Arm's length TNMM benchmarking barred a separate notional interest adjustment on trade receivables.

Where medical transcription and ITeS transactions were already benchmarked at arm's length under TNMM with working capital adjustment, a separate notional interest adjustment on outstanding receivables from the associated enterprise was unsustainable. The receivables arose from the same international transactions, and the working capital analysis had already captured the effect of delayed realisation. Adding interest again would duplicate the pricing impact already reflected in the arm's length margin and amount to an impermissible re-characterisation of the transaction. The transfer pricing adjustment for interest on trade receivables was therefore deleted.

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Issues: Whether a separate transfer pricing adjustment could be made on account of interest on outstanding trade receivables from the associated enterprise when the underlying international transactions had already been accepted at arm's length under the transactional net margin method after working capital adjustment.

Analysis: The assessee's medical transcription services and ITeS transactions had already been benchmarked at arm's length under the transactional net margin method, and the margins of the assessee remained higher than those of the comparables even after working capital adjustment. The receivables arose from the same international transactions and the working capital analysis had already factored in the effect of delayed realisation. A further notional interest adjustment on the outstanding receivables would therefore duplicate the pricing impact already captured in the arm's length benchmarking and would amount to an impermissible re-characterisation of the transaction. The adjustment for interest on receivables was accordingly unsustainable.

Conclusion: The separate transfer pricing adjustment on account of interest on outstanding trade receivables was deleted, and the issue was decided in favour of the assessee.

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