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

ITA 4157/MUM/2025

AI Insights

The case involves Unilever India Exports Limited, which appealed against the final assessment orders for the Assessment Years 2015-16 and 2016-17 concerning transfer pricing adjustments made by the TPO. The primary contention was the inappropriate application of Internal TNMM after the rejection of External TNMM, which was initially accepted by the Tribunal in the first round of proceedings. The Tribunal found that the TPO and the DRP had exceeded their jurisdiction by reverting to Internal TNMM without proper justification, despite the clear directions in the earlier Tribunal order to examine the comparables under External TNMM.

• Counselvise Citation: [2026] 140 COUNSELVISE.COM (IT) 836667 (ITAT-MUMBAI)
• Duration Of Justice: 7 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-02-2026
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: J
• Assessment Year: 2016-2017
• Appeal Filed On: 19-06-2025
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PANKAJ KUMAR; LD
• Assessee Lawyers: KARISHMA PHATARPHEKAR AW; CUMULATIVELY APPLYING TURNOVER FILTER
• Keywords: Set aside; Additional evidence; Transfer pricing; International transaction; Initiation of penalty proceedings; Wholly owned subsidiary; Related party transaction
• Section: 143(3); 271(1)(c); 234B; 27; 10B

Judgement Text

"IN THE INCOME TAXAPPELLATE TRIBUNAL “J” BENCH MUMBAI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER& SHRI MAKARAND VASANT MAHADEOKAR, ACCOUNTANT MEMBER ITA No. 4156/Mum/2025 (Assessment Year: 2015-16) & ITA No. 4157/Mum/2025 (Assessment Year: 2016-17) Unilever India Exports Limited, Unilever House, B. D. Sawant Marg, Chakala, Andheri East, Sahar P & T Colony, S. O. Mumbai-400 099 Vs. DCIT Central Circle-5(2), Room No. 427, 4th Floor, Kautilya Bhawan, C-41 to C- 43, G Block, Bandra Kurla Complex, Bandra (East), Mumbai- 400 051. PAN/GIR No. AAACI0991D (Applicant) (Respondent) Assessee by Ms. Karishma Phatarphekara/w Shri Harsh Shah & Shri Shreyas Sardesai, Ld. ARs Revenue by Shri Pankaj Kumar, Ld. DR Date of Hearing 13.01.2026 Date of Pronouncement 12.02.2026 आदेश / ORDER PER MAKARAND VASANT MAHADEOKAR, AM: These two appeals filed by the assessee are directed against the final assessment orders passed under section 143(3) read Printed from counselvise.com 2 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited with section 144C(13) read with section 254 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”] for Assessment Years 2015–16 and 2016–17. Since common issues are involved, both appeals were heard together and are being disposed of by this consolidated order, with Assessment Year 2015–16 taken as the lead year. Facts of the Case 2. Before adverting to the rival submissions on the lead year, it would be appropriate to set out the basic factual chronology and statutory backdrop for both the 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: Printed from counselvise.com 3 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited 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) 10.83 percent 14.74 percent Median margin of comparable companies (as per updated analysis) 5.85 percent 4.14 percent Range of comparable companies 3.34 percent to 8.31 percent 1.23 percent to 6.70 percent First round TP adjustment by TPO Rs. 154,36,00,000/- Rs. 198,40,88,000/- Draft assessment order in first round 28 December 2018 9 December 2019 Final assessment order in first round 28 November 2019 30 April 2021 Tribunal order in first round Order dated 31 March 2023 restoring issue to TPO Same order dated 31 March 2023 Second round TPO order Order dated 30 April 2024 proposing adjustment of Rs. 154,36,00,000/- Order dated 30 April 2024 proposing adjustment of Rs. 198,40,88,000/- Draft assessment order in second round 27 June 2024 27 June 2024 DRP directions in second round Issued under section 144C(5) in March 2025 Issued under section 144C(5) in March 2025 Final assessment order in second round 17 April 2025 determining income at Rs. 269,38,87,930/- 25 April 2025 determining income at Rs. 346,25,40,670/- (as per computation sheet Rs. 345,89,08,080/- as per order) 5. 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 Printed from counselvise.com 4 ITA No. 4156 & 4157/Mum/2025 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. 6. 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. 7. 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. Printed from counselvise.com 5 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited 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 agreed with the TPOthat no appropriate comparable companies were available for application of External TNMM. The DRP further held that the remand by the Tribunal permitted fresh examination and justified the adoption of Internal TNMM. Consequently, the final assessment orders dated 17 April 2025 for Assessment Year 2015–16 and 25 April 2025 for Assessment Year 2016–17 were passed under section 143(3) read with section 144C(13), incorporating the transfer pricing adjustments. 9. Aggrieved by the aforesaid action, the assessee has filed the present appeals. Following are the specific grounds: Assessment Year 2015–16 - ITA 4156-MUM-2025 General: 1. Whether on the facts and in the circumstance of the case and in law, the learned AO erred in determining the Appellant's assessed income as Rs. 269,38,87,930 as against the Appellant's returned income of Rs. 115,02,87,930 by making a transfer pricing addition of Rs. 154,36,00,000 concerning the international transaction of export of goods? Printed from counselvise.com 6 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited Export of finished goods to Associated Enterprises: 2. Whether on the facts and in the circumstances of the case and in law, orders passed by the learned TPO dated 30 April 2024, by the learned AO dated 27 June 2024 & 17 April 2025 and directions issued by the Hon'ble DRP dated 29 March 2025 are without jurisdiction, non-est and void-ab-initio since they are in direct contravention of the order dated 31 March 2023 of this Hon'ble Tribunal in the first round of proceedings? 3. 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 holding that there are no external comparable companies that can be selected as comparable instances for application of Transactional Net Margin Method (TNMM)? 4. 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 rejecting not only the set of comparable companies identified by the Appellant in its transfer pricing study report but also the fresh set of comparable companies submitted by the Appellant as additional evidence before the Hon'ble DRP? 5. Whether 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 incorrect calculations. Printed from counselvise.com 7 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited Interest under section 234B and 234D: 8. Whether on the facts and in the circumstances of the case and in law, the learned AO has erred in levying interest under section 234B and section 234D of the Act. Initiation of penalty under section 270A: 9. Whether on the facts and in the circumstances of the case and in law, the learned AO has erred in initiating penalty proceedings under section 274 read with section 271(1)(c) of the Act. Order barred by limitation: 10. Whether on the facts and in the circumstances of the case and in law, the final assessment order dated 17 April 2025 passed under section 143(3) read with section 144C(13) of the Act for AY 2015-16 is void and bad in law as it has been passed beyond the time limit prescribed under section 153 of the Act. Assessment Year 2016–17 - ITA 4157-MUM-2025 General: 1. Whether on the facts and in the circumstance of the case and in law, the learned AO erred in determining the Appellant's assessed income as Rs. 346,25,40,670 as against the Appellant's returned income of Rs. 147,48,20,080 by making a transfer pricing addition of Rs. 198,77,20,590 concerning the international transaction of export of goods? Export of finished goods to Associated Enterprises: 2. Whether on the facts and in the circumstances of the case and in law, orders passed by the learned TPO dated 30 April 2024, by the learned AO dated 27 June 2024 & 25 April 2025 and by the Hon'ble DRP dated 30 March 2025 are without jurisdiction, non-est and void- ab-initio since they are in direct contravention of the order dated 31 March 2023 of this Hon'ble Tribunal in the first round of proceedings? 3. 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 holding that there are no external comparable companies that can be selected as comparable instances for application of Transactional Net Margin Method (TNMM)? 4. 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 rejecting not only the set of comparable Printed from counselvise.com 8 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited companies identified by the Appellant in its transfer pricing study report but also the fresh set of comparable companies submitted by the Appellant as additional evidence before the Hon'ble DRP? 5. Whether 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 incorrect calculations? Incorrect determination of total income: 8. Whether on the facts and in the circumstances of the case and in law, the learned AO, erred in determining the total income of the Appellant as Rs. 346,25,40,670 in the computation sheet in contradiction with the final assessment order dated 25 April 2025 where the total income of the Appellant is determined as Rs. 345,89,08,080? Interest under section 234B and 234D: 9. Whether on the facts and in the circumstances of the case and in law, the learned AO has erred in computing the interest under section 234A and 234B of the Act while computing the Appellant's total liability? Initiation of penalty under section 270A: 10. Whether on the facts and in the circumstances of the case and in law, the learned AO has erred in initiating penalty proceedings under section 274 read with section 271(1)(c) of the Act? Printed from counselvise.com 9 ITA No. 4156 & 4157/Mum/2025 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 Printed from counselvise.com 10 ITA No. 4156 & 4157/Mum/2025 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. 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 ground. It was submitted that the TPO, the Assessing Officer and the DRP have acted in patent violation of the binding directions issued by the Co-ordinate Printed from counselvise.com 11 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited bench in its order dated 31 March 2023 passed in the first round of proceedings. 14. 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. 15. 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. 16. 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 Printed from counselvise.com 12 ITA No. 4156 & 4157/Mum/2025 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. 17. 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. 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 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. 20. It was argued that the Co-ordinate Bench had not directed that External TNMM must be applied in all circumstances. Printed from counselvise.com 13 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited 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 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. 24. 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. Printed from counselvise.com 14 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited 25. In the second round, the TPOdid undertake examination of the comparables selected by the assessee. Detailed reasons have been recorded for rejection of each comparable on grounds such as turnover filter, related party transaction filter, export filter and functional dissimilarity. The DRP has also examined and affirmed these findings. Therefore, to the extent of examination of comparables, it cannot be said that the authorities have failed to comply with the remand directions. 26. 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. 27. 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. 28. If no comparable survived, it was incumbent upon the TPO to carry out an objective search and identify appropriate external Printed from counselvise.com 15 ITA No. 4156 & 4157/Mum/2025 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. 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 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. Printed from counselvise.com 16 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited II. Rejection of External TNMM and non-availability of comparables(Ground Nos. 3 and 4 for both Assessment Years) 31. The learned AR submitted that the rejection of External TNMM on the ground that no comparable companies are available is factually and legally unsustainable.It was contended that the assessee had carried out a detailed and scientific search process in its transfer pricing study report by accessing recognized databases and applying appropriate quantitative filters, including manufacturing sales filter, positive net worth filter, sales threshold filter, AMP filter of less than 3 percent and R&D filter of less than 3 percent, with a view to identify companies engaged in routine contract manufacturing activity comparable to the assessee‟s AE segment. It was submitted that the assessee had further undertaken detailed FAR analysis and identified contract manufacturers supplying goods to other businesses rather than operating as entrepreneurial entities. 32. 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. Printed from counselvise.com 17 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited 33. It was further submitted that even during the proceedings before the DRP, the assessee had furnished a fresh benchmarking analysis, applying the filters suggested by the TPO, on a without prejudice basis. However, those comparables were also rejected. It was argued that the conclusion of the TPOthat no comparable companies exist under External TNMM is factually incorrect and is the result of arbitrary application of filters. 34. 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. 35. 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, Printed from counselvise.com 18 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited operate as entrepreneurial entities or do not predominantly derive revenue from contract manufacturing. 36. 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. 37. 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. 38. 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. 39. 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 Printed from counselvise.com 19 ITA No. 4156 & 4157/Mum/2025 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 Printed from counselvise.com 20 ITA No. 4156 & 4157/Mum/2025 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. 40. 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. 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 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. 42. 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. Printed from counselvise.com 21 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited 43. Accordingly, the transfer pricing adjustment made by discarding External TNMM on the premise that no comparables are available cannot be sustained. The benchmarking shall be carried out under External TNMM on the basis of appropriate comparables consistent with the functional profile of the assessee. 44. Ground Nos. 3 and 4 for both Assessment Years are allowed in the above terms. III. Rejection of Comparables Selected by the Assessee(Ground No. 4 for both Assessment Years) 45. The issue for consideration under this ground is whether the TPOand the DRP were justified in rejecting the comparable companies selected by the assessee under External TNMM for benchmarking the international transaction of export of finished goods to Associated Enterprises. 46. 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. 47. 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 Printed from counselvise.com 22 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited Contract Manufacturing Comparables in Paper Book Vol. 02, which reads as under: Sr. Comparable Set – Contract Manufacturing Turnover (Rs. Crores) Weighted Average Margin (OP/TC) Reason for Rejection by TPO/DRP 1 Jocil Limited – Soap segment 330.52 6.06% FAR not comparable 2 Jagatjit Industries Limited – Food segment 826.17 8.63% FAR not comparable 3 Universal Starch-Chem Allied Limited 195.78 1.97% FAR not comparable 4 Milkfood Limited 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 Printed from counselvise.com 23 ITA No. 4156 & 4157/Mum/2025 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. 50. 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. 51. 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. Printed from counselvise.com 24 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited iii. Functional Dissimilarity – Companies were rejected merely on product differences without undertaking detailed FAR comparison. iv. Segmental Data Ignored – Where segmental data was available, the entire company was rejected instead of evaluating the relevant manufacturing segment. 52. 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. 53. 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. 54. 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. 55. 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 Printed from counselvise.com 25 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited 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 segment profile. 58. 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% Printed from counselvise.com 26 ITA No. 4156 & 4157/Mum/2025 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 59. 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. 60. From the record (Fact Sheet, Page 9–10) and Chart 1, it emerges that: - All companies were rejected if a 75% export filter was applied. - 6 companies (AY 2015-16) were rejected on FAR. - 3 companies were rejected on 10-times turnover filter. - 1 company was rejected on RPT filter. - One company was excluded for fluctuating margins. Thus, cumulatively, no company survived. 61. The assessee has demonstrated (Fact Sheet Pages 9–10) that: - The AE segment operates as a cost-plus contract manufacturer. Printed from counselvise.com 27 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited - It does not assume export risk, forex risk, credit risk or market risk. - Its remuneration remains constant irrespective of destination of goods. 62. 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. 63. 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. 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. Printed from counselvise.com 28 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited - 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 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. 67. 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. Printed from counselvise.com 29 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited 68. The benchmarking analysis undertaken by the assessee under External TNMM is found to be robust, scientifically conducted and aligned with Rule 10B. The assessee‟s AE segment margin of 10.83% (and even 9.16% on re-casted basis) is above the 65th percentile of 8.31%. Accordingly, we accept the benchmarking carried out by the assessee under External TNMM and hold that the international transaction of export of finished goods to AEs is at arm‟s length. Ground No. 4 for both Assessment Years is allowed. IV. Finding that AE and Non-AE segments are comparable - (Ground No. 5 for both Assessment Years) 69. The issue arising for consideration under this ground is whether the TPOand the DRP were justified in holding that the AE segment and the Non-AE segment of the assessee are comparable and in applying Internal TNMM by benchmarking the margin of the AE segment with that of the Non-AE segment.The controversy centres on whether both segments are economically comparable in terms of functions performed, assets employed and risks assumed, so as to constitute reliable internal comparables. 70. 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: Printed from counselvise.com 30 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited Particulars Segment A.Y. 2015– 16 A.Y. 2016– 17 Operating Profit / Total Cost (OP/TC) AE Segment 9.00% 9.16% Operating Profit / Total Cost (OP/TC) Non-AE Segment 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 Printed from counselvise.com 31 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited 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, 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 75. 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. Printed from counselvise.com 32 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited 76. The learned DR supported the finding of the TPO and DRP. 77. 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. 78. 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 Printed from counselvise.com 33 ITA No. 4156 & 4157/Mum/2025 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. 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 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. 81. 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. Printed from counselvise.com 34 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited ii. The AE segment operates as a limited-risk contract manufacturer remunerated on a cost-plus basis, whereas the Non-AE segment operates as a full-fledged entrepreneur bearing market, pricing and credit risks. iii. The re-casted segmental results relied upon by the TPO themselves demonstrate material difference: a. Assessment Year b. AE Segment (OP/TC) c. Non-AE Segment (OP/TC) d. A.Y. 2015–16 e. 9.00% f. 39.68% g. A.Y. 2016–17 h. 9.16% i. 36.67% j. It was argued that such disparity cannot be reconciled without risk adjustment, and therefore internal comparison is economically unreliable. iv. The TPO‟s reasoning that both segments deal in similar branded products is legally irrelevant because TNMM focuses on FAR profile and risk allocation, not product identity. v. Internal TNMM is appropriate only where internal uncontrolled transactions are economically comparable. In the present case, the Non-AE segment is not an uncontrolled comparable but represents a different economic character. It was therefore submitted that adoption of Internal TNMM as MAM is unsustainable both legally and factually. 82. The learned DR supported the adoption of Internal TNMM. 83. 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. Printed from counselvise.com 35 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited 84. In the present case, as already discussed while adjudicating Ground No. 5, the AE segment operates as a limited-risk contract manufacturer earning approximately 9 percent margin, whereas the Non-AE segment earns margins between 36 percent and 40 percent.Such disparity is not a minor variation but a structural difference reflecting divergent risk profiles.Further, the Paper Book demonstrates 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. Printed from counselvise.com 36 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited 88. Accordingly, Ground No. 6 for both Assessment Years is allowed. External TNMM remains the appropriate method for benchmarking the impugned international transaction. VI. Rejection of Audited Segmental Accounts and Reworking of Segmental Results - (Ground No. 7 for A.Ys. 2015–16 and 2016–17) 89. The issue arising under this ground is whether the TPOand the Assessing Officer were justified in rejecting the audited segmental profit and loss accounts furnished by the assessee and in re-casting the segmental results for the AE and Non-AE segments for the purpose of computing the arm‟s length price.The grievance of the assessee is that the audited segmental accounts were disregarded without any cogent defect being pointed out and that the re-casting exercise undertaken by the TPO is based on assumptions which distort the true profitability of the respective segments. 90. 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 Printed from counselvise.com 37 ITA No. 4156 & 4157/Mum/2025 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: Assessment Year AE Segment (%) Non-AE Segment (%) A.Y. 2015–16 9.00% 39.68% A.Y. 2016–17 9.16% 36.67% 91. It was submitted that this re-casting is not based on audited figures but is a reconstruction undertaken to justify Internal TNMM. The learned AR argued that such re-allocation of costs and profits is contrary to settled accounting principles and transfer pricing jurisprudence.It was further submitted that the audited segmental accounts reflect actual cost allocation and segmental profitability.The TPO has not demonstrated any specific error in allocation keys.The re-casting exercise effectively predetermines AE margin and adjusts Non-AE margin residually.Such approach lacks statutory sanction under Rule 10B.Accordingly, it was contended 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. Printed from counselvise.com 38 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited 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 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. 96. 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 Printed from counselvise.com 39 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited facilitate internal comparison. If such comparison is not valid, the necessity for re-casting disappears. 97. In absence of any specific defect in the audited segmental accounts, rejection thereof in entirety is not justified. 98. 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. 99. 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. Printed from counselvise.com 40 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited (iv) The rejection of the audited segmental accounts and the re- casting of segmental results are also set aside. 100. 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. 101. 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 Printed from counselvise.com 41 ITA No. 4156 & 4157/Mum/2025 Unilever India Exports Limited that the assessment order, computation sheet and consequential demand are consistent and free from arithmetical or clerical inconsistencies. 102. In the result, both the appeals of the assessee for Assessment Years 2015–16 and 2016–17 are allowed. Order pronounced in the open court on 12.02.2026. Sd/- Sd/- (AMIT SHUKLA) (MAKARAND VASANT MAHADEOKAR) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated 12/02/2026 Dhananjay, Sr.PS आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपीलाथी / The Appellant 2. प्रत्यथी / The Respondent. 3. संबंधधत आयकर आयुक्त / The CIT(A) 4. आयकर आयुक्त(अपील) / Concerned CIT 5. धिभागीय प्रधतधनधध, आयकर अपीलीय अधधकरण, मुम्बई/ DR, ITAT, Mumbai 6. गार्ड फाईल / Guard file. आदेशानुसार/BY ORDER, सत्याधपत प्रधत //True Copy// 1. उि/सहायक िंजीकार ( Asst. Registrar) आयकर अिीिीय अतिकरण, मुम्बई / ITAT, Mumbai Printed from counselvise.com "