ITAT Mumbai Partly Upholds TP Adjustment on Tata Chemicals’ Foreign Preference Shares

Tata Chemicals Ltd., engaged in manufacturing inorganic chemicals and fertilisers with overseas operations, was assessed for AY 2015-16 at a total income of Rs. 869.35 crore. A major dispute arose from a transfer pricing adjustment of Rs. 3.62 crore linked to its investment of about Rs. 732 crore in 5% non-cumulative preference shares of its wholly owned Mauritius subsidiary, Bio Energy Venture-1.

The subsidiary was consistently loss-making and had never declared dividends. The Transfer Pricing Officer treated the investment as lacking commercial substance, re-characterised it as a loan, and imputed notional interest. The Assessing Officer disallowed weighted deduction for in-house R&D expenditure under Section 35(2AB) and denied Foreign Tax Credit of Rs. 15.71 lakh, despite specific directions of the DRP.

Main Issue: Whether a non-cumulative preference share investment in a loss-making foreign subsidiary can be re-characterised as a loan for transfer pricing purposes, and whether disallowance of R&D deduction and denial of Foreign Tax Credit were sustainable in law.

ITAT’s Decision: The ITAT upheld the transfer pricing adjustment. It held that the preference share investment carried no real expectation of return, yielded no dividends, and effectively functioned as a funding arrangement. The Tribunal found the re-characterization as a loan to be justified and sustained the imputation of arm’s length interest.

The Tribunal granted relief. It remanded the claim for weighted deduction under Section 35(2AB) to the Assessing Officer for fresh verification of the nexus between the expenditure and in-house R&D activities. On Foreign Tax Credit, it directed the AO to implement the DRP’s directions and dispose of the rectification application in accordance with law. The appeal was thus partly allowed for statistical purposes.

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