ITAT Delhi Deletes ₹3.42 Crore Transfer Pricing Addition On Loans and Receivables In Relief To Varun Beverages

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that no transfer pricing adjustment is warranted where the interest charged on loans advanced to associated enterprises exceeds the internal Comparable Uncontrolled Price (CUP).

The bench comprising Judicial Member Yogesh Kumar U.S. and Accountant Member Manish Agarwal deleted the entire transfer pricing adjustment of Rs 3,42,31,778 for Assessment Year 2017-18 in the case of Varun Beverages Limited, including Rs 2,84,45,221 towards interest on foreign currency loans advanced to overseas associated enterprises and Rs 57,86,557 towards notional interest on outstanding receivables.

Varun Beverages Limited, engaged in the manufacturing, bottling, and distribution of Pepsi-branded beverages, had advanced foreign currency loans to its overseas associated enterprises and charged interest thereon.

The Transfer Pricing Officer determined the arm's length price by applying six months' average LIBOR plus 400 basis points and proposed a total transfer pricing adjustment of Rs 3,42,31,778 for AY 2017-18. This comprised Rs 2,84,45,221 towards interest on loans and Rs 57,86,557 towards notional interest on outstanding receivables. The Commissioner (Appeals) sustained the additions.

Before the tribunal, the assessee submitted that it had itself borrowed foreign currency loans from banks at LIBOR plus 2.65 percent and that the interest charged to its associated enterprises was higher than this internal benchmark.

In transfer pricing analysis, an internal CUP refers to the rate at which the taxpayer itself enters into a comparable uncontrolled transaction. Here, the interest rate at which it borrowed foreign currency loans from independent banks.

As recorded in the tabular summary reproduced in the order, the effective average rates charged were 4.1% to Varun Beverages Morocco SA, 4.18% to Varun Beverages Mozambique Limited, and 4.49% to Varun Beverages (Zambia) Limited.

The tribunal noted that these rates were higher than the internal CUP, i.e., LIBOR + 2.65%. Holding in favour of the assessee, the Bench observed:

"In the present case, the Assessee has charged more than the internal CUP on all the three AE's i.e. on Varun Beverages Morocco SA average interest rate 4.1%, Varun Beverages Mozamibique Limited average rate 4.18% and in Varun Beverages (Zambia) Limited is average 4.49%. The said average interest imposed on all the three entities are much more higher than determined by the Tribunal in the case of CIT v. Vaibhav Gems Ltd. (supra). Thus, in our opinion, the transactions involved in the present Appeal are at Arm's Length as per the ratio laid down thereon and the effective rate of interest charged by the Assessee from its subsidiary Companies is even higher than internal CUP of interest rate on foreign currency loan taken by the Assessee. Accordingly, we delete the additions made by the A.O. which has been confirmed by the Ld. CIT(A) by allowing Ground No. 6 & 7 for the Appeal filed by the Assessee for Assessment Year 2017-18"

The Bench further stated that “the effective rate of interest charged by the Assessee from its subsidiary Companies is even higher than internal CUP of interest rate on foreign currency loan taken by the Assessee.”

It concluded that the transactions were at arm's length and deleted the addition sustained by the Commissioner (Appeals) on this issue.

On the separate issue of notional interest on outstanding receivables from associated enterprises, the tribunal deleted the adjustment of Rs 57,86,557. It noted that the assessee's operating margins were higher than those of comparable companies and that interest was not charged from either associated or non-associated enterprises.

Since identical issues arose for Assessment Years 2016-17 and 2018-19, the Tribunal applied the same reasoning and allowed the appeals for those years as well.

The appeals were accordingly allowed.