ITAT Delhi Deletes ₹13.97 Crore TP Adjustment Against Coca-Cola India Over Delayed Receivables

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has recently held that Coca Cola India Inc.'s Indian branch cannot be subjected to a transfer pricing adjustment over delayed recovery of receivables from its Associated Enterprises (AEs) where it had no borrowings and its working capital requirements were entirely funded by its US head office.

A bench of Judicial Member Vimal Kumar and Accountant Member S. Rifaur Rahman partly allowed the Revenue's appeal only on the issue of interest under the Income Tax Act.

It dismissed the Revenue's challenge to deletion of the transfer pricing adjustment. The assessee's cross-objections were dismissed as infructuous.

The tribunal observed, "The TPO could make working capital adjustment provided the assessee had borrowings and claimed huge borrowing cost. In absence of the same, the TPO cannot proceed to make working capital adjustments to all the comparables and proceeded to make ALP adjustment in the case of the assessee."

The soft drinks company's Indian branch provides consultancy services to its Associated Enterprises in India in the fields of manufacturing, marketing and business support. It charged a five per cent mark-up on specified service costs. Third-party expenses incurred on behalf of the group companies were reimbursed without any mark-up.

During the transfer pricing proceedings, the Transfer Pricing Officer (TPO) found that payments from the Associated Enterprises were recovered after an average of about 537 days. Taking the view that the prolonged credit period blocked the branch office's working capital, the officer adjusted the operating margins of comparable companies. Based on that exercise, the officer determined a higher arm's length price and made a transfer pricing adjustment.

The Revenue argued that the prolonged credit period effectively amounted to providing interest-free finance to the Associated Enterprises and justified the adjustment.

The beverage company's Indian branch argued that it was a debt-free entity whose working capital requirements were fully met by its US head office. It submitted that it had incurred no borrowing costs or interest expenditure because of the delayed recoveries and had therefore suffered no opportunity loss.

After examining the balance sheet, the tribunal found that the branch office had no borrowings and had not claimed any interest expenditure. It also noted that extending credit facilities to the group entities formed part of the US company's policy and did not result in any opportunity loss to the overall group.

The tribunal further observed, "The whole exercise is only based on presumptions without there being any substance. It is the policy of the US company to allow the credit facilities to its own sister concerns through its branch office, which will give benefit across the group companies. There is no opportunity loss to the overall group."

The tribunal consequently upheld the Commissioner of Income Tax (Appeals)' order deleting the transfer pricing adjustment.

It, however, accepted the Revenue's contention that the issue relating to levy of interest under Section 234D of the Income Tax Act was consequential in nature and allowed that ground of appeal.

Since the Revenue's challenge to the transfer pricing adjustment failed, the tribunal dismissed the assessee's cross-objections as infructuous.

For the Assessee: Shri Nitesh Joshi, Advocate; Shri Arun Siwach, Advocate; Shri Nikhil Garg, AR; and Shri Ritik Rath, Advocate

For the Revenue: Shri Rajesh Kumar, CIT-DR