TNMM-based transfer pricing: receivables, leasehold amortisation and royalty benchmarking are tested consistently with operating results.

When TNMM is accepted as the most appropriate method, outstanding receivables are treated as embedded in the net margin and no separate notional interest adjustment is warranted if working capital effects are already considered. LIBOR plus 200 basis points was accepted as the arm's length rate for ECB interest. Lump-sum leasehold charges were treated as revenue expenditure allowable proportionately over the lease term, making the disallowance unsustainable. Royalty, however, should not be isolated for separate benchmarking when it forms part of aggregated transactions tested under TNMM; the matter was nevertheless restored for fresh adjudication because the operating cost adopted by the TPO did not reconcile with the books.

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Issues: (i) whether the adjustment made on account of notional interest on outstanding receivables was sustainable; (ii) whether the benchmarking of interest on ECBs at LIBOR + 200 basis points was correct; (iii) whether the disallowance of leasehold amortisation charges was justified; and (iv) whether the royalty adjustment required separate benchmarking or fresh adjudication.

Issue (i): whether the adjustment made on account of notional interest on outstanding receivables was sustainable.

Analysis: The Tribunal followed the view taken in the assessee's earlier years that receivables, when the Transactional Net Margin Method is accepted as the most appropriate method, are adequately reflected in the net margin, and that working capital adjustment must be considered while comparing the assessee with its comparables. On that basis, no separate upward adjustment towards overdue receivables was found warranted.

Conclusion: The adjustment on account of notional interest on outstanding receivables was deleted, in favour of the assessee.

Issue (ii): whether the benchmarking of interest on ECBs at LIBOR + 200 basis points was correct.

Analysis: The Tribunal applied its earlier decision in the assessee's own case and accepted the view that the Reserve Bank of India framework and supporting precedents justified the adoption of LIBOR + 200 basis points as the arm's length rate for ECB interest. No reason was found to disturb the rate fixed by the lower authorities.

Conclusion: The benchmarking of interest on ECBs at LIBOR + 200 basis points was upheld, against the assessee.

Issue (iii): whether the disallowance of leasehold amortisation charges was justified.

Analysis: The Tribunal followed its earlier ruling that long-term leasehold charges paid as a lump sum are allowable proportionately over the lease period as revenue expenditure. Since the facts were identical, the proportionate amortisation claim was held allowable.

Conclusion: The disallowance of leasehold amortisation charges was deleted, in favour of the assessee.

Issue (iv): whether the royalty adjustment required separate benchmarking or fresh adjudication.

Analysis: The Tribunal accepted the principle that, where royalty and related transactions are already aggregated and tested under TNMM, separate cherry-picking of royalty for an independent adjustment is impermissible. However, because the operating cost adopted by the TPO did not tally with the expenses recorded in the books and the discrepancy was not reconciled, the matter was restored for fresh adjudication after reconciliation.

Conclusion: The royalty issue was remanded to the Assessing Officer for fresh consideration, partly in favour of the assessee.

Final Conclusion: The appeal succeeded on the receivables and leasehold amortisation issues, failed on the ECB interest issue, and the royalty adjustment was sent back for reconsideration after reconciliation of the operating cost discrepancy.

Ratio Decidendi: When TNMM is accepted for a segment, separate adjustment for a transaction already embedded in the segment's operating results is generally impermissible, while receivables and leasehold charges must be tested consistently with the method and the underlying commercial substance of the transaction.

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