Safe Harbour does not shield receivable interest adjustment; Tribunal upholds adjustment in principle but lowers the benchmark rate.

Interest on outstanding receivables from an associated enterprise was held not to be absorbed by the assessee's Safe Harbour election because such interest is not part of an "eligible international transaction" under Rule 10TC. The transfer pricing adjustment was therefore sustained in principle. However, the benchmark rate adopted for the adjustment was considered excessive, and Tribunal precedent supported a lower rate of LIBOR plus 200 basis points. The rate was accordingly reduced from LIBOR plus 400 basis points, granting partial relief to the assessee.

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Issues: Whether interest on outstanding receivables from the associated enterprise could be separately adjusted in transfer pricing despite the assessee having opted for the Safe Harbour Regime, and if so, at what rate.

Analysis: The assessee had declared income under the Safe Harbour Rules for software and knowledge process outsourcing services. The definition of "eligible international transaction" under Rule 10TC does not include interest on delayed realization of receivables, so such interest does not get subsumed merely because the assessee's main transaction is covered by Safe Harbour. The adjustment, therefore, could not be eliminated on that ground. However, the adopted rate of LIBOR plus 400 basis points was found excessive, and consistent with Tribunal precedent, a lower benchmark of LIBOR plus 200 basis points was considered appropriate.

Conclusion: The interest adjustment on outstanding receivables was sustained in principle, but the rate was reduced from LIBOR plus 400 basis points to LIBOR plus 200 basis points, resulting in partial relief to the assessee.

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