Cornell Overseas Pvt Ltd Vs DCIT (ITAT Delhi)
The case concerns transfer pricing adjustments for Assessment Year 2007-08 involving a company engaged in the manufacture and export of readymade garments for ladies and children, as well as home furnishings. The appeal challenged the assessment order passed under Sections 254/143(3) read with Section 144C of the Income Tax Act pursuant to the directions of the Dispute Resolution Panel (DRP).
The assessee was a 100% Export Oriented Undertaking, with approximately 96% of its turnover arising from exports and the remaining 4% from local sales such as exhibitions. During the relevant year, it entered into international transactions relating to the sale of garments and home furnishings, samples for design and development, reimbursements received, and reimbursement of foreign travel expenses. For determining the Arm’s Length Price (ALP), the assessee adopted the Cost Plus Method (CPM), selecting 33 comparable companies and using Gross Profit on Cost as the Profit Level Indicator (PLI). The average markup of the comparables was computed at 15.90%, while the assessee’s own Gross Profit on Cost at the entity level was 29.14%, leading it to conclude that its international transactions were at arm’s length.
The Transfer Pricing Officer (TPO), however, rejected the assessee’s search process and substituted the Cost Plus Method with the Transactional Net Margin Method (TNMM), considering it the most appropriate method. The TPO adopted a fresh set of comparables and benchmarked the assessee’s profitability at the entity level. The assessee’s operating profit to total cost margin was determined at (-)2.08%, whereas the mean margin of the selected comparables was computed at 9.54%. Based on this analysis, the TPO proposed an adjustment by determining the ALP at the entity level.
