were in foreign currency, LIBOR plus 200 basis points was held to be the appropriate benchmark rate. Netting of payables against receivables was rejected because the invoice cycles and payment dates were distinct.

Conclusion: Separate interest adjustment on year-end receivables was excluded to the extent covered by working capital adjustment, but interest at LIBOR plus 200 basis points was directed on delayed invoice-wise realisations for assessment years 2013-14 and 2014-15, and netting off of payables was denied.

Issue (iii): Whether mark-up on reimbursement expenses from associated enterprises was liable to be sustained.

Analysis: The assessee did not substantiate that the reimbursement was pure cost-to-cost reimbursement. In the absence of supporting evidence, a reasonable mark-up was upheld, and the rate adopted by the first appellate authority was found acceptable.

Conclusion: The mark-up on reimbursement expenses was sustained.

Issue (iv): Whether TDS credit was to be verified and granted.

Analysis: The matter required verification of the supporting records and eligibility.

Conclusion: The assessing authority was directed to verify the claim and grant credit according to law.

Final Conclusion: The assessee succeeded on the core transfer-pricing objection for the earlier years and obtained only partial relief for the later years, while the reimbursement adjustment was upheld and the TDS-credit claims were left to verification; the stay applications became infructuous.

Ratio Decidendi: Deferred receivables become an international transaction only when the statutory definition and factual delay beyond the agreed credit period bring them within section 92B, and a separate interest adjustment is not warranted for year-end receivables already absorbed in working capital adjustment, though delayed invoice-wise realisations may still be benchmarked on a foreign-currency LIBOR-based rate.

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