Transfer Pricing Must Be Benchmarked Using AE Transactions, Not Entity-Level Profits: ITAT Delhi

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) on 2 June 2026 held that transfer pricing analysis must ordinarily be restricted to international transactions with Associated Enterprises (AEs) where reliable segmental data is available, and cannot be extended to entity-level profitability.

Judicial Member Anubhav Sharma and Accountant Member Naveen Chandra partly allowed the appeal filed by Cornell Overseas Pvt. Ltd. for Assessment Year 2007–08 and remanded the transfer pricing issue to the Transfer Pricing Officer (TPO) for fresh consideration of comparables. The Bench held:

“Where transaction can be segregated, the law mandates that profitability from AE Transactions can only be benchmarked and not profitability at entity level.”

Cornell Overseas Pvt. Ltd., engaged in manufacturing and export of readymade garments and home furnishing products, had challenged a transfer pricing adjustment arising from the TPO's rejection of the Cost Plus Method adopted by the company and the substitution of the Transactional Net Margin Method (TNMM) at the entity level.

Before the Tribunal, the company submitted that its profitability from AE transactions stood at 5.88%, compared to 4.5% from non-AE transactions, and therefore its international transactions were at arm's length. It further argued that the TPO erred in benchmarking overall entity profits instead of restricting the analysis to controlled international transactions.

The Tribunal noted that although the segmental accounts maintained by the taxpayer were not audited, the company was relatively small and not statutorily required to maintain segment reporting. It held that such segmental data could not be rejected solely on the ground of being unaudited.

The Bench also found that several comparables selected by the TPO were functionally dissimilar, including companies engaged in retail operations, fabric and yarn manufacturing, leather garments, and contract manufacturing activities. It further observed that a 100% export-oriented garment exporter could not be compared with entities having export revenue below 75% of total sales.

Emphasising the importance of functional comparability, the Tribunal observed that “the comparables companies chosen should have comparable Functional, Assets and Risk Profile.”

Accordingly, the ITAT remanded the matter to the TPO for fresh examination of comparables, directing exclusion of companies failing the FAR (Functions, Assets and Risks) test and those not meeting the export revenue threshold of 75% of sales. It also directed the TPO to consider inclusion of Meenakshi India Ltd. and to extend the benefit under Section 92C(2) of the Income Tax Act wherever applicable.