MADURA COATS PVT. LTD.,MADURAI vs. ACIT, CORPORATE CIRCLE-2,, MADURAI

आयकर अपीलीय अधिकरण, ‘डी’ न्यायपीठ, चेन्नई। IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH: CHENNAI श्री मनु कुमार गिरर, न्यागिक सदस्य एवं श्री एस. आर. रघुनाथा, लेखा सदस्यकेसमक्ष BEFORE SHRI MANU KUMAR GIRI, JUDICIAL MEMBER AND SHRI S. R. RAGHUNATHA, ACCOUNTANT MEMBER

आयकर अपील सं./IT(TP)A No.117/Chny/2024 ननिाारण वर्ा/Assessment Year: 2021-22

Madura Coats Private Limited The Asstt. Commissioner No.35, New Jail Road, Madurai of Income Tax, H.O., Madurai South, Madurai, Corp Circle- 2, Tamil Nadu-625001 Madurai [PAN: AABCM8279K] (अपीलार्थी/Appellant) (प्रत्यर्थी/Respondent) अपीलार्थी की ओर से/ Appellant by Mr. Vishal Kalra, Advocate & Mr. Ankit Sahi, Advocate & Mr.Ankit Sahni by Virtual प्रत्यर्थी की ओर से /Respondent by Mr. ARV Sreenivasan, CIT सुनवाई की तारीख/Date of Hearing 15.10.2025

घोषणा की तारीख 12.01.2026 /Date of Pronouncement आदेश / O R D E R PER MANU KUMAR GIRI (Judicial Member):

This appeal is filed by the assessee against the final assessment order passed by the Assessing Officer dated 28.10.2024 pursuant to directions of the Dispute Resolution Panel (“DRP”) under section 144C of the Income-tax Act, 1961 (“the Act”), wherein a transfer pricing adjustment of Rs.9,06,00,000/- was sustained in respect of the manufacturing segment.

Before the DRP, the assessee furnished additional evidence including detailed break-up of COVID-19 related shutdown costs amounting to Rs.89.40 crores, supported by the Cost Audit Report. The DRP called for a remand report from the TPO. The TPO, in remand proceedings, rejected the additional evidence and reaffirmed rejection of comparables. The DRP upheld the TPO’s action, holding that the assessee failed to demonstrate that COVID-19 impacted it differently from comparable companies, and that export incentives were non- operating in nature. The DRP also rejected inclusion of eight comparables for alleged non-availability of data.

The assessee further contends that the loss incurred during AY 2021-22 was entirely due to extraordinary external factors arising from COVID- 19, and not due to any non-arm’s length pricing of AE transactions. It is demonstrated that the gross profit margins during the relevant year were consistent with the preceding and succeeding years, and the erosion in net margin was attributable to under-absorption of fixed costs and increased SG&A expenses.

The assessee relied upon multiple judicial precedents, including recent decisions of the Chennai Bench in Reynolds Pen India Pvt. Ltd., POS– Hyundai Steel Manufacturing India Pvt. Ltd., and Ambattur Clothing Ltd., wherein primacy was accorded to internal TNMM when reliable segmental data is available.

(i) Whether the TPO/DRP were justified in rejecting internal TNMM and applying external TNMM without recording reasons or identifying defects in the segmental data; and

(ii) Whether the loss incurred by the assessee during AY 2021–22 warrants transfer pricing adjustment, despite being attributable to extraordinary COVID-19 related factors.

Internal TNMM vs External TNMM Rule 10B(1)(e) read with Rule 10B(2) of the Income-tax Rules, 1962, envisages comparison of net margins from comparable uncontrolled transactions, which may include internal comparables where available and reliable.

In the present case, it is undisputed that the assessee furnished segmental profitability between AE and non-AE transactions. The TPO has neither rejected the segmental accounts nor pointed out any specific defect in allocation keys or reconciliation with audited accounts.

We note that the TPO himself aggregated AE and non-AE margins for determining adjustment, thereby implicitly accepting functional similarity. Having done so, it was incumbent upon the TPO to first examine and reject the internal comparables with cogent reasons before resorting to external TNMM.

The judicial precedents relied upon by the assessee, particularly the recent decisions of this Bench, clearly hold that internal TNMM deserves primacy when reliable segmental data is available. Respectfully following the same, we hold that rejection of internal TNMM in the present case is unsustainable in law.

Since the segmental results demonstrate that margins from AE transactions are higher than those from non-AE transactions, the international transactions are at arm’s length.

COVID-19 Impact and Loss Situation

The financial data placed on record shows that while the assessee incurred loss during AY 2021–22, it earned profits in both the preceding and succeeding years. The gross profit margins across the three years remain broadly consistent.

The erosion in net margins during AY 2021-22 is attributable to sharp decline in revenue, under-absorption of fixed overheads, and additional COVID-19 related costs. These are extraordinary external factors.

The TPO’s presumption that decline in turnover is attributable to non- arm’s length AE pricing is unsupported by any evidence, particularly when AE sales constitute only about 23% of total revenue and are on a cost-plus basis.

In our view, entity-level losses caused by extraordinary economic conditions cannot, by themselves, justify a transfer pricing adjustment in the absence of evidence of manipulation of inter-company pricing.

In view of the foregoing discussion, we hold that internal TNMM based on the assessee’s segmental data is the most appropriate method for benchmarking the international transactions in the manufacturing segment. The rejection of internal TNMM and mechanical application of external TNMM by the TPO/DRP is unsustainable. The loss incurred by the assessee during AY 2021-22 is attributable to extraordinary COVID- 19 related factors and not to non-arm’s length pricing.

Accordingly, the transfer pricing adjustment of Rs.9,06,00,000/- is directed to be deleted.

We have heard the rival submissions and perused the material available on record. The present grounds relate to disallowance of various expenses and bad debts, which are dealt with issue-wise as under:

Ground No. 4: Disallowance of Miscellaneous Expenses- Rs. 8,03,81,678/-.

The assessee has challenged the action of the Assessing Officer, as affirmed by the DRP, in disallowing miscellaneous expenses on the ground that complete documentary evidences were not furnished. It is the contention of the assessee that sample invoices along with explanations were submitted during the assessment proceedings and no specific deficiency or particular line item was pointed out by the AO requiring further clarification or evidence.

On perusal of the assessment order, we find that the disallowance has been made primarily on an ad hoc basis by accepting sample invoices and disallowing the balance amount without identifying specific unverifiable expenses. In our considered view, such an approach does not meet the requirement of a reasoned assessment, especially when the assessee had sought clarification as to the exact details required.

In the interest of justice, we deem it appropriate to set aside this issue to the file of the AO for fresh examination. The AO is directed to verify the claim after calling for specific details and evidences and decide the issue in accordance with law after providing due opportunity of being heard to the assessee.

Accordingly, this ground is allowed for statistical purposes.

Ground No. 5: Disallowance of Repair and Maintenance Expenses (Building and Plant & Machinery):Rs.11,81,62,725/-.

The assessee contends that the expenditure incurred on repair and maintenance was revenue in nature and essential for maintenance of manufacturing assets, without resulting in any enduring benefit or enhancement of capacity. It is further submitted that sample invoices and explanations were filed, which were not duly considered by the AO.

We observe that the AO has disallowed the expenses without bringing on record any specific finding as to how the expenditure resulted in capital advantage or extension of useful life of the assets. Further, no specific line items were identified for which the evidence was found to be insufficient.

Considering the nature of the expenditure and the submissions made, we are of the view that the issue requires re-examination at the assessment level. Accordingly, we restore this issue to the file of the AO with a direction to examine the nature of expenditure item-wise, after considering the evidences furnished by the assessee and after providing a reasonable opportunity of being heard.

This ground is allowed for statistical purposes.

Ground No. 6: Disallowance of Rent Expenses: Rs.8,36,92,634/-.

The AO disallowed the rent expenses on the ground that the assessee failed to explain the nature of expenses. However, the assessee has submitted that ledger extracts and sample lease agreements were furnished during the assessment proceedings, clearly explaining the nature of rent expenditure.

On examination of the records, we note that the assessment order does not deal with the documentary evidences submitted by the assessee and the disallowance appears to have been made without proper verification. In the interest of justice, we consider it appropriate to remand this issue back to the AO for verification of lease agreements, ledger details, and other supporting documents.

The AO shall decide the issue afresh in accordance with law after granting due opportunity to the assessee.

Accordingly, this ground is allowed for statistical purposes.

Ground No.7:Disallowance of Bad Debts Written Off :Rs.1,11,06,931/-.

The assessee has challenged the disallowance of bad debts written off, contending that complete party-wise details, procedure followed for write-off, and justification were duly furnished during assessment proceedings. It is submitted that the AO disallowed the claim without appreciating the write-off entries and explanations provided.

We observe that the AO has disallowed the claim primarily on the ground that sufficient justification was not furnished. The assessment order does not contain any finding as to whether the amounts were written off in the books of account.

In our considered opinion, the matter requires fresh verification of factual details. We therefore set aside this issue to the file of the AO with a direction to verify whether the bad debts have been written off in

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the books and whether the statutory conditions are satisfied, after considering the details submitted by the assessee.

This ground is allowed for statistical purposes.

Order pronounced on 12th day of January, 2026 at Chennai.

Sd/- Sd/- (एस. आर. रघुनार्था) (मनु कुमार गिरर) (S.R. Raghunatha) (Manu Kumar Giri) लेखा सदस्य /Accountant Member न्याययक सदस्य / Judicial Member चेन्नई/Chennai, ददनांक/Dated: 12th January, 2026. KB, Sr.PS आदेश की प्रनिललपप अग्रेपर्ि/Copy to: 1. अपीलार्थी/Appellant 2. प्रत्यर्थी/Respondent 3. आयकर आयुक्ि/CIT, Chennai /Madurai/Coimbatore/Salem 4. पवभागीय प्रनिननधि/DR 5. गाडा फाईल/GF

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