Transfer pricing adjustment on nil ALP and notional interest on receivables deleted; section 43B ground rejected

Arm's length price for management, testing and validation services could not be fixed at nil where the assessee's aggregated TNMM benchmarking showed a higher operating margin, services were received, and no comparable uncontrolled transaction was brought on record; the transfer pricing adjustment was deleted. Notional interest on outstanding receivables from associated enterprises was also disallowed as a separate adjustment because the receivables were closely linked to the main transaction, already covered by TNMM and working capital adjustment, and no duplication was permitted; the addition was deleted. The section 43B payment-basis disallowance was rejected because it had not arisen in the assessment or DRP proceedings and was not within the appeal.

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Issues: (i) whether the arm's length price of management, testing and validation services could be determined at nil by rejecting the assessee's aggregated benchmarking under TNMM; (ii) whether notional interest could be imputed on outstanding receivables from associated enterprises; and (iii) whether the disallowance claimed under section 43B on payment basis could be entertained in these proceedings.

Issue (i): whether the arm's length price of management, testing and validation services could be determined at nil by rejecting the assessee's aggregated benchmarking under TNMM.

Analysis: The assessee had benchmarked the international transactions on an aggregated basis under TNMM and had shown a higher operating margin than comparables. The TPO rejected the analysis without establishing the statutory conditions for rejection and adopted the other method without bringing any comparable uncontrolled transaction on record. The material showed receipt of services and business need, and the services were closely linked to the assessee's manufacturing and operational activities. The aggregation approach was therefore accepted.

Conclusion: The determination of arm's length price at nil was unsustainable and the transfer pricing adjustment was deleted in favour of the assessee.

Issue (ii): whether notional interest could be imputed on outstanding receivables from associated enterprises.

Analysis: The receivables were held to be closely linked to the main service transaction. The international transaction had already been benchmarked under TNMM and working capital adjustment had been granted. In such circumstances, a separate adjustment on notional interest would amount to impermissible duplication. The assessee was also treated as debt-free, reinforcing the absence of a basis for imputing borrowing cost.

Conclusion: No separate transfer pricing adjustment on account of notional interest on receivables was warranted and the addition was deleted in favour of the assessee.

Issue (iii): whether the disallowance claimed under section 43B on payment basis could be entertained in these proceedings.

Analysis: The impugned disallowance was not made in the draft or final assessment order and arose only from the intimation under section 143(1). The issue was not raised before the Assessing Officer or the Dispute Resolution Panel and did not arise in the present appeal proceedings.

Conclusion: The ground was rejected.

Final Conclusion: The assessee succeeded on the transfer pricing issues, while the section 43B ground was rejected, resulting in partial relief overall.

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