Interest on Foreign Currency Loan to AE at Rate Higher Than Internal CUP is at Arm’s Length: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), NewDelhi, held that interest on foreign currency loan to Associated Enterprises(AE) at a rate higher than internal CUP is at arm’s length.

The assessee company was handling manufacturing, selling, bottling and distribution of beverages of Pepsi brand. Since the company had entered into various international transactions, the case was referred to the TPO who passed an order dated 31.01.2021.

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The Assessing Officer (AO) made addition of notional interest on outstanding receivables from various AEs for delayed period computed on the basis of six month LIBOR rate +400 basis points. CIT(A) sustained the addition made giving the rationale that outstanding receivables constitute a separate international transaction which is required to be benchmarked separately.

Assessment orders were passed on 27.04.2021, 10.01.2021 and 05.10.2021 for three assessment years. The Commissioner of Income Tax (Appeals) [CIT(A)] dismissed the appeals filed against these assessment orders and thus the assessee preferred the present appeal(s).

The counsel for the assessee submitted that transaction of outstanding receivables is connected to main international transaction which already factored in sale price/service income being charged by the assessee. Further, reliance was placed on Dabur India Ltd. v. DCIT Circle (2024) and PCIT v. Kusum Healthcare (2016).

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The tribunal’s view was that the transactions involved are at arm’s length as per the ratio laid down 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.

The ITAT concurred with the submissions of the assessee and referred to Micro Ink Limited v. Additional Commissioner of Income Tax, Vapi Range (2015). The bench, comprising Manish Agarwal (Accountant Member) and Yogesh Kumar U.S. (Judicial Member), held that the reasoning in the assessment orders is arbitrary and allowed the appeal for the Assessment Years 2016-17, 2017-18 and 2018-19, thereby deleting the additions made by the AO and confirmed by the CIT(A).

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