February 05, 2026 : The Mumbai Bench of the Income Tax Appellate Tribunal has upheld significant additions made against Tata Chemicals Ltd. for Assessment Year 2015–16, sustaining the re-characterisation of a ₹732.34 crore preference share investment in its Mauritius subsidiary as a loan transaction and confirming the disallowance of ₹146.73 crore in interest expenditure.
In its order dated 4 February 2026 in Tata Chemicals Ltd. v. Dy. CIT-2(3)(1), Mumbai (ITA No. 7912/MUM/2019), the Bench comprising Judicial Member Rahul Chaudhary and Accountant Member Om Prakash Kant partly allowed the appeal for statistical purposes but ruled against the company on the core transfer pricing and interest issues.
The dispute arose from Tata Chemicals’ subscription to non-cumulative 5 percent preference shares of its Mauritius-based associated enterprise, Bio Energy Venture-1 (Mauritius) Pvt. Ltd., with a total investment of about USD 148.47 million, equivalent to ₹732.34 crore. The Transfer Pricing Officer questioned the commercial rationale of the investment, noting that the subsidiary was loss-making and had not declared any dividend. The officer also observed that while equity shares of the same entity were issued at a face value of USD 1, the preference shares were issued at USD 100 per share. In the officer’s view, no independent enterprise would deploy such substantial funds in a loss-making entity without assured returns.
On that reasoning, the TPO treated the preference share investment as a loan in substance and applied an arm’s length interest rate of LIBOR plus 2 percent. This led to a transfer pricing adjustment of ₹3.62 crore towards notional interest, including interest on share application money. The Dispute Resolution Panel affirmed this approach.
Before the Tribunal, Tata Chemicals argued that preference shares are a recognised capital instrument and that the investment was made to support the funding requirements of the subsidiary, which functioned as an investment holding company with downstream investments. It contended that the absence of dividend was a consequence of the subsidiary’s losses and did not alter the nature of the instrument. The company also pointed to documentary evidence, including share certificates, registers and regulatory filings, to demonstrate that the transaction was a genuine capital infusion.
The Tribunal, however, agreed with the findings of the lower authorities. It held that the economic substance of the arrangement justified re-characterisation. The Bench noted that the assessee had not provided conclusive share-wise identification to establish that preference shares issued upon earlier loan conversions had been fully redeemed. It found no infirmity in benchmarking the transaction as a loan and upheld the application of LIBOR plus 200 basis points.
Another major issue concerned the disallowance of ₹146.73 crore in interest expenditure incurred on borrowings used to acquire controlling stakes in overseas subsidiaries, including General Chemical Industrial Products in the United States. The company maintained that the acquisitions were commercially expedient and strengthened its core operations. The Assessing Officer, however, treated the interest as capital in nature and not allowable as a deduction.
The Tribunal upheld the disallowance, observing that interest on borrowed funds utilised for acquiring controlling interest is not deductible under Section 57(iii), since such expenditure is not incurred wholly and exclusively for earning dividend income.
On disallowance under Section 14A, the Tribunal sustained the disallowance of administrative expenses but deleted the interest component after accepting that the company’s interest-free funds exceeded its investments. The Bench also rejected the deduction claimed under Section 80IA in respect of captive power generation, agreeing with the authorities that the method adopted by the assessee to compute profits by allocating cost to steam, which was integrally linked to electricity generation, distorted the eligible profit calculation.
Certain issues, including post-retirement medical benefit expenditure, part of the in-house scientific research claim under Section 35(2AB), and the claim for foreign tax credit, were restored to the Assessing Officer for fresh consideration. Even so, the Tribunal’s ruling largely favours the Revenue, particularly on the substantive transfer pricing and interest disallowance questions.
Case Reference : ITA No. 7912/MUM/2019 – Tata Chemicals Ltd. v. Dy. CIT-2(3)(1), Aayakar Bhavan, M.K. Road, Mumbai; Assessee by Mr. Nitesh Joshi along with Mr. Vanish Bhansali and Mr. Samkit Chaudhary; Revenue by Mr. Ajay Chandra, CIT-DR.
