Kellogg India – Resale Price Method - Decision of the Income Tax Appellate Tribunal in Mumbai, India
dated 12 February 2022
The Income Tax Appellate Tribunal (ITAT) in Mumbai, India, supported Kellogg India in a case regarding the distribution of Pringles products, produced by a third-party and sold at a cost-plus pricing of 5%. In a transfer pricing report, Kellogg argued it was a distributor for Pringles and handled the overall business strategy in India, designating Pringles International Operations, the Singapore-based associated enterprise (AE), as the tested party with a profit level indicator of 50.07%.
However, Indian revenue authorities dismissed this approach and decided to use the Indian entity as the tested party instead, applying the Transactional Net Margin Method (TNMM) to compare the net profit margins from similar transactions.
Kellogg India challenged the Arm's Length Price (ALP) adjustment related to advertisement, marketing, and promotional (AMP) expenses. The company argued that the expenses were incurred for its own products, not the AE's. The ITAT acknowledged that there was no formal agreement between Kellogg India and the AE for such expenses, therefore these did not constitute an international transaction. The Transfer Pricing (TP) adjustment was thus eliminated. Further, Kellogg India disputed the ALP adjustment linked to the import of finished goods. The ITAT noted that Kellogg India, unlike the AE in Singapore, was managing key decisions, operations, marketing, supply chain, and various risks. Hence, it was unreasonable to isolate profits from the AE's goods. The Singapore AE, compensated on a cost-plus mark-up basis, was considered less complex.
The Resale Price Method was used to determine ALP as Kellogg India merely imported and sold goods without significant value addition. Their gross margins were higher than comparable companies, thus no ALP adjustment was deemed necessary by the ITAT.