Transfer pricing and CSR-linked donations: overdue receivables need justified benchmarking, while section 80G deduction can still apply.

Delayed receivables from associated enterprises may be treated as a separate transfer pricing item only on a justified arm's-length basis, and an unsupported LIBOR plus 450 basis points benchmark was replaced with LIBOR plus 200 basis points. ESOP cost did not require substantive examination because the related transfer pricing adjustment had already fallen away, leaving that issue infructuous. Donations made to eligible charitable trusts did not lose deduction under section 80G merely because they formed part of CSR expenditure and had been disallowed in business income computation; the independent Chapter VI-A deduction remained available.

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Issues: (i) whether notional interest on overdue receivables from associated enterprises was to be benchmarked at LIBOR plus 450 basis points or LIBOR plus 200 basis points; (ii) whether employee stock option plan cost was to be included in the assessee's operating cost for transfer pricing margin computation; (iii) whether deduction under section 80G was allowable in respect of donations forming part of corporate social responsibility expenditure.

Issue (i): whether notional interest on overdue receivables from associated enterprises was to be benchmarked at LIBOR plus 450 basis points or LIBOR plus 200 basis points.

Analysis: The adjustment was made by treating delayed receivables as a separate international transaction and imputing interest on the outstanding balances. The record showed no justification for adopting LIBOR plus 450 basis points, and the rate was not supported by any benchmarking exercise. The assessee relied on judicial precedents indicating that LIBOR plus 200 basis points was the appropriate rate for overdue receivables. In the circumstances, the higher rate could not be sustained and re-benchmarking of the small amount was considered unnecessary.

Conclusion: The notional interest was directed to be recomputed by applying LIBOR plus 200 basis points. The issue was partly decided in favour of the assessee.

Issue (ii): whether employee stock option plan cost was to be included in the assessee's operating cost for transfer pricing margin computation.

Analysis: The transfer pricing addition on this count was not surviving because the transfer pricing adjustment for the relevant segment had been eliminated. In the absence of any surviving adjustment, there was no requirement to determine the operating cost base for this purpose. The issue therefore did not call for substantive adjudication on the merits of ESOP cost inclusion.

Conclusion: The issue was dismissed as infructuous.

Issue (iii): whether deduction under section 80G was allowable in respect of donations forming part of corporate social responsibility expenditure.

Analysis: The assessee had donated to charitable trusts that were eligible for deduction under section 80G, and the amounts had already been disallowed in computing business income. There was no statutory bar against claiming deduction under section 80G merely because the donations formed part of CSR expenditure. The disallowance under the business head did not extinguish the independent deduction available under Chapter VI-A.

Conclusion: The deduction under section 80G was held allowable and the disallowance was reversed in favour of the assessee.

Final Conclusion: The appeal succeeded only in part: the receivables adjustment was reduced, the ESOP ground did not survive, and the assessee obtained relief on the CSR related deduction claim.

Ratio Decidendi: Delayed receivables may be benchmarked separately only on a justified arm's-length basis, and an unsupported higher interest rate cannot be sustained; independently, eligible charitable donations do not lose deduction under section 80G merely because they are funded from CSR expenditure already disallowed under business income computation.

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