Arm’s Length Reaffirmed and Benchmarking restored

The appeals before the Tribunal concerned transfer pricing adjustments proposed by the Transfer Pricing Officer relating to two principal issues: the imputation of notional interest on delayed receivables from associated enterprises and the determination of the arm’s length interest rate on loans granted by the assessee to its foreign subsidiaries. The Assessing Officer adopted LIBOR plus 400 basis points as the benchmark for both adjustments and enhanced the assessee’s income accordingly. The Tribunal held that where the overall operating margins of the assessee are higher than those of comparable companies and the receivables arise as an integral component of the primary international transaction of sale of goods or services, a separate adjustment for notional interest is unwarranted. It further held that when the interest charged on loans to associated enterprises exceeds the internal comparable benchmark derived from the assessee’s own borrowing cost, no transfer pricing adjustment is sustainable.