ITAT Directs TP Reassessment And Holds Only AE Transactions Can Be Benchmarked for ALP Determination

The Income Tax Appellate Tribunal (ITAT) Delhi,  held that where reliable segmental data is available, transfer pricing benchmarking must be confined to international transactions with Associated Enterprises and cannot be undertaken at the entity level.

The assessee, M/s Cornell Overseas Pvt. Ltd. conducts business of manufacturing and exporting readymade garments for ladies and children along with home furnishing products with 96% of its sale arising from Exports. The assessee entered into various international transactions with its Associated Enterprises (AEs) for exports.

For transfer pricing purposes, the assessee adopted the Cost Plus Method (CPM) and selected 33 comparable companies. Based on its analysis, it claimed that its international transactions were conducted at arm’s length. However, the Transfer Pricing Officer (TPO) rejected the assessee’s transfer pricing study, adopted the Transactional Net Margin Method (TNMM) as the Most Appropriate Method.

The Tribunal observed that the TPO had rejected the assessee’s segmental profitability analysis primarily on the ground that the segmental accounts were not audited and held that where international transactions can be segregated from non-AE transactions, transfer pricing provisions require benchmarking only of the international transactions and not the profitability of the enterprise as a whole.

Allowing the appeal for statistical purposes, ITAT Delhi remanded the transfer pricing issue to the TPO for fresh examination and reaffirmed that benchmarking under transfer pricing provisions must focus on international transactions alone where proper segmental information is available, while ensuring selection of truly comparable companies for ALP determination.