UNILEVER INDIA EXPORTS LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME-TAX CENTRAL CIRCLE - 5(2), MUMBAI, MUMBAI

From the record, it is evident that these appeals arise in the second round of proceedings. In the first round, the Transfer Pricing Officer (TPO) had rejected the audited segmental accounts of the assessee and re-casted the segmental results by assuming a fixed return of 9.16 percent on the Associated Enterprise cost base and attributing the residual profits to the non-Associated Unilever India Exports Limited Enterprise segment. Internal Transactional Net Margin Method (Internal TNMM) was adopted as the Most Appropriate Method (MAM), and transfer pricing adjustments were computed accordingly.

The assessee carried the matter in appeal before the Tribunal. By order dated 31 March 2023, the co-ordinate Bench upheld the selection of External Transactional Net Margin Method (external TNMM) as the MAM and rejected the adoption of Internal TNMM. However, since the TPOhad not examined the comparables selected by the assessee under External TNMM, the issue of determining the appropriateness of the comparable companies was restored to the file of the TPOfor fresh adjudication in accordance with law.

Pursuant to the said remand, the TPOexamined the comparables selected by the assessee in its transfer pricing study report. 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 TPOtook 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.

Aggrieved by the aforesaid action, the assessee has filed the present appeals. Following are the specific grounds:

Unilever India Exports Limited Order barred by limitation: 11. Whether on the facts and in the circumstances of the case and in law, the final assessment order dated 25 April 2025 passed under section 143(3) read with section 144C(13) of the Act for AY 2016-17 is void and bad in law as it has been passed beyond the time limit prescribed under section 153 of the Act? 10. On a careful reading of the grounds for both Assessment Years 2015–16 and 2016–17, it is evident that Grounds 2 to 7 in both years are identical in substance and arise out of the same transfer pricing controversy relating to benchmarking of export of finished goods to Associated Enterprises. These grounds can therefore be grouped together for combined adjudication, as they emanate from a common set of facts, common remand directions of the Tribunal dated 31 March 2023, and identical reasoning adopted by the TPOand affirmed by the DRP in the second round.For clarity, the common grounds may be structured thematically as under: I. Jurisdictional challenge and scope of remand II. Rejection of External TNMM and non-availability of comparables III. Rejection of comparables selected by the assessee IV. Finding that AE and Non-AE segments are comparable V. Adoption of Internal TNMM as the Most Appropriate Method VI. Rejection of audited segmental accounts and reworking of segmental results Unilever India Exports Limited 11. Since these issues are common in both years 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.

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.

The learned AR invited our attention to the operative portion of the Co-ordinate bench‟s earlier order and submitted that the Bench had unequivocally accepted External TNMM as the Most Appropriate Method and had rejected the application of Internal TNMM adopted by the TPOin the first round. It was submitted that the only reason for restoring the matter to the file of the TPOwas that the comparables selected by the assessee under External TNMM had not been examined. Therefore, the remand was limited and specific, namely, to examine the comparables selected by the assessee and to determine the arm‟s length price on that basis.

According to the learned AR, the TPO, in the second round, has misdirected himself in law by re-opening the question of the MAM itself. It was submitted that after rejecting all the comparables selected by the assessee and those additionally furnished before the DRP, the TPOhas again reverted to Internal TNMM, which had already been disapproved by the Co-ordinate Bench. This, it was argued, is clearly beyond the scope of the remand.

It was further contended that the remand was not a de novo remand but was circumscribed by the findings recorded in the earlier order.Once the Tribunal had held that External TNMM was the appropriate method and that Internal TNMM was not justified, the authorities below were bound by such finding. It Unilever India Exports Limited was submitted that the power of the TPOin the second round was confined only to evaluating the suitability of the external comparables and to compute the arm‟s length price accordingly. The learned AR emphasized that the authorities below could not indirectly achieve what was directly disapproved in the first round by reverting to Internal TNMM on the pretext that no external comparables survived.

The learned AR also submitted that the DRP erred in holding that the remand permitted fresh adjudication of the method. It was argued that the DRP has misconstrued the remand and has effectively permitted the TPOto disregard the binding observations of the Co-ordinate Bench. It was submitted that such action renders the entire proceedings in the second round without jurisdiction, non-est and void ab initio.

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.

It was contended that in the second round, the TPOexamined 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.

It was argued that the Co-ordinate Bench had not directed that External TNMM must be applied in all circumstances.

Ground No. 2, according to the Revenue, does not raise any jurisdictional defect and the issue should be examined on merits.

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.

From the order of the Co-ordinate Bench in the first round, it is evident that the co-ordinate Bench had rejected the adoption of Internal TNMM as the MAM and had accepted the assessee‟s selection of External TNMM. However, the Tribunal also recorded that the comparables selected by the assessee under External TNMM had not been examined by the TPO. Accordingly, the issue of determining the arm‟s length price was restored to the file of the TPOfor analysing the comparable companies selected by the assessee and for deciding the issue afresh in accordance with law after granting opportunity of hearing.

Thus, the remand was not for a de novo examination of all issues but was confined to benchmarking under External TNMM by examining the appropriateness of the comparables selected by the assessee. The Co-ordinateBench had clearly disapproved the approach of re-casting segmental accounts and applying Internal TNMM in the first round.

However, after rejecting all the comparables under External TNMM, the TPOreverted to Internal TNMM and repeated the adjustment by adopting the same approach which had been rejected by the Co-ordinate Bench in the first round. In our considered view, this course of action cannot be said to be consistent with the tenor of the remand.

Once the Co-ordinate Bench had held that External TNMM was the appropriate method and had rejected the application of Internal TNMM on the same set of facts, the scope of remand was confined to evaluating whether the comparables selected by the assessee were appropriate and, if not, to determine a proper set of comparables under External TNMM in accordance with law. The remand did not confer jurisdiction upon the TPO to re-open the issue of the MAM itself and to revert to Internal TNMM merely because the comparables selected by the assessee were found unsuitable.

If no comparable survived, it was incumbent upon the TPO to carry out an objective search and identify appropriate external Unilever India Exports Limited 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 Benchin the first round and amounts to indirectly reviving an approach already rejected.

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.

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 examined within the framework of External TNMM in accordance with the earlier order of the Co-ordinate Bench.The jurisdictional ground is thus partly accepted to the extent indicated above, and the matter shall now be examined on merits of rejection of comparables and application of method in light of these findings.

The learned AR submitted that the TPOhas rejected all the comparables primarily by applying a 10 times turnover filter, a 75 percent export filter, related party transaction filter and on alleged functional dissimilarity. It was argued that these filters have been applied mechanically and selectively so as to eliminate all comparables. It was specifically contended that the export filter is wholly irrelevant in the case of a contract manufacturer operating on a cost-plus basis, since the assessee does not assume export-related risks and earns a fixed mark-up irrespective of the geographical destination of the goods.

According to the learned 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.

The learned DR, on the other hand, supported the findings of the TPOand 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, Unilever India Exports Limited operate as entrepreneurial entities or do not predominantly derive revenue from contract manufacturing.

We have carefully considered the rival submissions and examined the detailed reasoning recorded by the TPOas well as the DRP for rejection of all comparables under External TNMM.

At the outset, it is undisputed that in the first round of proceedings, the Co-ordinate Bench accepted External TNMM as the MAM for benchmarking the export transactions of the AE segment. The only aspect left open was the examination of comparables selected by the assessee. Therefore, the exercise before the TPOin the second round was confined to determining whether reliable comparables exist under External TNMM and, if so, to compute the arm‟s length price accordingly.

In the second round, the TPOrejected all the companies selected by the assessee by cumulatively applying turnover filter, related party transaction filter, export filter and functional dissimilarity filter. The DRP has affirmed such rejection.

We have independently examined the rationale for rejection as recorded in the orders. The following aspects emerge: - First, the application of related party transaction filter is, in principle, a valid filter to ensure reliability of comparables. To the extent companies fail such filter materially, their exclusion cannot be faulted. - Secondly, as regards turnover filter, we find that the TPOhas applied a rigid turnover multiple without demonstrating how Unilever India Exports Limited difference in scale materially affects margins in the case of routine contract manufacturers operating under cost-plus model. It is well settled that turnover by itself is not a determinative factor unless it materially impacts functional comparability or bargaining power in a manner affecting margins. In the present case, no specific reasoning has been recorded to establish such distortion. Mechanical application of turnover filter has led to elimination of companies which are otherwise functionally similar. - Thirdly, the export filter of 75 percent has been applied on the premise that the AE segment relates to export transactions. However, the undisputed position is that the assessee operates as a limited risk contract manufacturer earning a fixed mark-up on cost. It does not assume market risk, credit risk or foreign exchange risk. Therefore, the ultimate destination of goods does not materially alter its profitability. In such a scenario, insistence that comparable companies must also derive 75 percent or more revenue from exports does 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 Unilever India Exports Limited 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.

Having regard to the above, we find that the conclusion of the TPOthat 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.

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 appreciation of the record, however, it is clear that there do exist companies performing routine manufacturing functions which, after reasonable application of related party transaction filter and functional comparability test, can serve as appropriate comparables under External TNMM.

In view of our findings the rejection of External TNMM on the ground of non-availability of comparables is held to be unsustainable.The cumulative exclusion of all comparables by application of rigid turnover and export filters is not justified in the facts of the present case.External TNMM remains the appropriate method for benchmarking the AE export segment in both the years.

The learned AR submitted that the rejection of all comparables selected by the assessee is contrary to the detailed benchmarking analysis placed on record and is inconsistent with Rule 10B.

It was pointed out that the assessee had undertaken a structured search process and identified routine contract manufacturers after applying specific quantitative filters. The summary of such benchmarking is recorded in Chart 1 – TPSR Comparable Set – Turnover Weighted Reason for Sr. Contract Manufacturing (Rs. Average Rejection by Crores) Margin TPO/DRP (OP/TC) 1 Jocil Limited – Soap 330.52 6.06% FAR not comparable segment 2 Jagatjit Industries Limited 826.17 8.63% FAR not comparable – Food segment 3 Universal Starch-Chem 195.78 1.97% FAR not comparable Allied Limited 4 Milkfood Limited 370.95 3.34% FAR not comparable 5 Aarti Industries Limited – 2,870.65 0.33% FAR not comparable Home and Personal Care Chemicals 6 Girdharilal Sugar and 135.63 8.31% FAR not comparable Allied Industries Limited – Dairy 7 Saraf Foods Limited 25.03 11.41% Fails ten times turnover filter 8 Ultra International 62.55 10.20% Fails ten times Limited turnover filter 9 Prima Industries Limited 23.48 (2.74%) Fails ten times turnover filter 10 Primary Industries 142.45 – RPT transactions Limited are more than 25% of total income 11 JHS Svendgaard 55.32 NA* Not considered due Laboratories Limited – Job to fluctuating Work Oral Care and margins (as per TPO Hygiene Care* 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 9.16% segmental results) Assessee‟s turnover in AE segment Rs. 686.79 crores Unilever India Exports Limited 48. It was submitted that the AE segment margin of approximately 9% to 10% falls within or above the interquartile range of routine contract manufacturers.The learned AR further pointed out that the filters applied for selecting such comparables are recorded in the same chartas - - Rejecting companies undertaking advertising, marketing and distribution expenses of more than 3% - Rejecting companies undertaking R&D expenses of more than 3% 49. It was argued that this clearly demonstrates that the assessee consciously excluded entrepreneurial and brand-driven entities, aligning comparables with the limited-risk contract manufacturing profile of the AE segment.

The learned AR submitted that despite this structured exercise, the TPO rejected all comparables by applying a rigid turnover multiple, 75% export filter, related party transaction filter, and alleged functional dissimilarity.

It was contended that: i. Turnover Filter – No economic analysis has been provided to demonstrate how difference in turnover materially affects margins in a cost-plus contract manufacturing model. ii. Export Filter – The AE segment earns a fixed mark-up and does not assume export-related risks; therefore, insisting on 75% export orientation is economically irrelevant.

It was further submitted that even during DRP proceedings, the assessee furnished additional benchmarking applying filters suggested by the TPO, but those were also rejected. According to the learned AR, the cumulative approach adopted ensured that no comparable survived, thereby enabling reversion to Internal TNMM.

The learned DR supported the orders of the TPO and DRP and submitted that the comparables were rejected on objective criteria including turnover, export orientation and related party transactions, and on functional grounds.

We have carefully considered the rival submissions, the Transfer Pricing Study Report, the detailed submissions placed in Paper Book Volumes 01, 02, 03, and 04, and the Fact Sheet placed before us.

At the outset, it is an admitted factual position that in the first round of proceedings the Co-ordinate Bench 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 Unilever India Exports Limited assessee. The mandate was therefore confined to evaluation of comparables under External TNMM and not to substitute the benchmarking framework.

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 segment profile.

As reflected in Chart 1 – TPSR Contract Manufacturing Comparables (PB Vol. 02, Page 1), the comparable set and margin summary were as under: - 35th Percentile: 3.34% - Median: 6.06% Unilever India Exports Limited - 65th Percentile: 8.31% - Assessee‟s margin (audited segmental): 10.83% - Without prejudice – TPO recasted margin: 9.16% - Assessee‟s AE turnover: Rs. 686.79 crores

Thus, even if the re-casted margin of 9.16% is adopted, the same falls above the 65th percentile of 8.31%. On audited segmental results, the margin is 10.83%, which is comfortably above the interquartile range.Further, the Fact Sheet confirms that for A.Y. 2015-16 and A.Y. 2016-17 the AE segment margin exceeds the updated comparable median and lies within the range of 3.34% to 8.31% and 1.23% to 6.70% respectively.

From the record (Fact Sheet, Page 9–10) and Chart 1, it emerges that:

The assessee has demonstrated (Fact Sheet Pages 9–10) that:

We find merit in the contention that in a limited-risk cost- plus model, export intensity of a third-party comparable does not alter its profitability expectation unless the tested party bears export-related risks. No such risk has been demonstrated.Moreover, the record shows that when the TPO himself proposed a fresh set of comparables during DRP remand, he did not consistently apply the export filter. This itself establishes inconsistency in application.We therefore hold that the 75% export filter was not justified in the factual matrix.

The TPO applied a 10-times turnover filter and subsequently modified it to 15-times in remand proceedings. No economic analysis has been demonstrated as to how scale differences distort margins in a cost-plus contract manufacturing model.In the absence of demonstrated economies of scale materially affecting margins in a limited-risk model, rigid application of turnover multiple lacks economic foundation.

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.

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 TPO proposed entrepreneurial FMCG entities with margins ranging from 20.12% to 23.87%, which are clearly full-fledged brand-owning manufacturers incurring substantial R&D and AMP expenditure. These cannot be compared to a limited-risk contract manufacturer.This reinforces that the benchmarking exercise of the assessee was aligned with its functional profile, whereas the rejection was based on inappropriate filters and improper FAR evaluation.

Upon cumulative evaluation of the structured search process undertaken by the assessee, the quantitative filters applied (AMP and R&D < 3%), the segment-wise analysis demonstrated in Paper Book, the statistical range reflected in Chart 1, we hold that the rejection of the entire comparable set selected by the assessee is not sustainable.

The learned AR submitted that the finding of comparability between AE and Non-AE segments is contrary to the factual record placed in the Paper Book and ignores material economic distinctions.He invited attention to the re-casted segmental margins recorded in Paper Book Vol. 1, which read as under:

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.

The learned AR further relied upon Chart 1 – TPSR Contract Manufacturing Comparables in Paper Book Vol. 2, which records:

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 Margin Particulars 35th Percentile 20.12% Median 21.78% 65th Percentile 23.87%

It was pointed out that these companies, such as Dabur India Limited, incur substantial R&D expenditure and own brands. The learned AR submitted that the Non-AE segment economically resembles such entrepreneurial operations, as reflected by its high margins of 36–40 percent

It was further submitted that the TPO was of the view that the Assessee had almost similar nature of business while transacting with AE and non-AE given that all products sold to AE and non-AE were branded products of „Unilever Group‟. Accordingly, Internal TNMM was adopted as the MAM.The learned AR argued that similarity of products is not determinative under TNMM. What is decisive is risk profile. The AE segment operates as a limited-risk contract manufacturer earning a fixed mark-up, whereas the Non-AE segment operates as an entrepreneurial manufacturer bearing market, pricing and credit risks.It was therefore submitted that the substantial margin differential itself establishes non-comparability and that Internal TNMM is fundamentally inappropriate.

We have carefully considered the rival submissions and examined the documentary evidence placed in the Paper Book.The re-casted segmental results clearly demonstrate a stark difference in margins. AE segment: approximately 9 percent and Non-AE segment: approximately 37–40 percent. The AE segment margin is broadly aligned with contract manufacturing comparables whose median is 6.06 percent and upper quartile 8.31 percent. On the other hand, entrepreneurial FMCG entities identified in Chart 3 earn margins exceeding 20 percent and own brands and intangibles. The economic inference is evident that – i. The AE segment operates as a limited-risk contract manufacturer remunerated on cost-plus basis. ii. The Non-AE segment operates as an entrepreneurial manufacturer exposed to market risk and brand exploitation. iii. The magnitude of margin difference is consistent with difference in risk profile.

Under transfer pricing principles, risk assumption materially influences expected return. A limited-risk manufacturer would ordinarily earn lower but stable returns. An entrepreneurial entity bearing full market risk and owning intangibles would expect higher margins.The reasoning of the TPO that similarity of products justifies internal comparability overlooks the fundamental principle that comparability under TNMM requires similarity in functions, assets and risks, not Unilever India Exports Limited 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.

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 TPOand 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.

The learned AR submitted that adoption of Internal TNMM in the present case is fundamentally flawed and contrary to the earlier order of the Co-ordinate Bench.It was contended that: i. In the first round of proceedings, the Co-ordinate Bench had expressly rejected the application of Internal TNMM and had accepted External TNMM as the appropriate method.

The learned DR supported the adoption of Internal TNMM.

We have carefully examined the rival submissions and the material on record.Under Rule 10B, the MAM is to be selected having regard to the nature of the transaction, availability of reliable data and degree of comparability. Internal TNMM is ordinarily preferred where internal uncontrolled transactions are economically comparable to the controlled transaction.However, internal comparability presupposes similarity in functions performed, assets employed and risks assumed.

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.

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.

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.

The learned AR submitted that the assessee had furnished audited segmental profit and loss accounts clearly bifurcating the AE and Non-AE segments. It was contended that the segmental allocation was made on the basis of consistent accounting principles and supported by cost allocation workings placed in the Paper Book.It was further submitted that the TPOdid not identify any specific accounting defect, inconsistency, or violation of accounting standards in the audited segmental accounts. Instead, the TPO proceeded to re-cast the segmental results by assuming that the AE segment must necessarily earn a fixed 9.16 Unilever India Exports Limited percent margin and by allocating residual profits to the Non-AE segment.The learned AR invited attention to the re-cast margins recorded in the Paper Book:

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.

We have carefully examined the rival submissions and the material on record.

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 results reflected in the Paper Book show that while the AE segment margin remains around 9 percent, the Non-AE margin escalates to nearly 40 percent. This reconstruction is not shown to be based on audited accounting entries but on a reallocationlogic adopted by the TPO.Transfer pricing determination must be based on actual financial data of the tested party. Rule 10B does not empower the TPO to substitute audited accounts with reconstructed profit allocation unless demonstrable defects exist.

Further, once External TNMM has been held to be the appropriate method and Internal TNMM has been found unsustainable, the very foundation of re-casting segmental results collapses. The re-casting exercise was undertaken to Unilever India Exports Limited facilitate internal comparison. If such comparison is not valid, the necessity for re-casting disappears.

In absence of any specific defect in the audited segmental accounts, rejection thereof in entirety is not justified.

Accordingly, we hold that the audited segmental profit and loss accounts furnished by the assessee cannot be rejected in entirety in the absence of specific defects.The re-casting exercise undertaken by the TPO lacks demonstrated statutory or factual foundation.Benchmarking under External TNMM shall proceed on the basis of audited segmental results. Ground No. 7 for both Assessment Years is allowed.

In the light of the foregoing discussion and findings recorded in the preceding paragraphs, and having regard to the consolidated order passed in these appeals, we hold as under: (i) The action of the TPO and the DRP in rejecting External TNMM on the ground of non-availability of comparables is unsustainable. (ii) The rejection of the comparables selected by the assessee under External TNMM is not justified. The benchmarking analysis undertaken by the assessee is accepted. (iii) The finding that the AE and Non-AE segments are comparable and the consequent adoption of Internal TNMM as the Most Appropriate Method are set aside.

Accordingly, the transfer pricing adjustments of Rs. 154,36,00,000/- for Assessment Year 2015–16 and Rs. 198,77,20,590/- for Assessment Year 2016–17 made in the second round of proceedings are deleted. The international transactions of export of finished goods to Associated Enterprises are held to be at arm‟s length under External TNMM.

The consequential grounds relating to computation of income, levy of interest under sections 234A, 234B and 234D, initiation of penalty proceedings and arithmetical inconsistencies are treated as consequential and shall be dealt with by the Assessing Officer while giving effect to this order in accordance with law.In so far as Assessment Year 2016–17 is concerned, it is noticed that there exists a discrepancy in the determination of total income, inasmuch as the total income is reflected at Rs. 345,89,08,080/- in the body of the assessment order, whereas in the computation sheet the total income is reflected at Rs. 346,25,40,670/-. On account of this difference, the assessee, in Ground No. 1, has treated the differential amount as forming part of the transfer pricing addition. The assessment order, however, is silent on this aspect and does not reconcile the variation between the two figures.Accordingly, the Assessing Officer is directed to specifically examine and reconcile the aforesaid discrepancy, determine the correct total income strictly in accordance with the findings recorded in this order, and ensure Unilever India Exports Limited that the assessment order, computation sheet and consequential demand are consistent and free from arithmetical or clerical inconsistencies.

In the result, both the appeals of the assessee for Assessment Years 2015–16 and 2016–17 are allowed.