February 21, 2026 : The Delhi Bench ‘H’ of the Income Tax Appellate Tribunal (ITAT) has deleted a transfer pricing adjustment of ₹3,42,31,778 made against Varun Beverages Limited for Assessment Years 2016–17, 2017–18 and 2018–19, holding that the interest charged on loans advanced to associated enterprises (AEs) was at arm’s length and that no separate adjustment could be made on outstanding receivables.

The Bench comprising Judicial Member Yogesh Kumar U.S. and Accountant Member Manish Agarwal allowed the appeals filed by the assessee against the orders of the Commissioner of Income Tax (Appeals)-44, Delhi dated March 22, 2025.

Varun Beverages Limited, engaged in manufacturing, bottling and distribution of Pepsi-branded beverages in pre-defined territories, had entered into several international transactions with its associated enterprises during the relevant financial years. The Transfer Pricing Officer (TPO) proposed an adjustment of ₹3,42,31,778 for Assessment Year 2017–18. This included ₹57,86,557 towards notional interest on delayed receivables from AEs and ₹2,84,45,221 relating to interest on foreign currency loans advanced to overseas subsidiaries.

The Assessing Officer incorporated the proposed adjustments in the final assessment order, which were subsequently upheld by the Commissioner (Appeals), prompting the assessee to approach the Tribunal.

On the issue of notional interest on outstanding receivables, the Tribunal noted that the adjustment had been computed by applying six-month LIBOR plus 400 basis points. The assessee argued that receivables were intrinsically linked to the primary international transactions of sale of goods and provision of management and technical services, and that the interest component was already embedded in the pricing of such transactions. It was also highlighted that the assessee’s operating margins were higher than those of comparable companies.

The Tribunal observed that although outstanding receivables constitute a separate international transaction after the amendment to Section 92B of the Income Tax Act, where the entity-level margins are higher than those of comparable companies and benchmarking of the main transactions has been accepted, there is no need to separately benchmark the receivables. It further noted that the assessee did not charge interest on outstanding receivables from either associated enterprises or unrelated parties. In such circumstances, the Tribunal held that the arm’s length adjustment on account of notional interest was unsustainable and deleted the addition of ₹57,86,557.

With regard to the adjustment of ₹2,84,45,221 relating to interest on foreign currency loans advanced to AEs, the Tribunal examined the benchmarking adopted by the assessee. The TPO had determined the arm’s length price by applying six-month LIBOR plus 400 basis points. However, the assessee demonstrated that it had itself borrowed foreign currency loans from banks at LIBOR plus 2.65 percent and had charged interest to its associated enterprises at rates higher than this internal Comparable Uncontrolled Price (CUP).

The Tribunal recorded that the average interest rates charged were 4.1 percent to Varun Beverages Morocco SA, 4.18 percent to Varun Beverages Mozambique Limited and 4.49 percent to Varun Beverages (Zambia) Limited, all of which exceeded the internal benchmark rate at which the assessee had borrowed foreign currency loans from banks.

Relying on the judgment of the Rajasthan High Court in CIT v. Vaibhav Gems Ltd., the Tribunal observed that an ad hoc markup over LIBOR was not justified. It concluded that the interest charged by the assessee from its subsidiaries was higher than the internal CUP and therefore the international transactions were at arm’s length. Accordingly, the addition sustained by the Commissioner (Appeals) was deleted.

Since the issues involved in Assessment Years 2016–17 and 2018–19 were identical, the Tribunal applied the same reasoning and allowed the appeals for those years as well, thereby deleting the transfer pricing adjustments made on account of interest on loans and notional interest on receivables.

Case Title: Varun Beverages Limited v. Assistant Commissioner of Income Tax, Central Circle-7, New Delhi
Case Numbers: ITA Nos. 3476/Del/2025, 3477/Del/2025 & 3478/Del/2025