Transfer pricing adjustment on associated-enterprise receivables rejected where working capital effects were already built into arm's length pricing.

Outstanding receivables from associated enterprises do not automatically constitute a separate international transaction for transfer pricing purposes. Where the assessee has already incorporated the effect of receivables in the working capital adjustment used to determine arm's length price, a further adjustment on the same basis is not warranted because it would distort the comparability analysis and amount to impermissible re-characterisation. Applying binding jurisdictional precedent, the appellate authority deleted the adjustment, and the assessee's position was upheld.

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Issues: Whether outstanding receivables from associated enterprises could be treated as a separate international transaction warranting a transfer pricing adjustment, where the assessee had already factored the effect of receivables into working capital adjustment while determining arm's length price.

Analysis: The adjustment cannot be made mechanically on the basis of receivables alone. The relevant inquiry is whether the delay in collection reflects a distinct arrangement conferring a benefit on the associated enterprise, and whether the working capital impact has already been captured in the pricing analysis. Where the assessee has accounted for receivables in the working capital adjustment applied in the transfer pricing study, a further addition on the same footing would distort the comparability exercise and amount to impermissible re-characterisation of the transaction. The appellate authority followed the binding jurisdictional precedent and deleted the adjustment.

Conclusion: Outstanding receivables, in the facts of the case, were not to be separately benchmarked for transfer pricing adjustment. The deletion of the adjustment was upheld and the issue was decided in favour of the assessee.

Final Conclusion: The Revenue's challenge to the deletion of the transfer pricing adjustment failed, and the appeal was dismissed.

Ratio Decidendi: Receivables from associated enterprises do not automatically constitute a separate international transaction; a transfer pricing adjustment is unwarranted where the working capital effect of such receivables has already been reflected in the arm's length pricing analysis.

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