Court affirms arm's length pricing of bagasse supply to captive power unit, permits write-off of loans to Ghana subsidiary as business loss, and remands TDS issue on harvesting charges to Assessing Officer for detailed examination.
In a significant ruling dated October 12, 2026, the Karnataka High Court, Division Bench comprising Chief Justice Vibhu Bakhru and Justice K.S. Hemalekha, dismissed the appeal filed by the Principal Commissioner of Income Tax, Central, Bengaluru, against NSL Sugars Limited. The case pertained to contentious transfer pricing adjustments, business loss deductions, and tax deduction at source (TDS) obligations for the assessment year 2021-22.
The Revenue challenged the Income Tax Appellate Tribunal's (ITAT) order which had partly allowed NSL Sugars' appeal against transfer pricing adjustments made by the Transfer Pricing Officer (TPO) relating to the supply of bagasse by the sugar manufacturing unit to its captive power generation unit. The TPO had determined the arm's length price (ALP) based on the Central Electricity Regulatory Commission (CERC) tariff order, which the ITAT rejected in favor of the price adopted by the assessee at Rs. 1,500 per ton.
The Court agreed with the ITAT's rationale that the CERC tariff, although a credible benchmark, was not determinative for the Karnataka unit, where the Karnataka Electricity Regulatory Commission (KERC) tariff was relevant. The ITAT had accepted various cogent evidences including third-party quotations, KERC tariff data, and computations based on the Fair and Remunerative Price (FRP) of sugarcane to conclude that Rs. 1,500 per ton was a reasonable arm's length price. The Court found no substantial question of law arising from this finding, thereby upholding the ITAT's decision.
On the issue of the write-off of loans and advances amounting to Rs. 3.79 crore made on behalf of its wholly owned Ghana subsidiary, which was wound up due to continuous losses, the Court endorsed the ITAT's view allowing the deduction under Section 37(1) of the Income Tax Act as a business loss incurred out of commercial expediency. The Revenue's contention that payments made directly to the subsidiary's vendors lacked nexus with the assessee's business was rejected. The Court observed that the Ghana subsidiary was an extension of NSL Sugars' business and the payments were necessary to support its overseas operations. Reliance was placed on precedents including decisions of the Supreme Court and various High Courts affirming that expenditure incurred on commercial expediency for business purposes qualifies as allowable business expenditure.
Regarding the disallowance of Rs. 12.39 crore under Section 40(a)(ia) for failure to deduct TDS on harvesting and transportation charges paid to contractors, the Court remanded the matter to the Assessing Officer (AO) for fresh examination. The key issue was whether these payments were part of the purchase cost of sugarcane and hence deducted from the amounts payable to farmers. If so, TDS under Section 194C would not be applicable. The AO was directed to verify if such deductions were made and whether TDS was otherwise deducted on these payments.
This judgment provides clarity on several complex tax issues: it affirms the principle that transfer pricing adjustments must be based on relevant regulatory tariffs and reliable market data, recognizes the commercial expediency in write-offs related to wholly owned subsidiaries, and emphasizes the need for factual inquiry regarding TDS obligations on payments related to agricultural produce procurement.
Bottom Line:
Income Tax - Transfer pricing adjustment in respect of bagasse supplied by sugar unit to captive power unit - ITAT justified in accepting assessee's transfer price of Rs. 1,500/- per ton where CERC tariff was not determinative and material on record supported assessee's valuation - Write-off of loans/advances made on behalf of wholly owned Ghana subsidiary held allowable under Section 37(1) as business loss on grounds of commercial expediency - Issue of TDS on harvesting and transportation charges remanded to AO to examine whether such payments were deducted from cane price payable to farmers and thus formed part of purchase cost.
Statutory provision(s):
Income Tax Act, 1961 Sections 37(1), 40(a)(ia), 92 to 92C, 194C, 260A; Income Tax Rules 1962 Rules 10B and 10C
