DSM NUTRITIONAL PRODUCTS INDIA PRIVATE LIMITED,INDIA vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 1(3)(1), MUMBAI, INDIA

आदेश / ORDER PER: SHRI ANIKESH BANERJEE, (JM):

The instant appeal of the assessee filed against the final assessment order of the Assessment Unit, Income Tax Department [for brevity “Ld. AO”], order passed under Section 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 (for brevity ‘the Act’), date of order 30.10.2025 by pursuing the impugned order emanated from the order of the Ld. CIT DRP (1), Mumbai-2 1 (for brevity ‘Ld. DRP’), order passed under Section 144C(5) of the Act, date of order 10.09.2025.

2.1. The assessee filed its return of income declaring a total income of Rs. 12,51,42,030/-. The case was selected for scrutiny assessment and, considering the international transactions undertaken by the assessee with its AEs, a reference was made to the Ld. Transfer Pricing Officer (TPO) for determination of the Arm's Length Price (ALP) under section 92CA of the Act.

2.2. In its Transfer Pricing Study Report (TPSR), the assessee identified two reportable business segments, namely, reseller activities and provision of marketing support services. The assessee benchmarked its international transactions relating to the distribution business by applying the Transactional 2 Net Margin Method (TNMM), adopting Operating Profit to Operating Revenue (OP/OR) as the Profit Level Indicator (PLI).

The assessee selected eight comparable companies engaged in distribution activities. The updated arm's length range of the selected comparables was 2.23% to 3.17%, with a median margin of 2.50%, whereas the assessee had earned an operating margin of approximately 3%.

2.3. The assessee also undertook a corroborative benchmarking analysis for its premixing activity by considering companies engaged in contract manufacturing. On combining the returns attributable to the distribution and premixing functions, the assessee determined an overall arm's length range of 1.76% to 4.14%, with a median margin of 3.04%. Accordingly, the assessee contended that its international transactions were at arm's length.

2.4. However, the Ld. TPO did not accept the economic analysis undertaken by the assessee. The Ld. TPO considered the premixing activity to be manufacturing in nature and proceeded to benchmark the relevant transactions by applying margins derived from manufacturing comparables. The Ld. TPO accordingly proposed an upward transfer pricing adjustment of Rs. 40,12,78,106.

2.5. Aggrieved by the proposed adjustment, the assessee filed objections before the Ld. Dispute Resolution Panel (DRP). The Ld. DRP, vide directions dated 10.09.2025 passed under section 144C(5) of the Act, upheld the approach adopted by the Ld. TPO. Pursuant to the said directions, the Ld. AO passed the final assessment order dated 30.10.2025 under section 143(3) r.w.s. 144C(13) and 144B of the Act, incorporating the aforesaid transfer pricing adjustment. Being aggrieved, the assessee preferred the present appeal before the Tribunal.

3.1. The Ld. AR submitted that the assessee is primarily engaged in the distribution of nutritional and health products in India and functions as a limited-risk distributor. The premixing activity is merely an ancillary function undertaken in the course of its distribution business to meet specific customer requirements. The said activity does not constitute a separate and independent manufacturing segment. It was contended that the Ld. TPO had erroneously recharacterised the assessee as a manufacturer merely because certain products were subjected to premixing before being supplied to customers.

3.2. The Ld. AR explained that the premixing process involves only the dry blending of vitamins and other nutritional ingredients according to formulations provided by customers. No independent research and development, product formulation or complex manufacturing process is undertaken by the assessee. The premixing activity neither changes the chemical composition of the ingredients nor results in the emergence of any new or distinct product. Accordingly, the said activity cannot be equated with the manufacturing activities undertaken by independent manufacturers of pharmaceutical or chemical products.

3.3. The Ld. AR further submitted that the assessee had consistently maintained only two reportable segments, namely, reseller activities and provision of marketing support services. The relevant segmental disclosure is reflected in Note No. 32 to the financial statements, placed at APB page 52. Merely because the revenue arising from the sale of premixed products was disclosed as revenue from finished goods in the financial statements, the same could not constitute a valid basis for treating premixing as a separate manufacturing segment for transfer pricing purposes.

3.4. The Ld. AR contended that the Ld. TPO had accepted TNMM as the most appropriate method but disregarded the functional analysis undertaken by the assessee. The assessee had selected eight comparable companies engaged in distribution activities. The updated arm's length range of these comparable companies was 2.23% to 3.17%, with a median margin of 2.50%, whereas the assessee had earned an operating margin of approximately 3%. Therefore, the international transactions relating to the distribution business were within the arm's length range.

3.5. The Ld. AR further argued that the manufacturing comparables were selected only for the limited purpose of undertaking a corroborative benchmarking analysis of the premixing function. However, the Ld. TPO rejected the primary benchmarking analysis and applied manufacturing margins to the entire business segment. According to the Ld. AR, the said approach was fundamentally erroneous because the assessee's predominant activity continued to be distribution and not manufacturing.

The Ld. AR referred to the reply dated 16.01.2025 filed before the Ld. TPO, placed at APB pages 225 to 241, wherein the nature of the premixing activity and the functional differences between the assessee and independent manufacturing companies were explained.

3.6. The Ld. AR further contended that the Ld. TPO had placed undue reliance upon pharmaceutical industry-specific considerations, including Good Manufacturing Practices, regulatory approvals and quality control requirements, without appreciating that the assessee was engaged in the distribution of nutritional products. The Ld. AR submitted that the functional profile of a pharmaceutical manufacturer cannot be equated with that of an entity undertaking simple dry blending as an incidental activity in its distribution operations.

3.7. The Ld. AR further submitted that the total cost attributable to the premixing activity amounted to Rs. 34.99 crore. The assessee had furnished detailed cost-centre-wise particulars, supported by management certification, before the Ld. DRP. Subsequently, the assessee also furnished certification from an independent accountant, placed at APB pages 264 to 267. However, the said evidence was not accepted by the Ld. TPO on the ground that the expenditure had not been adequately reconciled with the audited financial statements.

3.8. The Ld. AR further argued that the Ld. DRP had erroneously relied upon the Functions, Assets and Risks (FAR) analysis relating to the marketing support services segment while determining the functional characterisation of the distribution segment. It was submitted that the FAR analysis relevant to the distribution business was separately provided in paragraph 5.2.2 of the TPSR, placed at APB pages 74 to 75. The Ld. AR contended that the functional profile of one segment could not be applied to another distinct segment.

3.9. Without prejudice to the principal contention, the Ld. AR submitted that even if an independent return were attributable to the premixing function, such return could be computed only with reference to the cost actually incurred for premixing and not by applying manufacturing margins to the entire distribution business.

The Ld. AR submitted that, even after considering the final manufacturing comparables retained by the Ld. TPO, the overall arm's length range worked out to 2.52% to 3.79%, with a median of 2.96%, whereas the assessee had earned a margin of approximately 3%. Accordingly, no transfer pricing adjustment was warranted even under the alternative benchmarking analysis.

3.10. The Ld. AR finally submitted that the premixing activity was intrinsically connected with the distribution business and did not constitute a separate manufacturing segment. The Ld. AR accordingly challenged the transfer pricing adjustment of Rs. 40,12,78,106 and relied upon the economic analysis, segmental financial disclosures and other documentary evidence placed on record.

4.1. The Ld. DR supported the finding that the assessee had separately disclosed purchases and sales relating to raw materials and finished goods in its financial statements. It was submitted that the said accounting treatment, together with the existence of plant and machinery, supported the conclusion that the assessee undertook manufacturing-related functions in addition to its distribution activities.

4.2. The Ld. DR further supported the rejection of the assessee's benchmarking analysis and the adoption of manufacturing comparables by the Ld. TPO. The Ld. DR relied upon the objections recorded by the Ld. TPO regarding the absence of separate segmental accounts for premixing and the alleged inadequacy of reconciliation of the premixing costs with the audited financial statements.

4.3. The Ld. DR also relied upon the observations of the Ld. DRP concerning the assessee's functional and risk profile and supported the determination of the ALP made by the Ld. TPO. Accordingly, the Ld. DR supported the transfer pricing adjustment incorporated in the final assessment order.

5.1. On examination of the facts, we find that the assessee is primarily engaged in the distribution of nutritional and health products in India. The assessee procures products from its AEs and supplies the same to customers in India. In certain cases, the products are subjected to premixing in accordance with the specific requirements and formulations provided by customers. The process involves dry blending of powdered ingredients without any chemical reaction or substantial transformation of their original properties. The assessee has specifically explained that no new or distinct product emerges as a consequence of such premixing.

5.2. We find that the nature and character of a business activity, for the purpose of transfer pricing analysis, are required to be examined with reference to the actual functions performed, assets employed and risks assumed by the assessee. The mere classification of certain transactions as manufacturing or sale of finished goods in the financial statements cannot, by itself, determine the functional characterisation of the assessee for the purpose of Chapter X of the Act.

In the present case, the assessee has explained that premixing is undertaken only to facilitate the distribution of nutritional products according to customer specifications. The assessee does not independently develop the formulations, undertake substantial research and development or carry out an integrated manufacturing process comparable to that undertaken by independent manufacturers.

5.3. We further find that the assessee has disclosed only two reportable segments in its financial statements, namely, reseller activities and provision of marketing support services. The relevant disclosure is placed at APB page 52. The premixing activity has not been identified as a separate reportable segment. It forms part of the reseller operations undertaken by the assessee.

In our considered view, the mere existence of plant and machinery or the accounting classification of certain products as finished goods does not necessarily establish that premixing constitutes an independent manufacturing segment. The functional characterisation must be determined by considering the actual economic activities undertaken by the assessee.

5.4. We further observe that the Ld. TPO has not disputed the adoption of TNMM as the most appropriate method. The principal disagreement relates to the selection of comparables and the functional characterisation of the distribution activities. The assessee had selected comparable companies engaged in distribution activities and had undertaken a separate corroborative analysis to demonstrate the arm's length nature of the overall profitability after attributing a return to the premixing function.

However, the Ld. TPO proceeded to apply manufacturing comparables to the entire business segment without adequately distinguishing between the predominant distribution functions and the limited premixing activity undertaken by the assessee.

5.5. We find that the Ld. TPO's approach proceeds substantially on the premise that the existence of premixing activity is sufficient to characterise the assessee as a manufacturer. Such an approach does not adequately consider the relative nature, scope and significance of the activities performed by the assessee. The premixing function cannot be examined in isolation from the distribution business of which it forms an integral part.

The benchmarking exercise under Rule 10B of the Income-tax Rules, 1962, requires consideration of the functions performed, assets employed and risks assumed, together with the other relevant comparability factors. Accordingly, the functional differences between a limited-risk distributor undertaking incidental premixing and an independent manufacturing enterprise are material considerations in determining the comparability of the selected companies.

5.6. We further observe that the Ld. DRP has relied upon the FAR analysis of the assessee while supporting the findings of the Ld. TPO. However, the assessee has specifically pointed out that the relevant discussion relied upon by the Ld. DRP pertains to the marketing support services segment, whereas the disputed international transactions relate to the distribution business. The relevant FAR analysis of the distribution activity is contained in paragraph 5.2.2 of the TPSR, placed at APB pages 74 to 75.

The functions and risks attributable to the marketing support services segment cannot automatically be applied to the distribution segment without examining the distinct nature of the activities undertaken under the respective segments.

5.7. We further find that the assessee had furnished detailed particulars of the premixing expenditure, including cost-centre-wise details and certification from an independent accountant. The assessee has also explained that the total premixing cost amounted to Rs. 34.99 crore. The said evidence is relevant to the assessee's alternative contention that any separate return attributable to the premixing function ought to be determined with reference to the cost incurred in performing that function rather than by applying manufacturing margins to the entire distribution business.

5.8. We also observe that, as per the updated benchmarking analysis furnished by the assessee, the arm's length range of the distribution comparables was 2.23% to 3.17%, whereas the assessee had earned an operating margin of approximately 3%. The assessee has further demonstrated, through its alternative computation, that even after attributing a separate return to the premixing activity, the overall margin falls within the arm's length range.

The material figures relevant to this contention are summarised below:

Particulars Margin Updated distribution comparables — 35th percentile 2.23% Updated distribution comparables — Median 2.50% Updated distribution comparables — 65th percentile 3.17% Assessee's operating margin 3.00% Alternative combined analysis — 35th percentile 2.52% Alternative combined analysis — Median 2.96% Alternative combined analysis — 65th percentile 3.79%

Thus, the assessee's operating margin falls within both the ranges submitted by it. The significance of the alternative computation is that the assessee has sought to demonstrate the arm's length nature of its transactions even after attributing an independent return to the premixing function.

5.9. Considering the facts and circumstances of the case, the material placed on record and the nature of the functions performed by the assessee, the essential distinction is between an independent manufacturing activity and an ancillary processing function undertaken to facilitate the distribution of products. The assessee's case is that the premixing activity is undertaken only in furtherance of its distribution business and does not constitute an independently identifiable business segment.

The proposed reasoning in favour of the assessee rests on the following considerations:

i. the customer-provided formulations,

ii. the absence of substantial product transformation,

iii. the limited nature of the premixing process, the segmental disclosure in the financial statements and the functional differences between the assessee and independent manufacturing companies.

These considerations support the proposition that the mere undertaking of premixing does not, by itself, justify recharacterising the assessee's entire distribution business as a manufacturing activity.

5.10. The principal issue requiring determination under Ground No. 3 is, therefore, whether the separate manufacturing characterisation adopted by the Ld. TPO is consistent with the assessee's actual FAR profile and the comparability requirements prescribed under Rule 10B. The assessee's contention that premixing forms an integral part of the distribution segment is supported by the description of its activities and the segmental disclosures referred to above. So, the recharactarisation of premixing as manufacturing is duly rejected. The premixing is the furtherance of the business related the part of trading activity. So, the ALP determined by the Ld. AO/TPO is unjustified.

So, the Ground No.3 stands allowed.

Ground Particulars Decision Assessment order barred by Independent legal ground; stands 1 limitation under section 153 academic, so kept open. Validity of notice under Independent legal ground; no separate 2 section 143(2) and adjudication is required, so kept open. jurisdiction Transfer pricing adjustment Addition is deleted. The Ground stands 3 of Rs. 40,12,78,106 allowed Interest under sections 234B Consequential, subject to statutory 4 and 234D provisions Initiation of penalty Premature. So, Ground stands 5 proceedings under section dismissed. 270A

Sd/- Sd/-

(RATNA DASGUPTA) (ANIKESH BANERJEE) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, िदनांक/Dated: 13/10/2026 Soumili, PS

Copy of the Order forwarded to: अपीलाथ�/The Appellant , 1. 14 �ितवादी/ The Respondent. 2. आयकरआयु� CIT 3. िवभागीय�ितिनिध, आय.अपी.अिध., मुंबई/DR, ITAT, 4. Mumbai गाड�फाइल/Guard file. 5.

BY ORDER, Digitally signed by ABHINAV ANANT ABHINAV ANANT GAVANDE GAVANDE //True Copy// Date: 2026.10.23 16:34:23 +05'30' (Asstt. Registrar), ITAT, MUMBAI