Transfer pricing on delayed receivables: interest adjustment sustained in principle, with netting off of payables sent back for review.

Delayed realisation of trade receivables from associated enterprises was treated as capable of constituting an international transaction for transfer pricing purposes, so an arm's length interest adjustment was sustained in principle. The computation of that adjustment, however, required examination of the assessee's plea that outstanding payables to associated enterprises should be netted off against receivables before final quantification. That factual and computational issue was remitted for fresh consideration by the Assessing Officer and Transfer Pricing Officer, leaving only the quantum aspect open while upholding the adjustment principle.

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Issues: (i) whether outstanding receivables from associated enterprises constituted an international transaction liable to arm's length price adjustment by way of interest; and (ii) whether netting off of outstanding payables against receivables was required to be examined.

Issue (i): whether outstanding receivables from associated enterprises constituted an international transaction liable to arm's length price adjustment by way of interest.

Analysis: The adjustment was made in the context of delay in realisation of trade receivables from associated enterprises. The statutory framework treats delayed realisation of receivables arising from business transactions as capable of giving rise to a transfer pricing adjustment, and the receivables were therefore examined as part of the international transaction for determination of arm's length price.

Conclusion: Outstanding receivables from associated enterprises were held to be an international transaction, and the adjustment on that basis was sustained in principle.

Issue (ii): whether netting off of outstanding payables against receivables was required to be examined.

Analysis: The alternative plea was that the assessee had substantial payables to associated enterprises and that the effect of such payables should be considered while quantifying any interest adjustment on receivables. The matter required factual examination by the Assessing Officer and the Transfer Pricing Officer before a final computation could be made.

Conclusion: The question of netting off payables against receivables was remitted for fresh examination.

Final Conclusion: The adjustment on receivables was upheld in principle, but the quantum aspect was sent back for reconsideration of netting off, resulting in a remand with only partial relief.

Ratio Decidendi: Delayed realisation of trade receivables from associated enterprises can constitute an international transaction for transfer pricing purposes, while the computation of any resultant adjustment must account for relevant offsetting payables if supported by the facts.

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