2026 (2) TMI 352 - AT - Income Tax

Transfer pricing for captive bagasse supply upheld at assessed market price; business loss writeoff and TDS scope on harvesting clarified.

Adoption of CERC tariff for pricing captive bagasse sales was rejected because byproduct status, captive consumption, cost analysis and independent ... TP Adjustment - determination of ALP specified domestic transaction being supply of Bagasse from sugar division to power division - adjustment made by adopting the CERC tariff rate - assessee is a public company and one of the most efficient integrated sugar companies in South India TPO rejected the assessee’s reliance on third-party quotations for determination of the ALP and proposed to adopt the market price of bagasse as per the tariff order issued by the Central Electricity Regulatory Commission (CERC) for FY 2021-22 dated 23 June 2020 - HELD THAT:- Considering the by-product nature of bagasse, its captive consumption, the relevance of KERC tariff rates, the cost analysis based on FRP of sugarcane, and the independent market quotations relied upon by the assessee, we are of the considered view that the adoption of CERC tariff rates leads to an unrealistic and skewed picture of the cost of production of sugar. Moreover, the assessee has also submitted the sales made to the unrelated parties which is lower than ₹ 1500. TPO/DRP has not given any cogent reason for rejecting the price of the third-party. Merely making a sale on a single day may create a suspicion but that is not the conclusive to reject the contention of the assessee unless the revenue brings some contrary material on record. Hence, we are of the view that the price of ₹1,500 per ton adopted by the assessee is reasonable and satisfies the arm’s length principle. Accordingly, we set aside the directions of the DRP, and the consequent adjustment made by the TPO. AO/TPO is directed to accept the transfer price of bagasse adopted by the assessee. Disallowing the claim of loan and advances - AO rejected the assessee’s claim and held that the amount written off represented loans/advances and not expenditure incurred in the ordinary course of the assessee’s business - HELD THAT:- It is well settled that commercial expediency has to be seen from the point of view of a businessman and not from that of the revenue authorities. In the present case, the subsidiary was incorporated for business expansion of the assessee, and any benefit arising from the subsidiary’s operations would have directly accrued to the assessee. Once the business venture failed and the subsidiary was wound up, the loss suffered by the assessee on account of non-recovery of the loan is a loss incidental to its business. As decided in ACE Designers Ltd. [2020 (9) TMI 970 - KARNATAKA HIGH COURT] has held that loss arising from investment in a wholly owned subsidiary made for business purposes is allowable as a business loss. The ratio laid down therein applies to the present case as well. The distinction sought to be made by the lower authorities between equity investment and loan/advance is, in our view, not material when the underlying purpose and business nexus are the same. Similar principles have also been laid down in Colgate Palmolive (India) Ltd. [2014 (12) TMI 846 - BOMBAY HIGH COURT], Cosmos Industries Ltd. [2019 (1) TMI 268 - ITAT DELHI] and Refex Industries Ltd. [2022 (2) TMI 390 - ITAT CHENNAI] We also find no merit in the objection regarding non-applicability of section 36 of the Act, since the assessee has never claimed the deduction as a bad debt. The claim has rightly been made u/s 37(1) of the Act as a business loss. The fact that the assessee is not engaged in money-lending business is therefore irrelevant for deciding the present issue. Thus, we hold that the write-off representing loans/advances given to the wholly owned subsidiary in Ghana is a business loss incurred on grounds of commercial expediency and is allowable as a deduction under section 37(1) of the Act. Disallowing harvesting charges u/s 40(a)(ia) - charges were paid in connection with harvesting and transportation of sugarcane and assessee did not deduct tax at source on these payments - as contended that the payments were effectively made to farmers and not to contractors, and hence the provisions of section 194C of the Act were not applicable - HELD THAT:- DRP has rejected the assessee’s objection mainly on the ground that the assessee was inconsistent in its submissions and that specific details of TDS in Form 26Q relating to harvesting charges were not furnished. In our view, this reasoning misses the core issue. When the assessee’s case is that TDS itself is not applicable to harvesting and transportation charges as they form part of sugarcane purchase cost, the question of verification of TDS details in Form 26Q does not arise. The ld. DRP has not brought on record any material to show that the nature of the payments in the year under consideration is different from that examined by the Tribunal in the earlier year. AO has proceeded on the presumption that the assessee, being a large sugar manufacturer, must have entered contracts with contractors for harvesting and transportation. Such presumption, without bringing any concrete material on record to establish existence of independent contracts attracting section 194C cannot override the settled factual and legal position already decided in the assessee’s own case. In view of the above discussion, and respectfully following the decision of the coordinate bench of this Tribunal in the assessee’s own case for earlier assessment year, we hold that the provisions of section 194C of the Act are not applicable to the harvesting and transportation charges paid by the assessee and, consequently, no disallowance u/s 40(a)(ia) is warranted. Disallowances u/s 43B - AO observed that the assessee had claimed a substantial amount of interest expenditure payable to banks and financial institutions during the relevant previous year - HELD THAT:- We note that the dispute relates to verification of actual payment of interest u/s 43B of the Act and reconciliation of differences between interest claimed by the assessee and interest reflected in the certificates issued by the lender banks. In our considered view, the issue requires proper verification of facts, which can be adequately carried out only at the level of the Assessing Officer. Issues: (i) Whether the CERC tariff rate can be mechanically adopted as the ALP for transfer of bagasse (specified domestic transaction) between the assessee's sugar and power divisions; (ii) Whether write-off of loans/advances to the wholly owned Ghana subsidiary is allowable as a business loss under section 37(1) of the Income-tax Act, 1961; (iii) Whether harvesting and transportation charges paid on behalf of farmers attract TDS under section 194C and consequent disallowance under section 40(a)(ia) of the Income-tax Act, 1961; (iv) Whether interest claimed as deduction is allowable under section 43B of the Income-tax Act, 1961 or requires verification (recomputation/remand).Issue (i): Whether the CERC-prescribed bagasse price is the appropriate benchmark for ALP of bagasse transferred intra-group to captive power units.Analysis: The Tribunal examined factual matrix showing bagasse is an in-house by-product captively consumed by co-generation units; the CERC rate is framed for tariff determination assuming external procurement and inclusion of transport/handling; alternative indicators relied upon by assessee (KERC tariff, FRP-based cost computation, TERI study, independent third-party quotations and limited third-party sales) were considered. The Tribunal held that mechanical adoption of CERC rates without testing applicability to the assessee's factual model is not justified and noted the absence of cogent contrary material from Revenue to reject third-party sales evidence.Conclusion: In favour of Assessee -- the transfer price of Rs.1,500 per ton adopted by the assessee is reasonable and satisfies the arm's length principle; directions of DRP and TPO adopting CERC rate set aside; AO/TPO directed to accept assessee's transfer price.Issue (ii): Whether the write-off of Rs.3,79,70,871 of loans/advances to the wholly owned Ghana subsidiary is allowable as business loss under section 37(1).Analysis: The Tribunal analysed the substance over form: funds were advanced to set up the subsidiary engaged in same business, payments routed as loans/advances to vendors to establish operations, and the subsidiary later wound up making sums irrecoverable. The Tribunal applied commercial expediency test, considered relevant precedents (including coordinate High Court and Tribunal decisions) and rejected the Revenue's distinction between equity and loan nomenclature as immaterial given identical business nexus.Conclusion: In favour of Assessee -- the write-off is a business loss incurred on grounds of commercial expediency and allowable under section 37(1); addition deleted.Issue (iii): Whether harvesting and transportation charges paid on behalf of farmers are subject to TDS under section 194C and disallowance under section 40(a)(ia).Analysis: The Tribunal found the payments formed part of cane purchase price and were paid on behalf of farmers, not as independent contractual payments to contractors. The Tribunal followed a binding decision of a coordinate bench in the assessee's own case for an earlier year (no appeal by Revenue) and held the DRP's reliance on alleged inconsistencies and missing Form 26Q details did not rebut the settled legal and factual position.Conclusion: In favour of Assessee -- provisions of section 194C are not applicable to such harvesting and transportation charges; disallowance under section 40(a)(ia) deleted.Issue (iv): Whether interest claimed as paid and allowable under section 43B is to be disallowed or requires remand for verification.Analysis: The Tribunal noted discrepancies between interest claimed and lender confirmations under section 133(6), acknowledged the assessee's ability to furnish full reconciliations and bank evidence, and that the matter principally involves verification of payments and documents which is best undertaken by the Assessing Officer after affording reasonable opportunity. The Tribunal directed verification and recomputation rather than deciding allowance on merits.Conclusion: Neutral (alternate remedy) -- issue set aside/remitted to Assessing Officer for fresh verification and speaking order after giving reasonable opportunity; AO to examine and decide in accordance with law.Final Conclusion: The appeal is partly allowed: material substantive issues (ALP of bagasse, write-off of loans to subsidiary, and TDS applicability on harvesting charges) are decided in favour of the assessee and corresponding additions deleted; the claim under section 43B is remitted to the Assessing Officer for verification. The overall effect is partly in favour of the assessee.Ratio Decidendi: Where a by-product is captively consumed and regulatory tariff rates are based on assumptions of external procurement and added costs, such regulatory rates cannot be mechanically adopted as ALP without testing applicability to the taxpayer's factual model; commercial expediency determines allowability of losses on failed wholly owned subsidiaries under section 37(1).