TaxTMI 
TaxTMI 
2026 (5) TMI 165
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....assessment years in a tabulated form, followed by a brief narrative of the proceedings. 3. Unilever India Exports Limited, hereinafter referred to as the assessee, is a wholly owned subsidiary of Hindustan Unilever Limited and is engaged in manufacturing Fast Moving Consumer Goods products. The assessee operates in two segments. In the Associated Enterprise segment, it acts as a contract manufacturer and exports finished goods to its group companies under inter-company supply agreements, earning a pre-agreed mark-up of 9.16 percent on cost. In the non-Associated Enterprise segment, it manufactures and sells products to unrelated parties on an entrepreneurial basis. This functional profile and remuneration model are recorded in the fact sheet forming part of the paper book. 4. For ready reference, the basic factual particulars for both years are tabulated below: Particulars AY 2015-16 AY 2016-17 Return of income filed Declared income of Rs. 115,02,87,930/- Declared income of Rs. 147,48,20,080/- Nature of international transaction Export of finished goods to AEs under contract manufacturing model Same Margin earned in AE segment (as per assessee) ....
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....t. For Assessment Year 2015-16, all eleven companies selected by the assessee were rejected on various grounds, including application of turnover filter, related party transaction filter, export filter and alleged functional dissimilarity. For Assessment Year 2016-17, all seventeen companies selected by the assessee were similarly rejected. The TPO took the view that no comparable companies were available under External TNMM and, holding that the scope of remand permitted fresh adjudication, reverted to Internal TNMM and recomputed the transfer pricing adjustment substantially in the same manner as in the first round. 8. The draft assessment orders dated 27 June 2024 incorporated the aforesaid adjustments. The assessee filed detailed objections before the DRP. During the DRP proceedings, the assessee also furnished a fresh benchmarking analysis as additional evidence, applying even the filters suggested by the TPO, on a without prejudice basis. The DRP forwarded the additional evidence to the TPO, who rejected the fresh comparables as well. The DRP, in its directions under section 144C(5), upheld the application of turnover, related party transaction and export filters and agree....
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....lant's claim that, the Associated Enterprises ('AE') and the Non-AE segment are not comparable is a theoretical & a vague claim and without any evidence or study, is not only perverse but also in direct contravention of the order dated 31 March 2023 of this Hon'ble Tribunal in the first round of proceedings? 6. Whether on the facts and in the circumstances of the case and in law, the learned TPO and the learned AO, under directions of the Hon'ble DRP, erred in applying internal TNMM as the most appropriate method despite the difference in function, asset and risk profile of the AE and the Non-AE segment and without appreciating that this Hon'ble Tribunal has held that the AE and the Non-AE segment are not comparable? 7. Without prejudice to the above, the learned TPO and the learned AO, under the directions of the Hon'ble DRP, erred in ignoring the audited segmental profit and loss account furnished by the Appellant and further erred in working out the segmental profit and loss account based on various assumptions and incorrect calculations. Interest under section 234B and 234D: 8. Whether on the facts and in the circu....
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....r on the facts and in the circumstances of the case and in law, the observation of the Hon'ble DRP that the Appellant's claim that, the Associated Enterprises ('AE') and the Non-AE segment are not comparable is a theoretical & a vague claim and without any evidence or study, is not only perverse but also in direct contravention of the order dated 31 March 2023 of this Hon'ble Tribunal in the first round of proceedings? 6. Whether on the facts and in the circumstances of the case and in law, the learned TPO and the learned AO, under directions of the Hon'ble DRP, erred in applying internal TNMM as the most appropriate method despite the difference in function, asset and risk profile of the AE and the Non-AE segment and without appreciating that this Hon'ble Tribunal has held that the AE and the Non-AE segment are not comparable? 7. Without prejudice to the above, the learned TPO and the learned AO, under the directions of the Hon'ble DRP, erred in ignoring the audited segmental profit and loss account furnished by the Appellant and further erred in working out the segmental profit and loss account based on various assumptions and inc....
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....ears and arise out of identical reasoning and findings recorded by the authorities below, Grounds 2 to 7 in both appeals are taken up together for adjudication. The determination in the lead year, namely Assessment Year 2015-16, shall, subject to factual parity, govern the outcome for Assessment Year 2016-17. 12. Ground No. 10 for Assessment Year 2015-16 and Ground No. 11 for Assessment Year 2016-17 pertain to the plea that the final assessment orders passed under section 143(3) read with section 144C(13) are barred by limitation under section 153 of the Act. In the course of hearing, no specific arguments were advanced on this ground and the learned Authorised Representative (AR) fairly submitted that the issue may be kept open. The learned Departmental Representative (DR) did not object to the same. Accordingly, the ground relating to limitation is not adjudicated at this stage and is kept open. The assessee is at liberty to raise the same in appropriate proceedings in accordance with law. I. Jurisdictional challenge and scope of remand (Ground No. 2 for both Assessment Years) 13. The learned AR assailed the validity of the impugned orders on a preliminary jurisdictional....
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....round without jurisdiction, non-est and void ab initio. 18. The learned DR submitted that there is no violation of the remand directions. The Co-ordinate Bench had restored the issue for fresh adjudication and had not finally approved any specific comparables or determined the arm's length price. 19. It was contended that in the second round, the TPO examined the comparables selected by the assessee and rejected them on objective grounds, which were affirmed by the DRP. Once no external comparables survived, External TNMM could not be applied. 20. It was argued that the Co-ordinate Bench had not directed that External TNMM must be applied in all circumstances. Therefore, adoption of Internal TNMM in the absence of reliable external comparables does not amount to exceeding the scope of remand. 21. Ground No. 2, according to the Revenue, does not raise any jurisdictional defect and the issue should be examined on merits. 22. We have carefully considered the rival submissions and perused the material placed on record, including the order of the Co-ordinate Bench dated 31 March 2023 passed in the first round of proceedings. 23. From the order of the Co-ordinate Bench ....
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....bjective search and identify appropriate external comparables under External TNMM rather than to revert to Internal TNMM, which stood disapproved in the earlier round. The adoption of Internal TNMM in the second round, in effect, neutralises the finding of the Co-ordinate Bench in the first round and amounts to indirectly reviving an approach already rejected. 29. At the same time, we do not find merit in the contention of the assessee that the entire proceedings in the second round are void ab initio. The TPO has acted pursuant to the remand and has examined the comparables. The defect, if any, lies in the manner of final determination of the method and benchmarking, and not in assumption of jurisdiction to proceed pursuant to remand. 30. Accordingly, we hold that the proceedings in the second round cannot be declared as non-est or void on the ground of lack of jurisdiction. However, the reversion to Internal TNMM after rejection of comparables under External TNMM is not in consonance with the binding directions of the Tribunal in the first round, which had accepted External TNMM as the MAM. The issue of benchmarking of export transactions is therefore required to be examine....
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....AR, the rejection of all comparables and consequent abandonment of External TNMM defeats the mandate of the Co-ordinate Bench in the first round and is contrary to the principles of comparability under Rule 10B. It was submitted that at least some of the comparables selected by the assessee are functionally comparable and ought to have been accepted. Therefore, the finding that no external comparables are available deserves to be set aside. 35. The learned DR, on the other hand, supported the findings of the TPO and the DRP. It was argued that the turnover filter and related party transaction filter are well recognized filters in transfer pricing analysis. It was further submitted that since the AE segment of the assessee relates to export of finished goods, application of export filter is justified to ensure comparability in terms of market orientation. The learned DR contended that many of the companies selected by the assessee are either engaged in different product lines, have mixed functional profiles, operate as entrepreneurial entities or do not predominantly derive revenue from contract manufacturing. 36. We have carefully considered the rival submissions and examined....
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....oes not align with the functional and risk profile of the tested party. The export filter, as applied, is not demonstrated to be economically relevant to margin determination. - Fourthly, in several instances, companies have been rejected on broad functional differences without a granular FAR comparison. The assessee's AE segment performs routine manufacturing functions under limited risk. Under TNMM, product differences are not decisive if the broad manufacturing functions and risk profile are comparable. The rejection of entire companies on the basis of product diversity, without establishing material functional deviation affecting profitability, is not fully justified. 40. Having regard to the above, we find that the conclusion of the TPO that no external comparable company is available is not sustainable. The elimination of all comparables appears to be the result of cumulative and, in certain respects, overly restrictive application of filters rather than objective application of Rule 10B principles. 41. At the same time, we also note that the assessee's selection cannot be accepted mechanically. Each comparable must withstand functional scrutiny. On a holistic ....
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.... 370.95 3.34% FAR not comparable 5 Aarti Industries Limited - Home and Personal Care Chemicals 2,870.65 0.33% FAR not comparable 6 Girdharilal Sugar and Allied Industries Limited - Dairy 135.63 8.31% FAR not comparable 7 Saraf Foods Limited 25.03 11.41% Fails ten times turnover filter 8 Ultra International Limited 62.55 10.20% Fails ten times turnover filter 9 Prima Industries Limited 23.48 (2.74%) Fails ten times turnover filter 10 Primary Industries Limited 142.45 - RPT transactions are more than 25% of total income 11 JHS Svendgaard Laboratories Limited - Job Work Oral Care and Hygiene Care* 55.32 NA* Not considered due to fluctuating margins (as per TPO note) Particulars Value 35th Percentile 3.34% Median 6.06% 65th Percentile 8.31% Assessee's margin (as per audited segmental results) 10.83% Without prejudice - Assessee's margin as per TPO (re-casted segmental results) 9.16% Assessee's turnover in AE segment Rs. 686.79 crores 48. It was submitted that the AE segment margin of approximately 9% to 10% falls within or above th....
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....nch categorically upheld External TNMM as the Most Appropriate Method and remanded the matter only for limited examination of the appropriateness of comparable companies selected by the assessee. The mandate was therefore confined to evaluation of comparables under External TNMM and not to substitute the benchmarking framework. 56. From the detailed submissions, it is evident that the assessee undertook a structured and scientific search process: - Databases used: Prowess and CapitalinePlus - Manufacturing sales > 75% - Positive net worth filter - Minimum sales threshold - AMP expenditure filter (< 3%) - R&D expenditure filter (< 3%) 57. The rationale for AMP and R&D filters has been clearly explained in the submissions, namely that a contract manufacturer, supplying goods to other businesses, does not undertake brand-building or significant R&D functions. These filters were therefore specifically designed to eliminate entrepreneurial and brand-owning entities. This demonstrates that the assessee did not adopt an arbitrary set of companies, but identified routine contract manufacturers aligned with its limited-risk AE segm....
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....of demonstrated economies of scale materially affecting margins in a limited-risk model, rigid application of turnover multiple lacks economic foundation. 64. From the detailed discussion in Paper Book Vol. 02 (Pages 11-14 and onward), it is evident that: - In cases such as Jocil Limited and Jagatjit Industries Limited, the assessee had selected specific segments (Soap segment; Food segment) supported by annual report disclosures and website extracts. - The TPO/DRP examined the profile of the entire entity rather than restricting examination to the relevant segment. - Segmental information was available and margins were computed on segment basis. 65. Under TNMM, functional similarity is relevant; product identity is not determinative. Where segmental data exists, the relevant segment must be examined. Rejection of entire entity without segment-level analysis is unsustainable. 66. It is further noted that during DRP proceedings, the assessee furnished a fresh benchmarking exercise after applying turnover and export filters suggested by the TPO (Fact Sheet Page 7-8) and Chart 2. Even this set was rejected on functional grounds. Simultaneously, the ....
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....ent 39.68% 36.67% 71. It was submitted that the AE segment consistently earns around 9 percent margin, whereas the Non-AE segment earns margins between 36 percent and 40 percent. Such substantial difference, according to the learned AR, is not accidental but reflects difference in economic character. 72. The learned AR further relied upon Chart 1 - TPSR Contract Manufacturing Comparables in Paper Book Vol. 2, which records: Particulars Margin 35th Percentile 3.34% Median 6.06% 65th Percentile 8.31% Assessee's margin (as per audited segmental results) 10.83% Without prejudice - Assessee's margin as per TPO (re-casted segmental results) 9.16% 73. It was argued that the AE segment margin of approximately 9 percent aligns with routine contract manufacturers whose interquartile range is 3.34 percent to 8.31 percent. In contrast, reference was made to Chart 3 - Comparables identified by TPO, which shows entrepreneurial FMCG companies with margins as under: Particulars Margin 35th Percentile 20.12% Median 21.78% 65th Percentile 23.87% 74. It was pointed out that these companies, such as Dabur India Limited, incu....
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....NMM requires similarity in functions, assets and risks, not merely product similarity. In the absence of any demonstrated risk adjustment reconciling the 9 percent margin with 39 percent margin, internal comparison cannot be regarded as reliable. 79. Accordingly, we hold that the AE and Non-AE segments are not economically comparable. The significant difference in profitability reflects difference in risk assumption and business model. The adoption of Internal TNMM based on such internal comparison is unsustainable. Ground No. 5 for both Assessment Years is allowed. V. Adoption of Internal TNMM as the Most Appropriate Method in entirety - (Ground No. 6 for A.Ys. 2015-16 and 2016-17) 80. The issue arising under this ground is whether the TPO and the DRP were justified in adopting Internal TNMM as the MAM for benchmarking the international transaction of export of finished goods to Associated Enterprises, after rejecting External TNMM. The controversy is not merely about computation, but about the appropriateness of the method itself in the factual matrix of the case. 81. The learned AR submitted that adoption of Internal TNMM in the present case is fundamentally flawe....
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....rates that entrepreneurial FMCG companies earn margins in the range of 20 percent and above, which is consistent with risk-bearing business models. 85. The reasoning recorded by the TPO for adopting Internal TNMM is that both segments deal in similar branded products. This reasoning overlooks the fundamental principle that product similarity does not override risk differences. 86. Where one segment earns a stable cost-plus return insulated from market fluctuations and the other earns entrepreneurial returns exposed to market risks, internal comparison without risk adjustment cannot yield reliable arm's length results. Moreover, adoption of Internal TNMM in the second round effectively revives the approach rejected by the Co-ordinate in the first round. The earlier order had accepted External TNMM as the appropriate framework for benchmarking. 87. In view of the above the Non-AE segment cannot be treated as a reliable internal comparable due to material difference in risk profile. The substantial margin differential demonstrates economic non-comparability. Adoption of Internal TNMM as the MAM in entirety is unsustainable. 88. Accordingly, Ground No. 6 for both Assessment....
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....ontended that rejection of audited segmental accounts in entirety is unsustainable. 92. According to the Revenue, the audited segmental accounts did not correctly reflect economic reality, and therefore the TPO was justified in re-working the margins. It was contended that the TPO's re-casting provides a more reliable basis for internal comparison. 93. We have carefully examined the rival submissions and the material on record. 94. At the outset, audited segmental accounts form part of the statutory financial reporting framework. Unless specific defects in allocation methodology, inconsistency in accounting principles, or violation of accounting standards are demonstrated, such audited segmental accounts cannot be discarded lightly. 95. In the present case, the orders of the TPO and DRP do not point out any inconsistency in accounting policies, any improper allocation key, any misclassification of revenue or expenditure, or any deviation from accounting standards. Instead, the re-casting appears to be premised on the assumption that the AE segment should earn a predetermined margin and that any excess profitability must belong to the Non-AE segment. The re-cast resu....