Russia vs LLC Bogoroditskoye, February 2019, Court of Appeal, Case No. А62-8105/2017

Category: Transfer Pricing Methods | Tag: , , ,
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LLC Bogoroditskoye processed and preserved fish and seafood. During the period under review, these products were sold only to related parties.

Following an transfer pricing audit, where the TNMM method was used, the tax authority concluded that the price of products paid by the related parties had been significantly lower than market prices, and that the non-arm’s length pricing had lead to an unjustified tax benefit.

LLC Bogoroditskoye disagreed and brought the assessment to court

The courts of first instance and the Court of Appeal found the assessment lawful, since sufficient evidence had been provided in support of the approach taken by the tax authorities.

  • The (internal) CUP method has priority in Russia, but the tax authority justified the inability to apply it in the present case, as during the audit period LLC Bogoroditskoye did not enter into any transactions with persons who were not related.
  • The subsequent sale price method can be used in situations “where the taxpayer under audit is a reseller of the purchased goods” but in this case LLC Bogoroditskoye was a manufacturer of the products and not a reseller.
  • The cost method are mostly used in transaction involving the provision of services.

The approach of the tax authorities (use of the TNMM method), was found to be both reasonable and in line with the tax legislation.

А62-8105-2017

A62-8105-2017_20190207_Reshenija_i_postanovlenija





Related Guidelines

  1. TPG2022 Chapter II paragraph 2.38Where the reseller is clearly carrying on a substantial commercial activity in addition to the resale activity itself, then a reasonably substantial resale price margin might be expected. If the reseller in its activities employs certain assets (e.g. intangibles used by the reseller,...
  2. TPG2022 Chapter II paragraph 2.29Following the principles in Chapter I, an uncontrolled transaction is comparable to a controlled transaction (i.e. it is a comparable uncontrolled transaction) for purposes of the resale price method if one of two conditions is met: a) none of the differences (if any)...
  3. TPG2022 Chapter II paragraph 2.39In a case where there is a chain of distribution of goods through an intermediate company, it may be relevant for tax administrations to look not only at the resale price of goods that have been purchased from the intermediate company but also...
  4. TPG2022 Chapter II paragraph 2.41Where the accounting practices differ from the controlled transaction to the uncontrolled transaction, appropriate adjustments should be made to the data used in calculating the resale price margin in order to ensure that the same types of costs are used in each case...
  5. TPG2022 Chapter II paragraph 2.36A resale price margin is more accurate where it is realised within a short time of the reseller’s purchase of the goods. The more time that elapses between the original purchase and resale the more likely it is that other factors – changes...
  6. TPG2022 Chapter II paragraph 2.28The resale price margin of the reseller in the controlled transaction may be determined by reference to the resale price margin that the same reseller earns on items purchased and sold in comparable uncontrolled transactions (“internal comparable”). Also, the resale price margin earned...
  7. TPG2022 Chapter II paragraph 2.13This part provides a detailed description of traditional transaction methods that are used to apply the arm’s length principle. These methods are the comparable uncontrolled price method or CUP method, the resale price method, and the cost plus method....
  8. TPG2022 Chapter II paragraph 2.32It may be appropriate to give more weight to other attributes of comparability discussed in Chapter I (i.e. functions performed, economic circumstances, etc.) when the profit margin relates primarily to those other attributes and only secondarily to the particular product being transferred. This...
  1. Additional guidance on the attribution of profits to permanent establishmentsThe OECD has released additional guidance on the attribution of profits to permanent establishments. This additional guidance sets out high-level general principles for the attribution of profits to permanent establishments arising under Article 5(5), in accordance with applicable treaty provisions, and includes examples...
  2. April 2013: Draft Handbook on Transfer Pricing Risk AssessmentThe 2013 Draft Handbook on Transfer Pricing Risk Assessment is a detailed, practical resource that countries can follow in developing their own risk assessment approaches. The handbook supplements useful materials already available with respect to transfer pricing risk assessment. The OECD Forum on...

Related Case Law

  1. Russia vs ViciunaiRus LLC, April 2020, Supreme Court, Case No. A21-133/2018ViciunaiRus LLC was engaged in production and wholesale distribution of its products. During the inspection, the inspection concluded that the chain of contractual relations between the Company and its sole official distributor in the Russian Federation artificially had established intermediates that do not...
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