Fact of the Case

Assessee is engaged in the business of exporting pharmaceutical products to its overseas Associated Enterprises (“AEs‟) as well as to third parties. Assessee declared export of manufactured medicines and export of traded medicines as an international transaction. Both transaction benchmarked using TNMM method.

The profitability of the Assessee from its manufacturing and trading segments was benchmarked with the average operating profit margin earned by comparable companies performing similar manufacturing and trading functions. In both sets of transactions, the profit level indicators (PLIs) showed the operating profit margin of the Assessee to be higher than that of the comparable companies. Accordingly, the international transactions were projected by the Assessee as having been undertaken at the arm’s length price (ALP).

TPO proposed an adjustment by way of addition of Rs 1,57,54,943/- to the income of the Assessee which is notional interest on receivables outstanding from AEs over 180 days. The TPO noted that the credit period for the debtors as mentioned in the sale contract with unrelated entities was 180 days. However, in the case of the AEs they were “allowed to linger for long”. The said receivables qua (in the capacity of) the AE was treated as a separate international transaction. Transfer Pricing adjustment as proposed by TPO, incorporated by the AO in draft assessment order.

TPO gave the effect of direction of DRP to apply SBI Basic lending rate plus 150 basis point. AO passed the final assessment order by making an addition of Rs. 93,69,275/- to the income of the Assessee.


Whether imputation of notional interest on delayed AE-receivables is justified and warranted?

Appeal to ITAT

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