Key takeaways
The story
NSL Sugars Limited makes sugar. Crushing sugarcane leaves behind bagasse, the fibrous residue, which the company burns in its own co-generation plant to make electricity. It uses part of that power itself and sells the rest to electricity distribution companies under power purchase agreements.
Because the sugar unit and the power unit are parts of the same company, and the power unit's profits enjoyed a deduction under section 80-IA, the movement of bagasse between them was a specified domestic transaction. The price the sugar unit charges the power unit decides how much profit sits in the power unit, so the law requires that price to be at arm's length.
For the assessment year 2021-22 the company charged its power unit ₹1,500 a tonne. It had also sold bagasse to an outside buyer at ₹1,200 a tonne. The tax department thought the price was too low and that too much profit had been shifted into the power unit, where it was eligible for the deduction.
Two other matters were caught in the same assessment. Years earlier, in 2012-13, the company had set up a wholly owned subsidiary in Ghana to make sugar there, and had paid that subsidiary's professionals, accountants, auditors and guest house directly, recording the amounts as loans and advances to the subsidiary. The Ghana venture made losses from the start and was wound up, so the company wrote off ₹3,79,70,871. And it had paid ₹41,31,06,305 to harvesters and transporters who cut and carried the cane, without deducting tax at source.
The three disputes
| Issue | The department | The company |
|---|---|---|
| Price of bagasse to the power unit | Use the fuel cost in the Central Electricity Regulatory Commission (CERC) tariff order: ₹2,274 a tonne (₹2,632 for Maharashtra). Addition of ₹30,77,53,817. | ₹1,500 is at arm's length: third-party quotes, the Karnataka regulator's cost of ₹1,161.28 and a working from the cane price all support it. |
| Write-off of advances to the Ghana subsidiary | Paid to the subsidiary's vendors, not invested as equity; no commercial expediency. Addition of ₹3,79,70,871. | The subsidiary was an extension of the same business; the money became irrecoverable when it was wound up: a business loss. |
| Harvesting and transport charges | Contract payments under section 194C with no TDS: disallow 30%, ₹12,39,31,392, under section 40(a)(ia). | The farmers bore these charges; the company paid on their behalf and recovered them from the cane price. |
Issue 1: the price of bagasse
There is no single market price for bagasse. A study by The Energy and Resources Institute for the Maharashtra regulator lists six recognised ways to value it: the coal equivalent method, the alternate fuel GCV method, the market value method, the split-off cost method, a calculation from the preferential tariff, and the production cost method. Each gives a different answer, so the arm's length price is a matter of judgment on the facts.
The Tribunal, and then the High Court, found the company's ₹1,500 well supported. Unrelated parties had quoted that price. The Karnataka Electricity Regulatory Commission had used ₹1,161.28 a tonne in its tariff, projected to the relevant year, so the fact that its order dated from 2018 did not make it stale. And for the Karnataka unit, the CERC figure was not even the applicable tariff, since the State regulator's tariff applies there.
The fair and remunerative price (FRP) of sugarcane for 2020-21 was ₹2,850 a tonne. One tonne of cane yields about 280 to 300 kg of bagasse. Even if the whole cane price were loaded onto bagasse, a tonne of bagasse would cost about ₹2,850 × 0.30 = ₹855. The ₹1,500 charged to the power unit was well above that, which made it hard to say the sugar unit had undercharged.
The High Court held that the Tribunal's acceptance of ₹1,500 was supported by cogent material and did not disregard the principles of sections 92 to 92C or rules 10B and 10C. No substantial question of law arose.
Issue 2: the Ghana subsidiary
The Dispute Resolution Panel had reasoned that because the company paid the subsidiary's vendors directly, instead of putting in equity, there could be no commercial expediency. The High Court called this reasoning plainly unsustainable. The payments were undisputedly made on behalf of the subsidiary and were booked as advances to it. The real question was whether the subsidiary was an extension of the company's business and whether the money was paid to support it.
It was: the Ghana company was set up to make sugar, the parent's core business, and nothing on record suggested any other purpose. The court relied on the Supreme Court in S.A. Builders Ltd. v. CIT (2007) 288 ITR 1, which holds that expenditure incurred voluntarily on grounds of commercial expediency is for the purpose of business even if a third party also benefits, and on ACE Designers Ltd. (Karnataka), Vaibhav Global Ltd. (Rajasthan, the department's special leave petition dismissed by the Supreme Court) and Colgate Palmolive (India) Ltd. (Bombay). The write-off of ₹3,79,70,871 was allowed under section 37(1).
Issue 3: harvesting and transport charges
The company showed a sample agreement in which the farmer agreed to pay the harvesting charges and authorised the company to deduct them from the price of the cane. If that is what happened, the charges are part of the farmers' cost of supplying cane, the company is only facilitating the payment, and there is no contract for work between the company and the harvester: no TDS under section 194C, and nothing to disallow under section 40(a)(ia).
Harvesting and transport charges paid: ₹41,31,06,305. Disallowance proposed at 30% under section 40(a)(ia): ₹12,39,31,392. As an illustration, at the normal company rate of 30% with 12% surcharge and 4% cess (34.944%), that is about ₹4.33 crore of tax, before interest.
The department argued that this had never been examined, because the company had deducted tax in some cases. The court agreed the facts needed checking and sent the matter back to the Assessing Officer: first, whether the charges were in fact deducted from the cane payments to farmers; if not, whether the company deducted tax at source on them as it claimed.
The conclusion
The Karnataka High Court (Chief Justice Vibhu Bakhru and Justice K.S. Hemalekha) disposed of the Revenue's appeal on 12 October 2026 in ITA No. 105 of 2026. On the transfer price of bagasse, the Tribunal's view stands. On the Ghana write-off, the company's deduction stands. On the harvesting charges, the outcome depends on what the farmer agreements and the cane payment records show when the Assessing Officer looks again.
What it means for your business
- Treat transfers to a unit that claims a profit-linked deduction as specified domestic transactions, and document the price with independent evidence.
- Collect third-party quotations and actual sales to outsiders at the time, not after a notice arrives.
- Where a regulator's figure exists, check whether it is the one that applies to your State and year before relying on or rejecting it.
- Keep a simple cost working (like the cane-price check) that shows the price is reasonable.
- Record why the subsidiary exists and how it serves your business: board minutes, project reports, correspondence.
- Book payments made on a subsidiary's behalf as advances to it, with the vendor invoices.
- For payments recovered from suppliers, such as harvesting charges, keep the agreements and show the deduction from their bills line by line; otherwise deduct TDS.
Does this mean a regulator's tariff can never be used as the arm's length price?
No. The court held only that, on these facts, the Tribunal was entitled to prefer the company's evidence. A regulator's figure is one piece of evidence; whether it is the most comparable depends on the State, the year and the method.
Is every loss on a subsidiary deductible under section 37?
No. The subsidiary must be connected to your business and the money spent to support that business. An investment held for its own sake, or a subsidiary in an unrelated line, is treated differently, and a loss on shares is often a capital loss.
Should we stop deducting TDS on harvesting charges after this judgment?
Not without checking your arrangements. The exemption depends on the charges being the farmers' cost, recovered from their cane price. If you contract and pay harvesters yourself, section 194C applies.
Which assessment year and which court?
Assessment year 2021-22; Karnataka High Court at Bengaluru, judgment of 12 October 2026 in ITA No. 105 of 2026, on appeal from the ITAT Bengaluru order of 8 January 2026 in IT(TP)A No. 2615/Bang/2024.
Facing a transfer pricing or TDS question like this?
Aypa's accountants can review your inter-unit pricing, subsidiary funding and TDS on contract payments before the department does.
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