ITAT Mumbai Re-characterises Investment in Mauritius Subsidiary as Loan, Denies ₹146.73 Crore Interest To Tata Chemicals

The Income Tax Appellate Tribunal has upheld a Rs. 146.73 crore interest disallowance against Tata Chemicals Ltd and affirmed a Rs. 3.62 crore transfer pricing adjustment, ruling against the company on the two biggest issues in its 2015-16 assessment.

A Bench of Judicial Member Rahul Chaudhary and Accountant Member Om Prakash Kant said, “In view of the foregoing discussion, we find no infirmity in the order of the Dispute Resolution Panel affirming the action of the Transfer Pricing Officer in re-characterising the preference share investment as a loan transaction and benchmarking the same accordingly.”

The appeal arose from multiple additions made by the Assessing Officer. The Tribunal partly allowed the appeal for statistical purposes but rejected the company's challenge on the major disallowances.

Tata Chemicals had invested about Rs. 732.34 crore in its Mauritius subsidiary through non-cumulative preference shares carrying 5 percent dividend. The tax authorities treated the investment as a loan and added notional interest of about Rs 3.62 crore. The officer also disallowed Rs 146.73 crore in interest on borrowings used to acquire controlling stakes in overseas subsidiaries, including General Chemical Industrial Products in the United States.

Other additions related to Section 14A, captive power deduction, research expenditure and post-retirement medical benefits.

The company argued that the preference shares were genuine capital instruments. It said the subsidiary was loss-making and no dividend was payable. On the interest issue, it cited commercial expediency and said the acquisition strengthened its core business. It also claimed that its own funds exceeded investments and no interest disallowance was justified under Section 14A.

The Tribunal rejected the transfer pricing challenge. It held that the revenue can examine the economic substance of a transaction. It found that the company failed to clearly explain the structure of the share subscription. On the interest claim, the Bench relied on binding precedent and observed, “It has been categorically held that interest incurred on borrowed funds utilised for acquiring controlling interest in a company is not allowable as a deduction under section 57(iii), as such expenditure is not incurred wholly and exclusively for the purpose of earning dividend income.”

On Section 14A, the tribunal upheld the disallowance of administrative expenses. However, it deleted the interest component after accepting that interest-free funds exceeded investments. It also rejected the deduction for captive power.

The Bench said, “The generation of steam is integrally and inseparably linked to electricity generation... Assigning a separate cost to steam so as to compute profits from generation of electricity... results in a loss, as rightly concluded by the Assessing Officer.”

The tribunal restored the issues relating to post-retirement medical benefits and part of the research expenditure to the assessing officer for fresh consideration. It also directed the officer to decide the foreign tax credit claim in line with earlier directions.