Philippines vs CYANAMID PHILIPPINES, INC, August 1995, Tax Court, CTA CASE No. 4724

Category: Transfer Pricing Methods | Tag: , , , , ,
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Cyanamid Philippines, INC was engaged in the marketing of various products in the areas of pharmaceutical, animal health and nutrition, and crop protection chemicals as well as medical devices.

The tax authorities issued an assessment for deficiency income tax, arising from (a) overstatement of cost of goods due to transfer pricing of products, namely; aurofac and minocycline, which petitioner purchased from its parent company, American Cyanamid; and (b) unnecessary and unreasonable payment of royalties to the latter company for the supply of technical know-how.

Judgement of the Tax Court

The Court decided in favour of Cyanamid Philippines.

According to the court, the tax authorities had acted in an arbitrary, unreasonable, and capricious manner. There were no apparent attempt to verify the comparability of the pharmaceutical products being compared under a comparable uncontrolled price (CUP) method analysis.

“It can be gleaned readily from the facts that the physical property and circumstances in the processing and sale of petitioner’s products are not “identical” or
“so nearly identical that any difference can either have no effect on price, or such difference can be reflected by a reasonable number of adjustments to the price” of Pfizer’s products.” 

“We so hold, therefore, that respondent never had any valid justification to declare the cost of goods of petitioner’s products, aurofac and minocycline, as having
been overstated in price when bought from its parent company, American Cyanamid. “

On the issue of Royalties the Court stated

“The obligation to pay royalties is founded on a licensing agreement duly sanctioned by proper government agencies. Without the license to use know-how, petitioner cannot engage in the processing and selling of its products. Petitioner continues to exist as a legitimate domestic corporation solely by virtue of its licensing agreement and any attempt to deny it the use of know-how would simply result in the natural cessation of its business. The elements of necessity and reasonableness are easily appreciated in the use of know-how in petitioner’s business. “

“In sum, we uphold the validity and the legality of the payment of royalties for know-how made by petitioner to its parent company, American Cyanamid.” 

The decision was later affirmed by the Court of Appeals in 1999.






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