Korea vs “Electrics Co., Ltd.”, August 2024, High Court, Case no. 2022누55844

Category: Benchmark, Range and Median, Comparability Analysis, Transfer Pricing Methods | Tag: , , , , , , , , , , , , , , ,
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A Korean subsidiary of a multinational electronics group imported medical equipment, small household appliances and lighting products from related parties abroad and sold them in Korea. It also provided after-sales maintenance services for medical equipment. The taxpayer segmented its activities by business line, applying the transactional net margin method separately to each segment and using operating profit margin as the profit level indicator. Maintenance services relating to medical equipment were treated either as a distinct activity or as a routine function with limited profitability.

Following an audit, the tax authorities rejected the taxpayer’s segmentation and functional analysis. They reclassified the taxpayer’s activities into four segments, treating the maintenance services for medical equipment as economically integrated with the sale of medical equipment. Based on this, they concluded that the prices paid to foreign related parties for medical equipment, small household appliances and automotive lighting products exceeded arm’s length price, while no adjustment was required for the general lighting segment. The authorities selected comparables that included domestic maintenance service companies and issued a tax assessments.

The taxpayer challenged the assessment in the Tax Tribunal, which partially upheld the challenge and ordered a re-examination of the lighting segment. This resulted in a partial refund. However, disputes remained regarding the medical equipment and small household appliances segments, particularly with regard to the functional characterisation of the taxpayer, the treatment of maintenance services and the selection and application of comparables. The taxpayer therefore pursued the case in the courts.

Judgment

The High Court ruled that the tax assessments for the disputed segments were unlawful.

It found that the tax authorities had failed to conduct a proper comparability analysis in line with the transactional net margin method. The authorities had also not adequately demonstrated that the taxpayer’s segmentation and functional analysis were inappropriate. Furthermore, they had relied on comparables whose functions and risk profiles were not sufficiently similar to those of the taxpayer.

The court also criticised the authorities for effectively substituting their own assumptions without providing a reasoned justification under the International Tax Coordination Law. Consequently, the court annulled the remaining transfer pricing adjustments.

 

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Related Guidelines

  1. TPG2022 Chapter VI paragraph 6.198In a transfer pricing analysis where the most appropriate transfer pricing method is the resale price method, the cost-plus method, or the transactional net margin method, the less complex of the parties to the controlled transaction is often selected as the tested party....
  2. OECD COVID-19 TPG paragraph 28This aspect is also relevant in performing the comparability analysis. For instance, assume government intervention forces a taxpayer to close its distribution facilities for three months. In undertaking a benchmark analysis, care should be taken in verifying that comparable enterprises have faced similar...
  3. OECD COVID-19 TPG paragraph 39In all circumstances it will be necessary to consider the specific facts and circumstances when determining whether a so-called “limited-risk” entity could incur losses at arm’s length. This is reflected in the OECD TPG which states that “simple or low risk functions in...
  4. OECD COVID-19 TPG paragraph 40In determining whether or not a “limited-risk” entity may incur losses, the risks assumed by an entity will be particularly important. This reflects the fact that at arm’s length, the allocation of risks between the parties to an arrangement affects how profits or...
  5. TPG2022 Chapter II paragraph 2.96A net profit indicator of net profit divided by sales, or net profit margin, is frequently used to determine the arm’s length price of purchases from an associated enterprise for resale to independent customers. In such cases, the sales figure at the denominator...
  6. TPG2022 Chapter II paragraph 2.64The transactional net margin method examines the net profit relative to an appropriate base (e.g. costs, sales, assets) that a taxpayer realises from a controlled transaction (or transactions that are appropriate to aggregate under the principles of paragraphs 3.9-3.12). Thus, a transactional net...


Related Case Law

  1. Korea vs “Electrics Co., Ltd.”, October 2025, Supreme Court, Case no. 2024두54065A Korean subsidiary of a Dutch electronics multinational was assessed for excess transfer prices paid to foreign related parties across medical equipment, household appliances, and lighting segments. Tax authorities aggregated maintenance services with product sales and selected comparables based on domestic service businesses....
  2. Zambia vs Nestlé Zambia Limited, August 2025, Supreme Court, Case No 03-2021Nestlé Zambia Limited recorded continuous losses, prompting the Zambia Revenue Authority to issue a transfer pricing assessment. The Tax Appeals Tribunal had invalidated the assessment over unsuitable comparables and methods. On appeal, the Zambia Supreme Court ruled in 2025 that the burden of...
  3. Zambia vs Nestlé Trading Ltd, March 2019, Tax Appeals Tribunal, Case No 2018/TAT/03/DTIn this case Nestlé Zambia had reported continuous losses for more than five years. Following an Transfer Pricing audit covering years 2010 – 2014, the tax administration  issued an assessment whereby profits were adjusted to ZMW 56,579,048 resulting in additional taxes of ZMW13,860,103 plus...
  4. Spain vs Transalliance Iberica SA, November 2022, Audiencia Nacional, Case No SAN 5336/2022 – ECLI:EN:AN:2022:5336Transalliance Iberica SA had priced its controlled transactions for the years 2008-2013 by comparing the gross margin achieved on an overall basis with the gross margins of comparable companies. Following an audit, the tax authorities issued a notice of assessment rejecting the method...
  5. Greece vs “Pharma Distributor Ltd.”, November 2022, Administrative Tribunal, Case No ΔΕΔ 3712/2022Following an audit, the Greek tax authorities determined that the profit of “Pharma Distributor Ltd” for sales and service activities had not been determined in accordance with the arm’s length principle. The tax authorities issued an assessment of additional taxable income, rejecting the...