Relief for Titan: ITAT Deletes Rs. 63.18 Crore Transfer Pricing Adjustment, Accepts Product-Mix and Segmental Margin Analysis [Read Order]

The Chennai Bench of Income Tax Appellate Tribunal ( ITAT) granted relief to Titan by deleting a Rs. 63.18 crore transfer pricing adjustment, accepting the appellant’s product-mix and segmental margin analysis for Assessment Year(AY) 2014-15.

Titan Company Ltd.,appellant-assessee, was engaged in manufacturing and selling jewellery and watches, with tax holiday units at Pantnagar and Dehradun and non-tax holiday units at Hosur. The Transfer Pricing Officer (TPO) proposed an adjustment of Rs. 63.18 crore, finding that tax holiday units earned significantly higher margins than non-tax holiday units.

The TPO rejected the assessee’s Transfer Pricing documentation and economic analysis and made the adjustment by comparing margins across units. The DRP upheld the TPO’s findings without considering the assessee’s detailed submissions, including segmental financials and product-mix-based margin explanations.

The assessee argued that there were no changes in facts over the years, opposed the use of internal Transactional Net Margin Method (TNMM), and noted that no adjustments had been made in prior years under section 143(3). The assessee also relied on the tribunal’s ruling in DCIT Vs Deepak Industries Ltd [2022].

The department countered that Specified Domestic Transactions (SDT) provisions applied only from AY 2013-14, and for earlier years, ALP determination for SDT was not mandatory. It further contended that the assessee’s TP study was unreliable due to incomplete data, necessitating the TPO’s own method to determine ALP.

The two member bench comprising Manu Kumar Giri (Judicial Member) and S.R.Raghunatha (Accountant Member) reviewed the TPO’s order, and found that the TPO had rejected the assessee’s product-mix claims without sufficient data.

The tribunal noted that the assessee had conducted a detailed Transfer Pricing study, adopting TNMM as the Most Appropriate Method, and the TPO had not identified any specific defects in the documentation under section 92C(3) before making the adjustment.

The appellate tribunal observed that the TPO compared margins of tax holiday units with non-tax holiday units without accounting for differences in product mix, production processes, and market conditions, which was inconsistent with established transfer pricing principles.

The assessee had submitted segmental profit and loss accounts certified by a Chartered Accountant, showing that margin variations arose from product mix, not profit shifting. The bench also noted that the adjustment involved inter-unit transfers of semi-finished goods, which were inappropriately benchmarked against third-party sales of finished goods.

Relying on the principle of consistency in treatment and relevant case law, the tribunal held that the TP adjustment of Rs. 63.18 crore made by the TPO and upheld by the DRP was unsustainable and deleted it for AY 2014-15.

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