CORNELL OVERSEAS P. LTD.,NEW DELHI vs. DCIT, NEW DELHI

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ITA 850/DEL/2017Status: DisposedITAT Delhi02 June 2026AY 2007-0811 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that profitability from international transactions should be benchmarked, not at the entity level, especially when segmental accounts are available. It also directed the TPO to re-adjudicate the comparables, excluding those with different FAR profiles or insufficient forex revenue.

What were the facts?

The assessee, a manufacturer and exporter of readymade garments, engaged in international transactions with associated enterprises. The TPO rejected the assessee's benchmarking at entity level and applied TNMM method, selecting a new set of comparables.

What were the issues?

Whether profitability should be benchmarked at entity level or for international transactions, and the validity of comparables chosen by the TPO.

Which sections of the Income-tax Act were involved?

Section 92C,Section 10B

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, DELHI BENCH ‘I’, NEW DELHI

Before: SHRI ANUBHAV SHARMA & SHRI NAVEEN CHANDRA

For Appellant: Ms. Vandana Bhandari, Adv
For Respondent: Shri Bhopal Singh, Sr. DR
Hearing: 10.03.2026Pronounced: 02.06.2026

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘I’, NEW DELHI BEFORE SHRI ANUBHAV SHARMA, JUDICIAL MEMBER And SHRI NAVEEN CHANDRA, ACCOUNTANT MEMBER

ITA No.850/Del/2017 Assessment Years: 2007-08 M/s Cornell Overseas Pvt Ltd. Vs Dy. Comm. Of Income Tax, C-1, Panchsheel Enclave, Circle-6(2), C.R. Building, New Delhi-110017 New Delhi (APPELLANT) (RESPONDENT) PAN No.AAACC0034F Assessee by Ms. Vandana Bhandari, Adv. Revenue by Shri Bhopal Singh, Sr. DR Date of Hearing 10.03.2026 Date of Pronouncement 02.06.2026

ORDER PER NAVEEN CHANDRA [A. M]: The above captioned appeal is preferred by the assessee against the assessment order dated 30.09.2016, passed by ld. Dy. Comm. Of Income Tax, Circle-6(2), New Delhi (hereinafter referred to as ‘ld. AO), passed u/s 254/143(3) r.w. 144C of the Income Tax Act, 1961 (hereinafter ‘the Act’) in pursuance of directions of the ld. Dispute Resolution Panel-1 (in short ‘ld. DRP') dated 12.08.2016 pertaining to Assessment Year 2007-08.

2.

The assessee has raised following revised grounds of appeal:-

ITA No.850/Del/2025 M/s Cornell Overseas Pvt Ltd 1) The DRP/TPO erred in benchmarking the profitability/mark-up of assessee at entity level instead of profitability/mark-up from international transactions. 2) Without prejudice to Ground No 3, the profitability/mark-up of assessee from international transactions (AEs) is more than profitability/mark-up from independent transactions (non AEs) and therefore international transactions are at Arm's length. 3) That DRP failed to appreciate; the functional, assets and risk profile of assessee and that some of the companies taken by TPO cannot be considered comparables as they had different Functional, Assets, Risk profile, cost structure, inconsistent performance, special/different economic circumstances and DRP further erred in upholding arbitrary filters applied by TPO 4) That DRP/TPO failed to correct errors in computation of operating profit mark-up of assessee and comparables. 5) That DRP/TPO erred in not allowing assessee the benefit of (+/-) 5% mentioned in the proviso to section 92C(2) of the Act. The assessee craves leave to alter, amend or withdraw all or any grounds herein or add any further grounds as may be considered necessary either before or during the hearing.

4.

Briefly, the assessee Cornell Overseas Private Limited, is engaged in the business of manufacturing and export of readymade garments for ladies and children and home furnishings. Mr. C. J. Cornell holds 50% of the shares and the other 50% of the shares are held by Mrs. Arpil Cornell. The assessee is a 100% Export Oriented Undertaking having the export turnover at approx. 96% of sales. The 4% local sales are exhibitions etc. The assessee has shown the following International Transactions during the year: Sr Description of Transaction Method Value no 1 Sale of garments and home furnishings CPM 100,426,298 2 Samples for design and development CPM CPM 191570 3 Reimbursements Received CPM 638357 4 Reimbursement of foreign travel CPM 20530

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ITA No.850/Del/2025 M/s Cornell Overseas Pvt Ltd

5.

The assessee, for determining Arms length Price, has taken a set of 33 companies as comparables and has applied Cost Plus Method using PLI as Gross Profit on Cost where the average markup on Cost is 15.90%. The assessee own Gross Profit on Cost is calculated at 29.14% at the entity level hence the assessee claims its transactions with the associated enterprises are at arm's length. 6. The TPO has rejected the entire search process carried out by assessee and applied Transaction Net Margin Method (TNMM) as Most Appropriate Method and a new set of search process and comparables. The TPO has worked out the OP/TC margin of the assessee at the entity level at -2.08% as against the mean operating profit of 9.54% on cost booked by the comparables and computed an Arms Length Price at Rs 1,19,48,300/- at entity level. 7. Aggrieved, the assessee is before us. With regard to ground 1, the ld counsel of the assessee argued that DRP/TPO erred in benchmarking profitability of assessee at entity level instead of profitability from international transactions. The nature of business of assessee in both AE and non AE segment is same i.e. manufacture and wholesale export of readymade garments and home furnishing items. The assessee submitted segmental profitability where profitability from AE transactions is 5.88% and the profitability from non-AE segment is 4.5%.

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ITA No.850/Del/2025 M/s Cornell Overseas Pvt Ltd This was not accepted by DRP on the ground that segmental financials were not audited. It is further submitted that profitability from AE transactions (5.88%) only can be benchmarked and not profitability at entity level as done by the TPO/DRP. 8. Without prejudice, the ld AR submitted that profitability/mark- up from international transactions (AEs) is 5.88% more than profitability mark-up from independent transactions 4.5% (non AEs) and therefore, international transactions are at arm's length using internal TNMM. 9. With respect to ground no. 3 & 4, the ld AR stated that the total no. of comparable companies taken by TPO in TP order is 17. It is submitted that the search is carried by TPO for companies operating in Apparels (Readymade Garments) Segment as well as companies where there is no manufacture of garments and the companies where there is fabric manufacturing and yarn manufacturing. Broadly assessee seeks exclusion of 10 companies on following grounds and inclusion of Meenakshi (India) Ltd (already directed by DRP but not taken by TPO as follows: A. Companies in retail business with retail outlets – As per Rule 10B(2), companies operating in retail market are not comparable to wholesale as they have different FAR profile. The assessee is a manufacturer and wholesale exporter of readymade garments.

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ITA No.850/Del/2025 M/s Cornell Overseas Pvt Ltd B. Manufacturer of fabric and/or yarn - (i) Manufacture of fabric and /or yarn is different industry which is not comparable to Readymade garments (Apparels). (ii) This is supported by the fact that TO applied search of companies in Readymade garments with product classification "Apparels (Readymade Garments)- refer page 9 of TP order. The companies where there is no manufacture of garments and the companies where there is fabric manufacturing and yarn manufacturing are rejected by TPO. (refer page 8 & 9 of TP Order) C. Contract manufacturer of socks with 3 shifts - Socks are not comparable to manufacture of Apparel (Readymade garments). The cost structure, business model assets deployed and number of shifts operated by socks manufacturer are different leading to different FAR D. Contract manufacturer: - The assessee is a full fledged risk bearing manufacturer and not comparable to contract manufacturers. The contract manufacturers have different cost structure, business model, assets deployed and risk profile. E. Manufacturer of leather garments- Manufacture of leather garments requires different raw material, different type of investment in machineries. The manufacture of leather garments with large order sizes is completely different from designer garments manufactured by

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ITA No.850/Del/2025 M/s Cornell Overseas Pvt Ltd assessee which is based on unique styles with small order sizes and single tailor stitching. 2. Companies with Forex revenue/ sales less than 75% - The assessee is a 100% export oriented undertaking. Its export turnover is app 95% of sales. The 5% local sales are exhibitions etc. As per Rule 10B(2), and established judicial precedents, companies with different market conditions, including geographical locations, size of market, the laws and Govt orders in force, economic development ete cannot be compared as they have different risks and return profile. Therefore, companies having revenue from exports (forex revenue) less than 75% /sales are not comparable to assessee. The TPO applied 75% forex revenue/sales filter in AY 2008-09 (Copy of TPO order is enclosed) No forex filter applied in AY 2007-08 even though the facts and FAR of assessee is same in AY 2007-08 and AY 2008-09. 3. Companies having Merger and Acquisition - As per established judicial precedents, the companies with merger and acquisition during the year cannot be taken as comparable. 10. The ld AR gave the list of 17 companies taken by TPO and Meenakshi India Ltd. below for quick reference. The ld AR prayed for exclusion of companies failing FAR filter (Functional, Assets and Risk Profile filter) and companies having forex/sales less than 75%.

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ITA No.850/Del/2025 M/s Cornell Overseas Pvt Ltd S.N. Name of Company FAR and/or Forex/ OP/OC (as Our submission Merger sales% per TPO) 1 Cantabil Retail Fails FAR NIL 10.86 Excluded because India Ltd. filter it fails both FAR and forex filter 2 Euro Fashions NIL (-)2.92 Excluded because Inners P. Ltd. it fails forex filter 3 Integra Apparels 55% 9.06 Excluded because & Textiles Ltd. it fails forex filter 4 Kitex Ltd. Fails FAR 0.5% 4.07 Excluded because filter it fails both FAR and forex filter 5 Nash Fashions 76% (-)0.93 (India) Ltd. 6 Vogue Textiles Fails FAR 71% 3.79 Excluded because Ltd. filter it fails both FAR and forex filter 7 CigFil Ltd. (Seg) NIL 27.52 Excluded because it fails forex filter 8 Cravatex Ltd. 89% 2.68 (Seg) 9 Evinix Accessories Fails FAR 26% 14.56 Excluded because (Seg) filter it fails both FAR and forex filter 10 Rana Polycot Ltd. 67% 6.42 Excluded because (Seg) it fails forex filter 11 Gangotri textiles NIL 9.73 Excluded because Ltd. (Seg) it fails forex filter 12 Superhouse Ltd. Fails FAR 80% 5.65 Excluded because (Seg) filter & it fails FAR and Merger merger during the year 13 Virat Industries Fails FAR 95% 17.2 Excluded because Ltd. (Seg) filter it fails FAR 14 Link Up Textiles 94% 3.69 Ltd. 15 Mangalam 83% 3.28 Ventures Ltd. 16 Raghubir Exim 88% 1.2 Ltd. 17 Ceenik Exports 90% 3.8 Ltd.-Seg 18 Meenakshi (India) 75% (-)1.22 Ltd.

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ITA No.850/Del/2025 M/s Cornell Overseas Pvt Ltd 11. With respect to Ground No.5, it is submitted that the assessee should be given the benefit of +/-5% as provided in second proviso to sec 92C(2) of the Act. 12. Per contra, the ld. DR stated that there is nothing mentioned with regard to the quality of the work done by the assessee and the segmental analysis is to be considered when the segmental financial accounts are audited. 13. We have heard the rival submissions and perused the material available on record. We find that the TPO has rejected the cost plus method, which was adopted in the TP report and has applied external TNMM method as segmental financials were not audited. The issue therefore for our adjudication is with regard to adoption of Cost Plus Method as against the external TNMM method adopted by the TPO as also the comparables chosen to ascertain the ALP. 14. We find that that the assertion of the assessee that AS-17 is not applicable to the assessee as the turnover is small, about 24 to 25 Crores, which means that segmental reporting is not required as the assessee is the small/medium company, has gone unrebutted. In such circumstances, we agree with the assessee that it is not required to maintain financials for AEs segment or non-AEs segment. Nevertheless, the assessee has maintained the segmental analysis also which can not be rejected on the ground that it is not audited.

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ITA No.850/Del/2025 M/s Cornell Overseas Pvt Ltd 15. The next issue is with regard to benchmarking of profitability of assessee at entity level instead of profitability of international transactions. The assessee has placed reliance on the principal that only profitability from international transactions can be benchmarked on the basis of following cases- i. CSR Technology (India) (P.) Ltd [2018] 90 taxmann.com 85 (Delhi - Trib.) – ii. Lummus Technology Heat Transfer BV [2014] 42 taxmann.com 342 (Delhi - Trib.)- iii. Messe Dusseldorf India (P.) Ltd. [2018] 90 taxmann.com 159 (Delhi - Trib.) iv. Paradigm Geophysical (I) (P.) Ltd [2016] 72 taxmann.com 108 (Mumbai - Trib.) v. Honeywell Electrical Devices & Systems India Ltd [2014] 42 taxmann.com 223 (Chennai - Trib.) - vi. Your Lifestyle (P.) Ltd [2018] 94 taxmann.com 446 (Mumbai - Trib.)

16.

We find that where the transactions are so intertwined so that segregation is difficult, profitability should be ascertained at entity level. Where transaction can be segregated, the law mandates that profitability from AE Transactions can only be benchmarked and not profitability at entity level. In the case of the assessee, the assessee has maintained segmental accounts, certified by the CA, and hence we agree with the assessee that the Assessing Officer has committed mistake in determining the profitability at entity level instead of international transactions.

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ITA No.850/Del/2025 M/s Cornell Overseas Pvt Ltd 17. We however, are of the opinion, that where the TPO applies External TNMM method, the comparables companies chosen should have comparable Functional, Assets and Risk Profile. We agree with the assessee that as per Rule 10B(2) and established judicial precedents, companies with retail business with retail outlets cannot be compared with wholesale manufacturer as they have different FAR profile; Similarly, Manufacturer of fabric and/or yarn is different industry which is not comparable to Readymade garments (Apparels) as in the case of the assessee. Similarly, Contract manufacturer of socks with 3 shifts, is not comparable to manufacture of Apparel (Readymade garments) as they have different FAR; Similarly, Manufacture of leather garments are not comparable to the assessee as they are completely different from designer garments manufactured by assessee. We also agree with assessee that the companies with merger and acquisition during the year cannot be taken as comparable. Further, the assessee being a 100% export oriented undertaking with export turnover app 95% of sales, cannot be compared with companies having revenue from exports (forex revenue) less than 75% /sales. We are fortified in our view by the fact that the assessee’s assertion that the TPO applied 75% forex revenue/sales filter in AY 2008-09 whereas no forex filter applied in AY 2007-08 even though the facts and FAR of assessee is same in AY 2007-08 and AY 2008-09, has gone unrebutted.

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ITA No.850/Del/2025 M/s Cornell Overseas Pvt Ltd 18. In view of the above discussion, we are of the considered view that the issue of comparables be set aside to the file of the TPO for a fresh adjudication with the direction that the companies failing FAR filter (Functional, Assets and Risk Profile filter) and companies having forex/sales less than 75% be excluded. The TPO is directed to consider the list of 17 companies taken by TPO as well as Meenakshi India Ltd, a company directed by the DRP to be included in the comparables. Needless to add that the assessee be allowed the benefit of (+/-) 5% mentioned in the proviso to section 92C(2) of the Act. The grounds are disposed off in the aforesaid terms. 19. In the result, the appeal in ITA 850/Del/2025 is allowed for statistical purposes. Order was pronounced in the open court on 2nd June, 2026. Sd/- Sd/- (ANUBHAV SHARMA) (NAVEEN CHANDRA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 02.06.2026 Shekhar Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asstt. Registrar, ITAT, New Delhi

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