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Issues: (i) Whether the transfer pricing adjustment made towards software development services and IT-enabled services survived after the rectified DRP directions and revised TPO giving-effect order; (ii) whether interest on outstanding receivables from associated enterprises was separately benchmarkable and, if so, at what rate and for what period; and (iii) whether the disallowance under section 43B made through the intimation under section 143(1) could be examined in the appeal against the scrutiny assessment.
Issue (i): Whether the transfer pricing adjustment made towards software development services and IT-enabled services survived after the rectified DRP directions and revised TPO giving-effect order.
Analysis: The assessee's transfer pricing adjustment was initially reduced by the DRP, and thereafter the assessee obtained rectification. The rectified DRP direction was followed by a revised giving-effect order from the TPO, which deleted the adjustment entirely. The final assessment order, however, did not incorporate the revised position. The assessment had been completed before the revised direction was issued, but the revised direction and consequential TPO order were still binding for the computation of income. The AO was required to give effect to the corrected direction and revised computation.
Conclusion: The adjustment towards software development services and IT-enabled services was directed to be deleted in full, in favour of the assessee.
Issue (ii): Whether interest on outstanding receivables from associated enterprises was separately benchmarkable and, if so, at what rate and for what period.
Analysis: Outstanding receivables beyond the agreed credit period constitute a separate international transaction and require independent benchmarking. The appropriate benchmark for such foreign-currency receivables is LIBOR plus an arm's length spread, and the period for adjustment must be confined to the year under consideration in accordance with the rectified DRP direction. The authorities below had not applied the revised direction and had used a domestic lending rate instead of a foreign-currency benchmark.
Conclusion: The receivables adjustment was upheld in principle, but the AO was directed to recompute it for the year under consideration only at LIBOR plus 200 basis points, partly in favour of the assessee.
Issue (iii): Whether the disallowance under section 43B made through the intimation under section 143(1) could be examined in the appeal against the scrutiny assessment.
Analysis: An intimation under section 143(1) is not a regular assessment, but where the same disallowance is carried into the scrutiny assessment and brought to the notice of the assessment authority, the matter can be examined to avoid double demand and ensure correct taxation. Since the lower authorities had not examined the issue on merits, a fresh adjudication was warranted.
Conclusion: The issue was remanded to the AO for fresh consideration, in favour of the assessee to that extent.
Final Conclusion: The appeal succeeded on the substantive transfer pricing issue, the receivables issue was recalibrated in the assessee's favour in part, and the section 43B disallowance issue was restored for fresh adjudication.
Ratio Decidendi: A rectified DRP direction and corresponding revised TPO giving-effect order must be implemented in computing income, outstanding receivables beyond the agreed credit period are separately benchmarkable as an international transaction, and foreign-currency receivables should ordinarily be benchmarked using LIBOR-based comparables.
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