Kellogg India Pvt. Ltd. is engaged in the manufacture and distribution of breakfast cereals and prepared meals and operates as a licensed manufacturer of the Kellogg brand.

During the year under consideration, Kellogg India launched Pringles products in the Indian market. Kellogg India purchases Pringles products from Singapore-based AE Pringles International Operations SARL. Singapore AE does not manufacture Pringles, instead they are manufactured by a third-party contract manufacturer. The goods are then delivered at the cost price plus the 5% surcharge on the third-party manufacturer’s cost. These Pringles are later imported by Kellogg India from its AE and distributed in the Indian market.

Kellogg India presents itself as a distributor of Pringles products and is responsible for the strategic and overall management of the Pringles business in India. The least complex entity, Singapore AE, was selected as the auditee for the International Finished Goods Import Trade Benchmark. Kellogg India conducted a search to identify manufacturers in the Asia Pacific region and based on the benchmarking analysis conducted, the arithmetic mean of 14 comparable gross profit/direct and indirect cost companies was 50, Ranked as 07% Profit Level Index (PLI).

The tax authority ignored Kellogg India’s benchmarking approach and instead chose an Indian company to audit. The Transaction Net Margin Method (TNMM) was selected as the most suitable method (MAM) for the transaction and based on 8 comparable companies, the arm’s length margin was determined to be 4.33%. Singapore AE was rejected by the tax authority as an auditable entity on the grounds that the company’s financial data and foreign peers were not available.
Judgement of the Tax Appellate Tribunal-
The Tribunal decided in favour 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.”