Overdue trade receivables can be separately benchmarked as an international transaction for arm's length interest adjustment.

Delayed realisation of trade receivables from an associated enterprise beyond the agreed credit period can constitute a separate international transaction under the Explanation to section 92B and be independently benchmarked for arm's length interest. The agreed credit period formed part of the commercial arrangement, but once payment remained outstanding beyond that period and no interest was charged, the receivables were treated as separately taxable for transfer pricing purposes. The contention that working capital adjustment had already absorbed the receivables impact was rejected on the facts, including the magnitude of the outstanding dues and the absence of a demonstrated working capital claim. The interest adjustment was upheld.

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Issues: Whether interest on overdue trade receivables from an associated enterprise constitutes a separate international transaction and whether the transfer pricing adjustment made on that account is sustainable.

Analysis: The receivables were examined in the light of the Explanation to section 92B of the Income-tax Act, 1961, which brings within the scope of international transaction any debt arising during the course of business, including receivables and deferred payments. On the facts, the outstanding dues had remained unpaid beyond the agreed credit period, and the assessee had not charged interest on the delayed realisation. The agreed 150-day credit period was treated as part of the commercial arrangement for the services rendered, but delay beyond that period was held capable of separate benchmarking. The plea that working capital adjustment had already captured the impact of receivables was rejected on the peculiar facts, including the magnitude of the receivables and the absence of a demonstrated working capital claim in the transfer pricing analysis.

Conclusion: The overdue receivables were rightly treated as a separate international transaction for transfer pricing purposes, and the adjustment of interest thereon was upheld against the assessee.

Ratio Decidendi: Delayed realisation of trade receivables from an associated enterprise beyond the agreed credit period can constitute an international transaction under section 92B and be separately benchmarked for arm's length interest adjustment, subject to the facts of the case.

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