Headquartered in Baruch, Gujarat, United Fertilizers Limited (UFL) started out as a small fertilizer trading company in 1965 that has now grown into…

Headquartered in Baruch, Gujarat, United Fertilizers Limited (UFL) started out as a small fertilizer trading company in 1965 that has now grown into a well established producer of fertilizers in the country. The company operates three urea plants at its manufacturing complex at Baruch, with a capacity of 3.4 million metric ton per annum (MTPA). The primary business vertical of the company is the fertilizer unit. Fertilizers require ammonium nitrate, which is formed by combining ammonia and nitric acid. Recent supply chain disruptions due to geo-political tensions and price fluctuations in the price of raw materials highlighted the need for UFL's management to develop risk mitigation strategies. As part of this strategy, in April 2024, UFL acquired Baruch Chemicals Private Limited (BCPL), which specializes in manufacturing ammonium nitrate. BCPL is located in close vicinity to UFL's manufacturing complex at Baruch. Background of BCPL On acquisition, UFL operated BCPL as a wholly owned subsidiary, as a separate entity from itself. Refer to Annexure 1, for the change in shareholding pattern at BCPL. The company had remained profitable until FY 2021-22. However, the COVID pandemic along with disruptions to supply chain due to geo-political events led to the company incurring losses in the year FY 2022-23. For Income Tax purpose, the business loss that was carried forward loss as per the return filed for AY 2023-24 was 5 crores while unabsorbed depreciation was 1 crore. This has been duly accepted by the income tax authorities. Issue raised by Assessing Officer for BCPL's return filed for AY 2024-25 BCPL filed the income tax return for AY 2024-25 within the due date. This year, under the management of Ramesh and Hitesh, the company had made a profit of 10 crores (before adjusting for the brought forward loss of 5 crores and unabsorbed depreciation of 1 crore from AY 2023-24). BCPL had set-off losses brought forward and unabsorbed depreciation from AY 2023-24 against the profit earned during AY 2024-25. For AY 2024-25, the Assessing Officer disallowed BCPL from setting off brough forward losses of 5 crores and unabsorbed depreciation of 1 crore from AY 2023-24. UFL's acquisition of Baruch Chemical Private Limited (BCPL) in April 2024. Ramesh Shah, after obtaining 50% stake of Mahesh Shah in BCPL, has successfully turned the company profitable again. However, he wanted to concentrate only on the technical operations of the company. Hitesh Shah, who originally held the rest 50% shareholding, was unable to keep up the entire management of the company with him. The management of UFL saw the opportunity to unlock value in the supply chain through backward integration by acquiring 100% stake in BCPL. Hence, when UFL made an offer to acquire the company, Ramesh and Hitesh found it a good opportunity to reduce their business interests in BCPL. Therefore, on April 1, 2024 UFL acquired 100% stake in BCPL. Operations of BCPL, wholly owned subsidiary of UFL from financial year 2024-25 onwards. Internal transfer pricing policy and performance assessment of Ramesh Shah, unit head. Post acquisition, the entire production of ammonium nitrate at BCPL is being transferred to UFL for manufacture of fertilizers. Since the management of UFL found a valuable resource in Ramesh Shah to handle the technical aspects of running chemical operations of manufacturing ammonium nitrate, they decided to retain him as an employee, heading the BCPL unit. The annual production capacity at BCPL is 240,000 tons per annum of ammonium nitrate. Production details are as below: Financial Year 2024-25 2025-26 onwards Capacity of the plant 2,40,000 tons 2,40,000 tons Actual Capacity utilized 2,00,000 tons 2,40,000 tons External demand for ammonium nitrate NIL 50,000 tons Variable cost of production of 1 ton of ammonium nitrate 30,000 30,000 Fixed cost of production of 1 ton of ammonium nitrate 80,000 100,000 During a senior management meeting in April 2024, it was decided that BCPL would charge its total cost of production per ton to UFL along with a 15% mark up on total cost. This was acceptable to the Income Tax authorities as well. As shown above, the total cost of production for the year FY 2024-25 was - 110,000 per ton while FY 2025-26 onwards it was 130,000 per ton. Accordingly, the internal transfer price charged by BCPL to UFL would be - 126,500 per ton for FY 2024–25, and - 149,500 per ton from FY 2025–26 onwards, reflecting a net increase of 23,000 per ton over the previous year. Since BCPL unit is a captive manufacturing unit, the performance measurement of Ramesh Shah, the unit head is based on technical and non-financial parameters rather than financial parameters like the profit generated by the unit. This suited Ramesh Shah fine until he realized that the rest of the management at UFL were able to make a better case for their annual increment and bonus based on financial parameters like the profit generated by their respective units. Hence, Ramesh Shah felt stifled by the current transfer pricing policy that allowed his unit to reflect only the 15% mark-up as BCPL's profit. Customer base for ammonium nitrate manufactured by BCPL Pre-acquisition, under the management of Mahesh, Hitesh and Ramesh Shah, the customers for ammonium nitrate produced by BCPL comprised of mining and infrastructure companies. Ammonium nitrate was used to make commercial grade explosives that were required within these industries. Similarly, there were pharmaceutical and chemical companies that needed this compound to manufacture their products. Post acquisition, BCPL was being operated as a fully captive unit, its entire production transferred to UFL. Hence, the erstwhile customers of BCPL found alternate suppliers to provide ammonium nitrate. However, given quality considerations many still wanted BCPL as their preferred supplier of ammonium nitrate. In due course of time from FY 2025-26 onwards, Ramesh Shah started receiving inquiries from erstwhile customers to resume supply of ammonium nitrate. Relook at the internal transfer pricing policy and Ramesh Shah's performance assessment. During the quarterly senior management meeting in July 2025. The meeting was attended by Mr. Prakash Seth, CEO of UFL, Mr. Mohan Lal, director of operations at UFL and Ramesh Shah among others. Ramesh brought up this issue: Ramesh Shah: “We have received numerous enquiries for the supply of ammonium nitrate from our erstwhile customers. This external demand indicates that my unit BCPL has the potential to generate value to UFL's overall business. I understand, that the main objective for acquisition of BCPL had been to operate as a captive unit that supports UFL's fertilizer production. While we continue this strategy, I request the management to have a relook at the internal transfer pricing policy. Instead of merely charging 15% mark-up on total cost, my unit should be allowed to charge UFL the market rate for ammonium nitrate. The average quote price from external inquires is approximately - 180,000 per ton of ammonium nitrate. Therefore, I propose that BCPL charge UFL the market rate of 180,000 per ton, which will reflect the true value of my unit's business. By being a profit center like all other units, my performance evaluation can also be done on important financial parameters." Mr. Mohan Lal countered this proposal “No doubt, BCPL is an important part of our company as it guarantees regular and uninterrupted supply of critical raw material. However, we are already bearing an increased transfer price charge of 23,000 per ton compared with FY 2024-25. In the interest of goal congruence for the company, I did not protest this increase. However, just like BCPL there are other suppliers who are ready to supply a similar grade ammonium nitrate at 170,000 per ton. By accepting a rate higher than the market rate, the profitability of my unit and consequently my performance assessment will be impacted". After a little deliberation, Mr. Prakash Seth observes “I agree with Mr. Ramesh Shah, the ammonium nitrate manufacturing unit has the potential to increase the revenue and profits for our business. Hence, his proposal to charge the external market rate is justified. At the same time, I do concur with Mr. Mohan Lal that a price above - 170,000 per ton of ammonium nitrate, which is the external market procurement rate for the same grade of ammonium nitrate is unjustified. We need to rethink our strategy as regards the ammonium nitrate production plant.” Repositioning BCPL to unlock business value Taking cognizance of the opportunity to earn extra revenue and profits, Mr. Prakash Seth and other members of the company's board of directors, decide to increase the capacity of the ammonium nitrate manufacturing plant. The capacity will now be increased to 400,000 tons per annum, that is an increase of 160,000 tons per annum from the current capacity. Out of the total capacity, UFL will get a committed supply of 240,000 tons per annum, as originally planned at the time of acquisition. The balance 160,000 tons per annum can be used to meet external demand. If UFL requires additional supply beyond the committed supply, BCPL is required to first cater to the internal captive demand before catering to the external market. From the year 2026-27, the unit will operate like a profit center just like the rest of the units within UFL. This put in effect a strategic move of converting the ammonium nitrate manufacturing unit from being a non-competitive captive raw material supplier to a unit that has to compete with external sellers in order to generate both profit from both internal and external sales. Mr. Ramesh Shah is also agreeable to this since it gives the ammonium nitrate manufacturing unit an opportunity to contribute more towards the company's value chain. For the year 2026-27, the variable expenses are expected to remain at the same level as previous years at 30,000 per ton. As regards fixed costs, increase in the capacity would result in increase the fixed cost by - 70,000 for every additional 1 ton produced. During many rounds of prolonged negotiations, Mohan Lal is trying to convince Ramesh Shah that - 155,000 per ton of ammonium nitrate would be appropriate. External sales will be priced at 180,000 per ton. This includes additional delivery cost (variable) of 18,000 per ton of ammonium nitrate to external customers. The price also includes - 2,000 per ton advertising expenses (variable). The rest of the cost structure remains the same for both internal and external supplies. Govt Loan at concessional rate Under the New Ammonium Nitrate Policy launched by the Ministry of Chemicals and Fertilizers, the Government of India has extended financial assistance to support domestic production and technological advancement in the sector. This policy aims to reduce import dependence, improve productivity, and ensure sustainable supply of ammonium nitrate, which is a critical input for fertilizers, explosives, and other chemical industries. As part of the financial support extended under this policy, the government provides concessional loans to eligible manufacturers for the development, modernization, and expansion of ammonium nitrate production facilities. These loans are intended to facilitate capital investments in plant and machinery, adoption of energy-efficient and high-yield technologies, and overall capacity enhancement. As part of this initiative, BCPL received from the government a loan of 5 crore @ 5% payable after 5 years in a bulleted payment. Interest is payable annually at the end of each financial year. The prevailing market rate of interest is 12%. This financial assistance has enabled BCPL to invest in critical infrastructure and machinery necessary to improve operational efficiency, reduce wastage, and increase the yield of ammonium nitrate production, thereby aligning with the national goal of strengthening the chemical manufacturing sector. Purchase of machinery by BCPL from Mechanix Gmbh With a strategic vision to enhance production efficiency and incorporate advanced technology at BCPL, a decision was made to import state of the art machinery from Germany. The machines were purchased from Mechanix GmBh for a total purchase value of USD 500,000 (that is approximately - 4.25 crores in terms of Indian currency). Since BCPL had previously purchased many machines from Mechanix GmBh, it got a credit period of 3 months to settle the transaction. The machines were shipped on November 1, 2024 from Germany. BCPL enters into a contract with Complete Logistics, a licensed customs broker with its office in Surat (Gujarat) to meet all the legal formalities in getting the said machines cleared from the customs station at the Hazira Port. Apart from this BCPL authorizes Complete Logistics to incur on its behalf the expenses in relation to clearance of the imported machines from the customs station and bringing the same to the manufacturing complex at Baruch, Gujarat. BCPL will reimburse Complete Logistics the expenses on actual basis in addition to agency charges. Please refer to Annexure 2 for the details of expenses made by Complete Logistics on behalf of BCPL, as shared via email by Mr. Sparsh Saddh (Manager Finance, Complete Logistics) to Mr. Sanjay Kumar (Accounts Head at BCPL). On receiving the machines on November 30, 2024, the machines were found not to be as per the specifications as requested by BCPL. This resulted in a dispute between BCPL and Mechanix GmBh. The dispute remained unresolved as of March 31, 2025. An amount of USD 100,000 is yet to be paid. Mechanix GmBh has issued a notice whereby it has started charging an interest on the unpaid amount @ 18% p.a. effective February 1, 2025 (the end of the 3 month credit period starting date of shipment November 1, 2024). CA Umakant Patel has been appointed as the statutory auditor of both UFL and BCPL for five years from FY 2024-25 onwards. On completion of the audit for consolidated results of United Fertilizer Limited, he issued the Audit Report following the Guidance Note on The Companies (Auditor's Report) Order, 2020 (CARO). He has examined and performed audit procedures on the disputed claims, short term liabilities of UFL, including the corporate guarantee and unsecured loans to its subsidiaries and step subsidiaries. United Fertilizers Limited supplies its products to a wide network of dealers and retailers across the country. As, UFL is leading manufacturer and distributor of agricultural fertilizers, Given the seasonal nature of demand and the credit-based sales model, managing cash flow is critical to the company's operations. To maintain healthy liquidity and minimize credit risk, In Mar 2025, Management has set an internal target of collecting 95% of accounts receivable within 60 days from the date of sale. This benchmark aligns with the company's working capital requirements and industry standards. This performance benchmark is actively monitored by the finance department through a structured receivables management system that includes weekly aging reports, customer-specific credit limits, and a disciplined follow-up mechanism involving reminder emails, calls, and field visits. To incentivize timely payments, the company offers early payment discounts and enforces strict credit terms. The management committee of UFL has issued right shares to all its shareholders which include employees of the company. Furthermore, UFL issues its own shares to a charity without any consideration to an NGO which is working for promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward group. Imported of tools UFL imported special tools from a German Company in the month of February 2025. The finance manager of company needs to borrow 5,00,000 euros for 90 days to settle the payments. Policy of the company is not to take any currency risk. The following rates are quoted: ₹/€ spot: 90/90.35 and 90 days swap: 20/25. € Interest rates: 4.00/4.25; Banker suggests another alternative of US dollar loan. Enquiries reveal that interest rate is 5% and $/€ rate is 1.0220/1.0240 and 90 days swap points of 15/10. Annexure 1 Background at a glance BCPL was originally founded by Mahesh Shah and his son Hitesh Shah in 1978. Over time, they could not keep up with the rapidly changing landscape of the chemical industry. They were not very well versed with modern business environment and as well as the latest production technology. Ramesh Shah joined the company in 2018 after his graduation as a chemical engineer. Ramesh brought in changes that helped the company remain profitable until FY 2021-22. The shareholding pattern of BCPL is as below: Shareholder name Upto FY 2022-23 FY 2023-24 FY 2024-25 onwards Mahesh Shah 50% NIL NIL Hitesh Shah 50% 50% NIL Ramesh Shah NIL 50% NIL United Fertilizer Limited (UFL) NIL NIL 100% Due to advancing age, Mahesh Shah wanted to reduce his business commitments. Therefore, during FY 2023-24, Mahesh Shah sold his 50% shareholding to Ramesh Shah, an unrelated person to Mahesh Shah. Later in FY 2024-25, UFL acquired 100% of the stake in BCPL from Hitesh Shah and Ramesh Shah.