Internal TNMM Takes Precedence Over External TNMM Where Reliable Segmental Data Is Available: ITAT Chennai Rules in Favour of Madura Coats
Overview of the Dispute
The Income Tax Appellate Tribunal, Chennai Bench, delivered a significant ruling in Madura Coats Private Limited Vs ACIT (ITAT Chennai), bearing Appeal Number IT(TP)A No.117/Chny/2024, vide its order dated 12th January 2026 for Assessment Year 2021-22. At the heart of this dispute was a transfer pricing adjustment of Rs.9,06,00,000/- sustained by the Assessing Officer pursuant to the directions of the Dispute Resolution Panel under Section 144C of the Income-tax Act, 1961, pertaining to the assessee's manufacturing segment.
The Tribunal's ruling addresses two foundational questions in transfer pricing law: first, whether tax authorities can bypass internal comparables under the Transactional Net Margin Method (TNMM) without articulating cogent reasons; and second, whether entity-level losses caused exclusively by extraordinary external conditions such as the COVID-19 pandemic can independently trigger a transfer pricing adjustment.
Background and Nature of the Assessee
Madura Coats Private Limited is a licensed manufacturer operating under the Coats Group, with its ultimate holding company being Coats Group plc, United Kingdom. The assessee's core business involves manufacturing sewing threads and accessories, and it distributes these products both to its Associated Enterprises (AEs) as well as to unrelated third parties.
During AY 2021-22, the assessee engaged in several international transactions with its AEs. The transactions that remained in contention were:
- Export of grey threads and finished goods: Rs. 272.13 crores
- Purchase of goods and raw materials from AEs: Rs. 6.99 crores
All other international transactions with AEs were accepted as being at arm's length and were not contested.
Benchmarking Methodology and the Assessee's Transfer Pricing Position
Method Adopted
The assessee employed the Transactional Net Margin Method (TNMM) as the most appropriate method for benchmarking its manufacturing segment, using Operating Profit to Operating Revenue (OP/OR) as the Profit Level Indicator (PLI). Its transfer pricing study identified 88 comparables, yielding an arm's length range of 3.60% to 6.55% with a median of 5.12%.
COVID-19 Disruption and Capacity Adjustment Claim
AY 2021-22 was significantly disrupted by the COVID-19 pandemic. The assessee's manufacturing operations remained shut for approximately six weeks, after which production resumed at reduced factory shifts. As a direct consequence:
- The assessee's turnover fell by 24.53% compared to the preceding year.
- The assessee recorded an operating loss of 0.95%.
To account for these extraordinary conditions, the assessee:
- Claimed a capacity adjustment to neutralise the impact of under-absorbed fixed overheads.
- Sought exclusion of COVID-19 related extraordinary costs from the operating cost base.
- Submitted detailed workings corroborated by a Cost Audit Report dated 22.04.2024.
After applying these adjustments, the assessee computed an adjusted operating margin of 6.93% and maintained that its AE transactions were at arm's length.
Internal TNMM Argument
Beyond the above, the assessee furnished segmental profitability data separately for AE and non-AE transactions. On the basis of this data, it argued that internal TNMM should be treated as the most appropriate benchmark, as margins earned on AE transactions were demonstrably higher than those earned on non-AE transactions. The assessee emphasised that: