Karnataka HC Upholds NSL Sugars’ ₹3.79 Crore Ghana Subsidiary Write-Off As Business Loss

The assessee, a sugar manufacturer that also generated electricity, transferred bagasse from its sugar unit to its power unit at ₹1,500 per tonne.

The Transfer Pricing Officer (TPO) used the CERC tariff fuel-cost rates to determine the arm’s-length price (ALP), resulting in an adjustment of ₹30,77,53,817; the ITAT accepted the assessee’s price.

The assessee also wrote off ₹3,79,70,871 paid to vendors on behalf of its Ghanaian subsidiary, which the ITAT allowed as a business loss under Section 37(1).

Finally, the ITAT held that harvesting and transportation charges of ₹41,31,06,305 were part of the sugarcane purchase cost and therefore did not attract the disallowance under Section 40(a)(ia) for failure to deduct tax at source.

The Revenue appealed under Section 260A.

Section 260A provides for an appeal to the High Court on a substantial question of law; findings of the ITAT supported by relevant material do not, without more, warrant appellate interference.

Sections 92 to 92C of the Income-tax Act and Rules 10B and 10C govern determination of the ALP, but a regulatory tariff used for electricity-tariff purposes is not necessarily determinative of the ALP where other relevant material supports the transaction price.

Under Section 37(1), expenditure incurred voluntarily for commercial expediency and for the purposes of the assessee’s business may be deductible even where a related entity also benefits; the court relied on S.A. Builders Ltd. v. CIT (Appeals), Chandigarh, which explains this principle.

For Sections 194C and 40(a)(ia), the court held that no TDS obligation arises if harvesting and transportation payments form part of the purchase price payable to farmers and are deducted from that price; if they do not, the AO must examine whether tax was deducted.

On bagasse pricing, the ITAT had considered third-party quotations, the KERC tariff calculation and the relationship between sugarcane FRP and the quantity of bagasse produced.

The High Court held that this material supported the ITAT’s acceptance of the assessee’s price and that the CERC fuel-cost rate was not conclusive of ALP; accordingly, no substantial question of law arose.

On the Ghana subsidiary, the payments to its vendors were undisputedly made on the subsidiary’s behalf, and the subsidiary had been established to manufacture sugar—the assessee’s core business.

The Revenue’s objection that direct payments to vendors could not demonstrate commercial expediency was therefore unsupported by the record.

On harvesting and transportation charges, the sample farmer agreement indicated that the farmer was responsible for the charges and authorised their deduction from the sugarcane price.

Because whether that arrangement was followed in practice required factual examination, the High Court remitted the issue to the AO.

It also affirmed the allowance under Section 37(1) of the write-off relating to the Ghanaian subsidiary.

As to harvesting and transportation charges, it remanded the matter to the AO to determine whether the payments were deducted from the sugarcane purchase price and, if not, whether TDS had been deducted.

The appeal was disposed of on those terms.