Titan Company Ltd. Vs DCIT (ITAT Chennai)
Conclusion: Provision for customer loyalty points, computed on a scientific and consistent basis, constituted a present and ascertained liability deductible under Section 37(1). Disallowance u/s 14A was deleted since no exempt income was earned during the year. Regarding transfer pricing adjustment on 80IC claim, Tribunal held that once profits of eligible units were accepted at arm’s length, no further adjustment could be made to deny deduction.
Held: Assessee had entered into international transactions with its Associated Enterprises (AEs), which were referred to Transfer Pricing Officer (TPO) for determination of Arm’s Length Price (ALP). TPO proposed TP adjustments vide order u/s 92CA(3), which were incorporated in the draft assessment orders and later confirmed (in part) by the DRP. Aggrieved, assessee appealed before the Tribunal, confining arguments to three specific issues: Provision for Consumer Loyalty Program; Disallowance under Section 14A and Transfer Pricing (TP) adjustment related to deduction under Section 80IC. Assessee contended that the provision for customer loyalty points was based on a scientific estimation of redemption trends over preceding quarters and hence constituted an ascertained liability allowable u/s 37(1); assessee relied upon the Supreme Court’s decision in Rotork Controls India Pvt. Ltd. v. CIT [314 ITR 62 (SC)], holding that provisions based on reliable estimates were deductible. It was further contended that in the assessee’s own case for earlier AYs 2009–10 to 2012–13 (ITA Nos. 505–507 & 518/Chny/2018, order dated 29.05.2024), the Tribunal had already allowed identical claims on identical facts, which should be followed for consistency. assessee submitted that it had not earned any exempt income during the relevant years and hence, no disallowance u/s 14A could be made. Assessee argued that transfer pricing adjustments should not have any impact on computation of deduction u/s 80-IC, as the same income could not be enhanced twice—once through TP adjustment and again through denial of deduction. Revenue opposed the claim, contending that the liability was contingent, depending on future redemption by customers. It was argued that no actual outflow had occurred in the relevant year and therefore, the provision could not be treated as a deductible expense. It was held that assessee’s method of estimating loyalty redemption was consistent, systematic, and based on past redemption trends, supported by verifiable data. The method was in accordance with the principles laid down by the Supreme Court in Rotork Controls India Pvt. Ltd., which recognized provisions based on reliable actuarial or statistical estimation as deductible. It was also noted that assessee reverses excess provisions in subsequent years and offers them to tax, ensuring neutrality over time. Since identical issues had been decided in favour of the assessee for earlier AYs by a coordinate bench in its own case, the Tribunal followed the principle of judicial consistency and held that the provision for consumer loyalty program was an allowable deduction. Accordingly, the disallowance was deleted. Tribunal observed that the assessee had not earned any exempt income during the relevant years. Relying on the jurisdictional Madras High Court decision in CIT v. Chettinad Logistics (P) Ltd. and the Supreme Court’s affirmation thereof, it held that no disallowance under Section 14A was warranted where there was no exempt income. Tribunal found merit in the assessee’s argument that once ALP was determined, the resulting enhanced income should also qualify for deduction u/s 80-IC, as it pertained to the same eligible undertaking. The object of Section 80-IC was to encourage profits derived from eligible business, not to deny benefits on account of arm’s length adjustments. Following the principles laid down in CIT v. Gem Plus Jewellery India Ltd. (330 ITR 175 [Bom]), Tribunal directed AO to allow deduction u/s 80-IC on the enhanced income post TP adjustment.
