Delmonte Kenya ran an integrated pineapple business in Kenya, covering the cultivation, harvesting, processing, packing and export of finished pineapple products. Its controlled transactions included the sale of fresh and processed pineapple products to foreign group distributors, intercompany charges and recharges for agricultural inputs and other production-related costs, and intra-group financing through related-party loan arrangements. Delmonte argued that it should be characterised as a cost-plus service-type producer with a routine return, while key market-facing functions and residual profits should belong to related parties abroad. Following an audit, the tax authority argued that the pricing and documentation did not reflect the economic reality of where the value was created. They claimed that Delmonte Kenya performed the core functions and bore key risks, meaning it had understated the taxable profits in Kenya. According to the tax authority Delmonte Kenya should not be the tested party when applying the transfer pricing method. Furthermore, they asserted that Del Monte had not provided sufficient documentation to support the basis for the pricing of its controlled transactions. Delmonte Kenya appealed, arguing that their functional analysis and characterisation were correct and that their benchmarking and TNMM-based cost-plus approach should be accepted for related-party sales. They also argued that the authority was wrong to use alternative methods and that its pricing of the controlled transactions should have been respected as documented. Judgment The Tax Appeal Tribunal dismissed the appeal, ruling that Delmonte Kenya had failed to provide sufficient evidence on key factual points and that the cost-plus and TNMM approaches were not appropriate given the nature of the Kenyan activities. Furthermore, the related-party loan arrangements were deemed to lack sufficient commercial substance or arm’s-length support, resulting in the assessment being upheld. Excerpts “202. The dispute herein arose because the Appellant had used the TNMM method combined with FCMU whilst the Respondent was of the view that the methods used to determine the arms- length price were inappropriate and that it could therefore only use the deductive method of customs valuation under the circumstances. The Tribunal notes that previous precedents as well as paragraph 7 (f) of the ITTP allows the Respondent to apply a method different from that applied from the Appellant where it finds it appropriate to do so. 203. Pursuant to the following provisions of paragraph 3.18 in order to apply TNMM and FCMU it would be necessary to establish the tested party: “When applying a cost plus, resale price or transactional net margin method as described in Chapter II, it is necessary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested [emphasis ours]. The choice of the tested party should be consistent with the functional analysis of the transaction [emphasis ours]. As a general rule, the tested party is the one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparables can be found, i.e. it will most often be the one that has the less complex functional analysis [emphasis ours] ….” 204. The Tribunal having made a finding that the FAR analysis was inaccurate will proceed on the basis that DMI GmbH is the party that has a less complex functional analysis and is the party that ought to have been the tested party. Accordingly, the TNMM and FCMU methods were inappropriately applied in the circumstances since the same would not reward the Appellant for its functions performed, assets employed and risks taken. The accurate FAR analysis reflects that the Appellant is the more complex party in the transaction and that therefore DMI GmbH should be the tested party.” […] “207. Having so found that the services provided by DMI GmbH were low value intra-group services, it follows that the provisions of paragraph 7.61 of the OECD transfer pricing guidelines apply. Paragraph 7.61 of the OECD transfer pricing guidelines provides as follows: “In determining the arm’s length charge for low value-adding intragroup services, the MNE provider of services shall apply a profit mark-up to all costs in the pool with the exception of any pass-through costs as determined under paragraphs 2.99 and 7.34. The same mark-up shall be utilised for all low value-adding services irrespective of the categories of services. The mark-up shall be equal to 5% of the relevant cost as determined in Section D.2.2. The mark-up under the simplified approach does not need to be justified by a benchmarking study [emphasis ours]. The same mark-up may be applied to low value-adding intra-group services performed by one group member solely on behalf of one other group member, the costs of which are separately identified under the guidance in paragraph 7.57. It should be noted that the low value-adding intra-group services mark-up should not, without further justification and analysis, be used as benchmark for the determination of the arm’s length price for services not within the definition of low value-adding intra-group…” 208. The Tribunal is of the firm view that the use of the FCMU was inappropriate and distinguishes the same from its findings in CIPLA Kenya Limited vs. Commissioner of Domestic Taxes [TAT No. E422 of 2024] and the findings in Checkpoint Technologies Kenya Limited v Commissioner of Domestic Taxes (Tax Appeal 1181 of 2022) [2024] KETAT 114 (KLR) (2 February 2024) (Judgment). In both cited cases, there was a dispute regarding the most appropriate position to adopt in the interquartile range and in both instances, it was held that the OECD transfer pricing guidelines allow a taxpayer to adopt any position within the interquartile range.” Click here for translation ...