Kellogg India Private Limited is engaged in manufacturing and sales of breakfast cereals and convenience foods and it operates as a licensed manufacturer under the Kellogg brand.
During the year under consideration, Kellogg India had commenced business of distributing Pringles products in the Indian markets. Kellogg India purchases the pringles product from its AE Pringles International Operations SARL, based in Singapore. Singapore AE does not manufacture pringles, but in turn gets it manufactured from a third party contract manufacturer. Thereafter, the goods are supplied at a cost plus mark up of 5% on third party manufacturer’s cost. These Pringles are later imported by Kellogg India from its AE and distributed in the Indian market.
Kellogg India characterised itself as a distributor of Pringles products and is responsible for the strategic and overall management of Pringles business in India. Singapore AE, being the least complex entity, was selected as the tested party for benchmarking the international transaction of import of finished goods. Kellogg India conducted a search in the Asia Pacific region to identify manufacturers and based on benchmarking analysis carried out, an arithmetic mean of 14 comparable companies with Gross Profit / Direct and Indirect Cost as the Profit Level Indicator (PLI) was determined at 50.07%.
The tax authorities disregarded the benchmarking approach adopted by Kellogg India and instead selected the Indian entity as the tested party. The Transactional Net Margin Method (TNMM) was chosen as the Most Appropriate Method (MAM) for the transaction and based on 8 comparable companies the arm’s length profit margin was determined at 4.33%. Singapore AE was rejected as tested party by the tax authorities on the ground that the financial details of the company and the foreign comparables were not available.
Judgement of the Tax Appellate Tribunal
The Tribunal decided in favor of Kellogg India and set aside the assessment.
“In view of the aforesaid observations, we hold that Singapore AE should be considered as the tested party, being the least complex entity, in the facts and circumstances of the case, which has been rightly done by the assessee. Hence no adjustment to ALP is required to be made. Even if the comparables chosen by the ld TPO are considered, undisputably since the assessee is only engaged in purchase and resale of goods without any substantial value addition thereon, RPM would be the MAM and in case of RPM only the gross margins are to be compared. We find that gross margins of assessee are much more than the gross margins of comparable companies chosen by the ld TPO. Hence no adjustment to ALP is to be made in respect of import of finished goods even if the comparable companies chosen by the ld TPO are upheld. Hence we hold that no adjustment to ALP is required to be made in the instant case in respect of import of finished goods in either case. Accordingly, the said adjustment of Rs 1,31,60,199/- is hereby directed to be deleted. Accordingly, the Additional Grounds raised by the assessee are allowed.”