KELLOGG INDIA P.LTD,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX 15(1)(2), MUMBAI

The Assessee/Appellant herein has preferred this appeal against the order dated 31.07.2022 impugned herein passed by Ld. Commissioner of Kellogg India Pvt Ltd. Income Tax/National Faceless Appeal Centre {in short ‘Ld. Commissioner’} u/s 250 of the Income Tax Act 1961 (in short ‘the Act’).

2.1 The Assessee, by filling its return of income in original for the Assessment Year under consideration on dated 30.11.2018 had declared its total income of Rs.72,32,70,720/- which was determined at Rs.73,49,49,580/- after adjustment of Rs.1,16,78,865/-. Subsequently, the case of the Assessee was selected for scrutiny under CASS for the determination of following issues:

(i) Lower amount disallowed u/s. 40(a)(ia) in ITR (Part A-OI) in comparison to audit report.

Kellogg India Pvt Ltd.

(ii) Claim of large value refund. (iii) Large "any other amount allowable as deduction claimed in Schedule BP of retun. (iv) Large sales promotion expenses vis-a-vis gross receipts:

2.2 Accordingly, statutory notices u/s 143(2) & 142(1) of the Act were issued to the Assessee, in response to which, the Assessee submitted details through e-mail on ITBA portal.

2.3 The AO by perusing financials of the Assessee noticed that during the year under consideration, the Assessee-Company has entered into International transactions as detailed in Form No. 3CEB filed along with return of income and therefore the AO referred the case to the Transfer Pricing Officer as per provisions of section 92CA(1) of the Act for computation of Arm's Length Price qua International Transactions.

2.4 Subsequently, an order u/s 92CA(3) of the Income-tax Act, 1961 dated 26.07.2021 was passed by the Transfer Pricing Officer/Assistant Commissioner of Income tax -2(3)(1), Mumbai, Kellogg India Pvt Ltd. wherein the Arm's Length Price was computed at Rs.113,59,72,724/-.

2.5 In pursuance to the order of Transfer Pricing Officer, the A.O. being agreed with the views taken by the TPO for determining the Arm's Length Price, accordingly framed the draft order u/s 144C of the Income-tax Act, 1961 dated 28/09/2021, and issued to the Assessee proposing the taxable income at Rs.1,87,50,05,741/- after considering the adjustments of Rs.113,59,72,724/- as per TPO order and disallowing meetings and seminar expenses of Rs.58,30,192/- and Repairs to Buildings expenses of Rs.99,32,105/-.

2.6 The Assessee being aggrieved with the Draft assessment order, preferred objections under section 144C(2) of the Act on 26/10/2021 before the Dispute Resolution Panel-1, Mumbai, who vide order dated 07-06-2022 u/s 144C (5) of the Act, decided the objections raised by the Assessee-Company and in para 12 of its order issued the directions and directed the Assessing Officer to give effect to the said order, and the AO gave effects as recorded in final assessment order . 4 Kellogg India Pvt Ltd.

5.2 On perusal of the order of the CIT(DRP-1), Mumbai, it is seen that the DRP has dealt the objections raised by the Assessee-Company as under: i. Objection No. 1: Transfer pricing adjustment of Rs.113,19,65,878/- in relation to AMP expenses incurred by the Assessee-Company -Rejected As, the additions on account of Transfer Pricing adjustments of Rs. 113,19,65,878/- in relation to AMP expenses incurred by the Assessee-Company are sustained, Penalty proceedings u/s.274 read with Section 270A of the Income-tax Act, 1961 are hereby initiated for under reporting as a consequence of misreporting of income. ii. Objection No. 2: TPO Transfer pricing adjustment of Rs.40,06,846/- in relation to provision of IT support services -Rejected As, the additions on account of Transfer Pricing adjustments of Rs.40.06,846/- in relation to provision of IT support services are sustained, Penalty proceedings u/s.274 read with Section 270A of the Income-tax Act, 1961 are hereby initiated for under reporting as a consequence of misreporting of income. iii. Objection No.

3. Ad-hoc disallowance of Rs.99,32,105/- of repair to building expenses Allowed Kellogg India Pvt Ltd. iv. Objection No. 4: Ad-hoc disallowance of Rs.58,30,192/ in respect of meetings and seminar expenses – Allowed 2.7 The Assessing officer ultimately computed the income the income of the Assessee at Rs. 187,09,22,300/- by making the additions of Rs. 113,19,65,878/- on account of Transfer pricing adjustment qua AMP expenses and Rs. 40,06,846/- qua Transfer pricing adjustment qua IT related services.

6. Ground no. 3 relates to the upholding of the upward adjustment of Rs. 40,06,846/- was also not pressed being meager amount by the Assessee, hence needs no adjudication .

7. Ground no 4 pertains to the denial of deduction qua employee’s contribution towards Provident Fund and ESIC funds which has been claimed in the return of income, was also not pressed by the Assessee, hence needs no adjudication.

8. Ground no 5 pertains to the initiating penalty proceedings u/s 270A of the Act, infact is premature, hence needs no adjudication.

9. Ground no 2 was only disputed and emphasized, which pertains to the making an adjustment of Rs. 113,19,65,878/- to the income of the Assessee on account of advertisement, marketing and promotional expenses (AMP) and selling and distribution expenses. The Assessee has claimed and not refuted by the ld. DR that the identical issue remained a subject matter before the Hon’ble Tribunal in the cases pertains to AY’s 2009-10, 2010-11, 2011-12, 2012-13 ,2013-14 and 2014-15 and the Tribunal consistently held that AMP expenditure incurred by the Assessee in India cannot come within the purview of the international transaction. Kellogg India Pvt Ltd. For clarity the conclusion drawn by the Hon’ble Co-ordinate Bench of Tribunal in the case pertaining to AY 2009-10 (ITA No. 2866/M/2014 decided on 19-07-2019) is reproduced below for ready references and clarity:-

6. We have considered rival submissions and perused material on record. We have also applied our mind to the decisions relied upon. Undisputed facts are, the assessee is not merely a distributor of the products manufactured by the AE but the assessee itself manufactures its own products in India under license from the AE. It is also a fact that for marketing and promotion of its manufactured products in India, assessee has incurred AMP expenditure by making payments to third parties in India. Therefore, the basic issue which arises for consideration is, whether the AMP expenditure incurred by the assessee in India can come within the purview of international transaction as defined under section 92B of the Act. In this regard, the contention of the assessee before the Transfer Pricing Officer was, since the assessee has incurred the AMP expenditure for products manufactured and sold by it in India, it does not come within the purview of international transaction. Further, the assessee has also submitted that since there is no arrangement/agreement between the assessee and the AE for incurring such expenditure to promote the brand of the AE, it cannot be said that there is an international transaction relating to AMP expenditure. It is worth mentioning, the Transfer Pricing Officer has also agreed with the assessee that the AMP expenditure was incurred with the third parties in India, hence, do not constitute 8 Kellogg India Pvt Ltd. international transaction. Having held so, the Transfer Pricing Officer has still proceeded to determine the arm's length price of the AMP expenditure on the reasoning that the compensation required in the arrangement between the assessee and the AE for improving the brand intangible of the owner has to be determined. Further, he has observed that the AMP expenditure incurred by the assessee not only benefits the assessee but also the AE in terms of increase in the brand value of Kellogg. Thus, the Transfer Pricing Officer has inferred that there is an arrangement between the assessee and the AE with regard to promotion of the brand of the AE by incurring AMP expenditure. However, he has not provided any factual basis on which he has drawn such inference. By merely stating that there is an arrangement between the assessee and the AE, the Transfer Pricing Officer cannot bring the AMP expenditure within the purview of international transaction. If the Transfer Pricing Officer alleges that the AMP expenditure comes within the purview of international transaction by virtue of an arrangement between the related parties, the burden is entirely upon the Transfer Pricing Officer to demonstrate the existence of such arrangement. A careful reading of the impugned order of the Transfer Pricing Officer does not reveal any such factual basis which can demonstrate the existence of an arrangement between the assessee and the AE for incurring AMP expenditure to promote the brand of the AE. That being the case, the entire approach of the Transfer Pricing Officer in determining the arm's length price of AMP expenditure is fallacious. Kellogg India Pvt Ltd.

4.1 As rightly pointed out by Ld. AR, this issue stood covered in assessee’s favor by the order of coordinate bench of this Tribunal in assessee’s own case for AY 2009-10 (lead case on the issue), Cross appeals & 2888/Mum/2014 common order dated 19/07/2019 wherein the issue has been decided in assessee’s favor by observing as under: -

The aforesaid decision has subsequently been followed by another coordinate bench in assessee’s own case for AY 2011-12 in revenue’s appeal and also in assessee’s appeal for AY 2012- 13 ITA No. 2314/Mum/2017; common order dated 24/02/2020.

Kellogg India Pvt Ltd.

4.2 It was observed by the bench in AY 2009-10 that the assessee was not merely a distributor of the products manufactured by its AE but the assessee itself was manufacturing its own products in India under license from the AE. Further, with a view to market and promote its own manufactured products, the assessee incurred AMP expenditure by making payments to third parties in India. There was no express arrangement / agreement between the assessee and the AE for incurring such expenditure to promote the brand of the AE and therefore, the said transactions would not constitute international transaction relating to AMP expenditure. It was also observed that BLT method as adopted by Ld. TPO was not a valid method to benchmark the transactions. The technical collaboration agreement as referred to by Ld. TPO did not envisage any such express arrangement / agreement between the assessee and its AE and therefore, the same could not support the case of the revenue. Therefore, facts being pari-materia the same, respectfully following the aforesaid decisions of Tribunal in assessee’s own case, we delete the impugned TP adjustment against AMP expenditure and allow ground no.1 of the appeal.

Order pronounced in the open court on 31.08.2023.