Tata Chemicals rallied for the second straight session on Thursday on modestly higher volumes, boosted by a favourable court ruling on a tax dispute.

The scrip of the Tata group chemical company was up by 3.4% at Rs 66.60 on the BSE by the first half of the session, quite near the day's high of Rs 66.90. A good volume of 200,000 shares was recorded on the counter.

The Tata Chemicals scrip rose by 3% on Wednesday to Rs 64.40 following the reports of a favourable court ruling regarding a tax dispute. The scrip trades at the higher end of the Rs 57-65 band in the last couple of months ever since the merger of Hindustan Lever Chemicals with TCL was announced in late January 2003. The scrip trades near its 52-week high of Rs 70.

On Tuesday, the Supreme Court issued an order that it will not amend or change an earlier order favouring TCL in respect of a decade-long tax dispute to the extent of Rs 400 crore (Rs 4 billion). TCL would have faced a huge liability had the verdict gone against it.

The dispute between the income-tax department and TCL was on the issue of whether the interest paid by the company on the borrowings for its Babrala unit in Uttar Pradesh should be taxed or not. The income tax department held the view that the Babrala unit was an independent one, which the company contested. Since the Income-Tax Act permits deduction only on expenditure incurred for expansion of existing units and not for setting up new independent enterprises, the company is not entitled for deduction.

TCL, in response, argued that the Babrala unit was part of its Mithapur plant in Gujarat and it was set up in Uttar Pradesh as part of the expansion plan. There was complete unity of control between the Mithapur plant and the Babrala unit and, therefore, this could not be regarded as a new unit. It was thus entitled for deduction of interest on borrowed funds, TCL contended.

The Supreme Court ruling will help TCL to claim deductions from assessment years 1992-93 to 1999-2000. The I-T department has disallowed so far Rs 370 crore (Rs 3.7 billion) on this ground and consequently levied tax of about Rs 284 crore (Rs 2.84 billion) and interest of about Rs 120 crore (Rs 1.2 billion).

Earlier, TCL got sops from the Railway Budget for 2003-04 wherein the freight rate for soda ash was cut by 6.7% to Rs 57.88 from Rs 62.01 for 100 kg, for a distance of 700 kilometres. TCL is a leading soda ash maker in the country. The company is also likely to benefit from the reduction in freight rates on naptha and furnace oil. Naptha and furnace oil are are important inputs in the production of fertilisers.

TCL is also a leading manufacture of urea in the country. HLCL is presently engaged only in the nitrogenous fertiliser business, manufacturing diammonium phosphate and SSP. HLCL is in the process of merger with TCL. The post-merger expanded equity of TCL will be about Rs 215 crore from the current Rs 180.72 crore (Rs 1.8 billion).

The merger is expected to benefit TCL in the fertiliser segment. TCL will be in a position to use HLCL's strong marketing and distribution network to sell its products in the eastern part of India, whereas HLCL can use TCL's strength for selling its products in western UP and northern India, where it has a strong presence. TCL sells fertilisers in UP, Haryana & Punjab.

Soda ash goes into the manufacture of detergents. TCL supplies soda ash to a host of other user industries (besides detergent) like glass and chemicals manufacturers. TCL is a leading player in the soda ash segment with an installed capacity of 8,75,000 tonnes per annum, accounting for 42% of India's soda ash capacity. The company manufactures several variants of soda ash such as soda ash light, medium dense, dense, granular and soda ash fused. It has a nationwide distribution network, mainly concentrated in the northern and western India. These areas account for the highest consumption of soda ash.

The soda ash industry has been growing at 5-6% over the last three years, mainly due to the growing demand from detergent and glass manufacturers. Glass, especially that used for construction purposes, is expected to significantly enhance the demand for soda ash.

BSE code: 500770