The tax authorities had applied the TNMM and used the interquartile range and median to determine the arm’s length income of Bayer Argentina S.A. for FY 1999 and this resulted in a tax assessment being issued where the taxable income had been adjusted upwards. Not satisfied with the assessment Bayer Argentina S.A. filed a complaint. Both the Tax Court and later the National Court set aside the assessment and decided in favour of Bayer Argentina S.A. An appeal was then brought by the tax authorities before the Supreme Court. Judgment of the Supreme Court The Supreme Court upheld the decision of the National Court and decided in favour of Bayer Argentina S.A. According to the Court, the application of the interquartile range used by the tax authorities to support the assessment of additional taxable income for FY 1999 was inadmissible, since the median and interquartile range was not applicable in the period and a contrary conclusion would seriously undermine legal certainty and would imply disregarding the need for the State to clearly prescribe the taxes and exemptions, so that taxpayers can easily adjust their respective conduct in tax matters. Click here for English Translation Click here for other translation ...

Dart Sudamericana S.A. (now Dart Sudamericana SRL) imported so-called EPS T601 pellets from related party abroad for use in its manufacturing activities. The controlled transactions had been priced using the CUP method. Following an audit the tax authorities made a transfer pricing adjustment where it had applied the transactional net margin method (TNMM). According to the tax authorities, the price paid for the pellets in the controlled transaction was higher than the arm’s length price. The adjustment resulted in an assessment of additional taxable income. Not satisfied with the assessment Dart Sudamericana filed a complaint. Tax Court Ruling The court upheld the assessment issued by the tax authorities and dismissed Dart Sudamericana’s appeal. Excerpts “In short, the appellant merely tried to prove the similarity of the product in order to carry out the price comparison, which is not sufficient for a proper study of the comparability of the transactions. At the risk of being reiterative, the transactions should be analysed, not only the products being traded. Therefore, the tax authority is right – as stated above – in its challenge to the application of the Comparable Price Method between Independent Parties – CUP or Uncontrolled Price – as a method of price analysis for the importation of EPS pellets and the application – entirely in accordance with the position taken by the appellant in the 2003 period – of the Transactional Net Margin Method for the 2004 tax period. “ “…In this regard, and as the Tax Court rightly pointed out, the OECD Committee on Fiscal Affairs has stated in its report that multi-year data are useful for providing information about the relevant business cycles and product life cycles of comparables. Differences in the business cycle or product cycle may have a substantial effect on transfer pricing conditions that must be assessed to determine comparability. Accordingly, in order to gain a full understanding of the facts and circumstances surrounding a controlled transaction, it may be useful to examine data for both the year under review and prior years. This type of analysis may be particularly useful when using one of the profit-based methods, as is the case here. The facts and circumstances of the particular case will determine whether differences in economic circumstances significantly influence the price, and whether reasonably accurate adjustments can be made to eliminate the effects of such differences” (Vid. CNACAF, Sala I, “Volkswagen Argentina S.A.”, 26/12/2019. The emphasis is my own). In this context, it is noted first of all that it is not clear from the appeals made, both in administrative proceedings and before this Court, that the use of multi-annual data was due to differences in the economic cycle of the industry under test. Likewise, it has not been proven that the economic situation the country went through in 2001 and 2002 existed in the countries of the companies used for the comparability study. The experts say nothing in their reports on the issue, limiting themselves to stating that national legislation does not prevent the use of multi-annual data, which – as mentioned above – is not in dispute. Therefore, and considering that the inclusion of data from 2001 and 2002 would inevitably increase the differences in comparability with companies abroad, I consider that the tax authority is right.” Click here for English Translation Click here for other translation ...

Quaker Italia Srl is a non-exclusive distributor of Quaker products in Italy – lubricating oils and greases. It also carries out a minor manufacturing activity. An assessment was issued by the tax authorities in 2012 regarding the remuneration received for the distribution activities in FY 2007. The Tax authorities considered that the documentation provided by the company was contradictory and incomplete, and therefore recalculated the income using a (partially) different method (TNMM in the modified resale price version, instead of TNMM in the modified cost-plus version). This resulted in additional taxable income in the amount of Euro 1,180,447.00. A complaint was filed by Quaker with the Provincial Tax Commission. The Provincial Commission confirmed the legitimacy and effectiveness of the tax assessment. An appeal was then filed with the the Regional Tax Commission (CTR) of Lombardy. The Regional Tax Commission rejected the appeal and confirmed the first instance decision. An appeal was then filed by Quaker with the Supreme Administrative Court. Quaker contested the decision of the Regional Commission due to the absence of sufficient statement of reasons in the judgment. According to Quaker, the Regional Commission merely declared that it agreed with the arguments put forward by the Provincial Commission, without expressing its own assessment of the facts of the case and the grounds of appeal. In the appeal Quaker also claimed that the decision of the Provincial court should be considered null and void because of the irreconcilable conflict between the grounds and the operative part of the appeal. Judgement of the Supreme Administrative Court The Court upheld the grounds of appeal put forward by Quaker and remanded the case to the Regional Tax Commission for a new ruling. Excerpt “As a preliminary remark, it is worth mentioning that Quaker Italia Sri states that “the transfer pricing policy adopted by the Company, as well as its profitability in the fiscal year 2007, had to be considered at market values” (rie., p. 27), and the premise appears to be acceptable, adding, for the sake of clarity, that the expression “market values” appears to be equivalent, in the case at hand, to “normal value”, or “competition price”, expressions also used by the appellant in its argument. Now, the company decided to adopt the TNMM method of calculation in the modified Cost Plus version, and the tax authorities instead used the same TNMM method, but in the version of the modified resale price method. The stated reason for the Tax Administration’s choice is that the TNMM Cost Plus looks at company productivity, while the TNMM resale price method turns its attention to distribution activity, which Quaker Italia Sri carried out with great preponderance. The appellant opposes, however, that ‘the OECD Guidelines require auditors to follow, as far as possible, the method adopted by the company (rie., p. 32), and furthermore criticises the choice of the Tax Revenue Office to have carried out every assessment in consideration of the distribution activity, totally neglecting the production activity, which was also carried out by the company. It is also worth noting that, in its counter-affidavit, the Tax Administration reiterated the reasons why the calculation method adopted by the company led, in its opinion, to results deemed unreliable, and why it was therefore necessary to adopt a different one (counter-affidavit, p. 14). (…) 6.4. Indeed, in its decision, the CTR illustrates the objections made by the Revenue Agency to the taxpayer during the assessment, and reconstructs in extreme synthesis the course of the proceedings. It then examines with adequate breadth the main appeal brought by the Office in relation to the penalties, and the reasons why it considers it appropriate to uphold the annulment ruling made by the court of first instance. Only in the final part does the CTR then state that it adheres for the remainder to the ruling of the CTP, whose “reasoning was clearly explained both with regard to the adjustment of the costs, the subject of the contested act, and with regard to the non-application of the penalties. The appeals lodged by the parties do not in the least affect the contents and conclusions of the judgment under appeal” (CTR judgment, p. 5). 6.5. The criticisms put forward by the taxpayer appear well-founded. In fact, the judge is not precluded from proposing a reasoning per relationem, but it is nevertheless his duty to illustrate the reasons that lead him to consider correct and acceptable what was decided by another judge. This Court has already had occasion to clarify that “on the subject of tax proceedings, it is null and void, for breach of Articles 36 and 61 of Legislative Decree No. 546 of 1992, as well as of Article 118 disp. att. c.p.c., the judgment of the Regional Tax Commission which is completely devoid of any illustration of the objections raised by the appellant to the decision at first instance and of the considerations which led the commission to disregard them, and which merely gave reasons ‘per relationem’ to the judgment under appeal by mere adherence to it since, in that way, it remains impossible to identify the ‘thema decidendum’ and the reasons underlying the decision, and it cannot be held that agreement with the contested grounds was reached by examining and assessing the groundlessness of the grounds of appeal. (Applying this principle, the Court of Cassation annulled the judgment under appeal that had confirmed the first instance decision by merely referring to the content of that ruling and to the defence writings of one of the parties, in an entirely generic manner and without explaining the logical juridical path followed to reach its conclusions)”, Cass. sez. V, 5.10.2018, no. 24452 (conf. Cass. sez. VI V, 16.12.2013, no. 28113), and it did not fail to specify that “for the purposes of the sufficiency of the reasoning of the judgment, the judge cannot, when examining the facts of evidence, limit himself to stating the judgement in which his assessment consists, because this is the only “static” content of the complex motivational statement, ...

The German BASF group is active in the chemical industry and has subsidiaries all over the world including Italy. In FY 2006 BASF Italia s.p.a. was served with two notices of assessment by the tax authorities. The tax assessments formulated three findings. 1. non-deductibility of the cancellation deficit – arising from the merger by incorporation of Basf Agro s.p.a. into Basf Italia s.p.a., resolved on 27 April 2004 – which the acquiring company had allocated to goodwill, the amortisation portions of which had been deducted in tenths and then, from 2005, in eighteenths. The Office had denied the deductibility on the ground that the company, in the declaration submitted electronically, had not expressly requested, as required by Article 6(4) of Legislative Decree No. 358 of 8 October 1997, the tax recognition of the greater value of goodwill recorded in the balance sheet to offset the loss from cancellation, as allowed by paragraphs 1 and 2 of the same provision. Moreover, as a subordinate ground of non-deductibility, the assessment alleged the unenforceability to the Administration of the same merger pursuant to Article 37-bis of Presidential Decree No 600 of 29 September 1973, assuming its elusive nature. 2. non-deductibility of the annulment deficit – arising from the merger by incorporation of Basf Espansi s.p.a. into Basf Italia s.p.a., resolved in 1998 – which the acquiring company had allocated partly to goodwill and partly to the revaluation of tangible fixed assets, the depreciation portions of which had been deducted annually. The Office, also in this case, had denied the deductibility due to the failure to express the relative option, pursuant to Article 6(4) of Legislative Decree No. 358 of 1997, in the company’s declaration. 3. non-deductibility of interest expenses arising from a loan obtained by the taxpayer to carry out the transactions above. The Provincial Tax Commission of Milan partially upheld BASF’s appeals against the tax assessments, upholding the latter limited to the finding referred to in the second finding, concerning the non-deductibility of the cancellation deficit arising from the merger by incorporation of Basf Espansi s.p.a.. The Lombardy CTR, accepted the first and rejected the second, therefore, in substance, fully confirming the tax assessments. BASF then filed an appeal with the Supreme Court against the judgment, relying on seven pleas. The sixth plea related to lack of reasoning in the CTR judgement in regards of non-deductibility for interest expenses arising from the intra group loan. Judgement of the Supreme Court The Supreme Court found that the (first and) sixth plea was well founded and remanded the judgement to the CTR, in a different composition. Excerpts “7. The sixth plea in law criticises, pursuant to Article 360(1)(3) of the Code of Civil Procedure, the judgment under appeal for breach of Article 110(7) of Presidential Decree No 917 of 1986, in so far as the CTR held that the interest expense incurred by the appellant in connection with the loan obtained from another intra-group company for the purchase of the share package of Basf Agro s.p.a. was not deductible. The plea is well founded. In fact, the CTR reasoned on this point solely by stating that the deduction was ‘held to be inadmissible on the basis of the thesis underlying the contested assessment, that is, the intention to evade tax’. Such ratio decidendi is limited to the uncritical mention of the Administration’s thesis, which, however, as far as can be understood from the concise wording used by the CTR, does not relate to the financing in itself, but to the transaction, referred to in the first relief, in which it was included. A transaction whose evasive nature was not even appreciated by the CTR, the question having been absorbed by the non-deductibility, for other reasons, of the negative component arising from the merger by incorporation of Basf Agro.” Click here for English translation Click here for other translation ...

Reca Química is active in industrial production of paints and synthetic resins. Its parent company is H.B. Fuller which is based in the United States. According to the “Transfer Pricing Policy” set by the parent company of the group and in place since 1992, a 10% margin on sales was applied to inventory transferred between affiliates. However, during the fiscal periods 2003 and 2004, the parent company changed the policy so that sales to related companies abroad were to be made with a profit margin of only 5%, while for local affiliates and independent parties, the margin would be 10%. The tax administration issued an assessment in which the margin of all the controlled transactions was set at 10% resulting in additional taxable income of ¢185,827,941.00. According to the tax administration the 5% margin was not even enough to cover the operating expenses for the transactions in question. In 2015 the Administrative Court of Appeal ruled in favor of Reca Quimica due to formal grounds. However, the assessment was allowed to be issued again in accordance with the guidelines set out in the ruling. An appeal was then filed with the Supreme Court. Judgement of the Supreme Court The Supreme Court upheld the Judgement of the Administrative Court of Appeal, except for allowed claims in respect of the award of damages and interest, which was annulled. The Courts considered that the the authorities had made an error in motivating the adjustment on a presumed basis determination, without complying with the legal requirements established for this type of tax determination. Furthermore, they said that if transfer prices had been determined, the authorities should have applied the adjustment according to one of the methods established by the OECD on a certain basis, and not on a presumed basis. The judicial decision commits, in our opinion, a mistake. The five OECD methods are to determine whether or not there is transfer pricing. These methodologies are designed to examine whether prices between related parties are adjusted or not, to transactions in comparable circumstances between independent parties. But once it has been determined that there are transfer prices, what is appropriate is precisely to adjust them to prices under competitive conditions. The new price must then be set by the authorities, so that it is the basis for determining the corresponding tax obligations.” Excerpts “…this Chamber endorses the Court’s decision, insofar as it ruled that this discrepancy did not allow the use of the presumed basis method. Likewise, it considered, “…this allegation is fallacious, since using a margin in sales to related companies abroad different from that used in sales to other companies is not a true accounting irregularity or defect”. This is due to the fact that the accounting of the plaintiff could not be qualified as omissive, irregular and contradictory, since the taxpayer did not fail to provide information on its transactions, but rather, based on its reality, reported a different, -minor- profit in the transactions carried out with its related companies abroad (regardless of their normality), then the Administration should have applied the method of certain basis, via transfer prices.” “Hence, there is no doubt that what the Administration should have done was to determine, -by using transfer prices- whether the price at which it sold to its related companies abroad was dissimilar to the market price, but never to use, as it did, the estimate based on a presumptive basis. For, as explained above, the plaintiff provided in her declaration information on the price at which she sold to her related companies abroad. According to the OECD (Organisation for Economic Co-operation and Development), there are five approved transfer pricing mechanisms, namely, first, the comparable free price method. Second, the resale price method. Third, the cost plus method. Fourth, the net transaction margin method; and fifth, the profit split method. With regard to this point, Executive Decree no. 37898-H of 5 June 1998 is currently in force in the legal system. 37898-H of 5 June 2013, and at the time of the facts that are of interest in the sub-lite, Interpretative Guideline no. 20-03 was in force, -with support in regulations 8 and 12 of the TC-. The legality of that Guideline was ratified by the Constitutional Chamber since its decision no. 2012-04940 of 15 hours 37 minutes on 18 April 2013. Consequently, the Court rightly stated: “…-based on what was indicated by the Chamber and taking into account the erga omnes binding effect of the constitutional jurisprudence (article 13 of Law 7135)- there is no contradiction between the transfer pricing methodology and the application of the economic reality principle of paragraphs 8 and 12 of the CNPT, nor is there any impediment to resort to the former even in the absence of an express legal rule that incorporates it into the Costa Rican legal system”. Thus, in this case, contrary to what was argued by the Administration, none of the assumptions established in canon 124 of the TC were met, so as to empower it to apply the presumptive basis methodology (article 125 ibid); on the contrary, according to the information provided by the plaintiff in its tax return, what was relevant was the application of the transfer pricing methodology, through any of its five mechanisms, so as to arrive at the correct determination of the tax liability. By not doing so, it is clear, as the judges ruled, that the Administration acted illegally, given that it should have applied the certain base method, which, since it was dealing with a transfer pricing case, should have been examined in accordance with the technical regulations of the OECD, which was feasible in accordance with the legal system in force at that time. Therefore, the complaint should be rejected.” Click here for English translation Click here for other translation ...

Reca Química is active in industrial production of paints and synthetic resins. Its parent company is H.B. Fuller which is based in the United States. According to the “Transfer Pricing Policy” set by the parent company and in place since 1992, a 10% margin on sales was applied to inventory transferred between affiliates. However, during the fiscal periods 2003 and 2004, the parent company changed the policy so that sales to related companies abroad were to be made with a profit margin of only 5%, while for local affiliates and independent parties, the margin would be 10%. The tax administration issued an assessment in which the margin of all the controlled transactions was set at 10% resulting in additional taxable income of ¢185,827,941.00. According to the tax administration the 5% margin was not even enough to cover the operating expenses for the transactions in question. Judgement of the Administrative Court The court ruled in favour of Reca Quimica due to formal grounds. However, the assessment was allowed to be issued again in accordance with the guidelines set out in the ruling. Excerpts “In the view of the Court of First Instance, we are therefore faced with conduct which, contrary to what the applicant’s representatives allege in arguing that the plea does not exist, is vitiated by a partially inadequate statement of reasons, but which does not give rise to the defects of absolute invalidity pointed out by the applicant’s representatives. “The Court considers that the plea does exist, since, as indicated above, the evidence adduced in the file, including the evidence admitted for the purpose of a better decision, which refers to the consolidated financial statements of the applicant company, provides the Court with the certainty that […] sold at prices below cost […], and that […] sold at prices below cost […]. …] sold at prices below the cost of sales to its related companies, in the fiscal periods two thousand three and two thousand four, incurring in a practice (sic) that derived in a self-determining action on the part of the plaintiff company in which it established as the amount of its tax obligation, an amount lower than the amount that would have corresponded in the case of applying the market value. This is the cause or reason for the contested conduct, and it is precisely the factual assumption that served as a background for the Administration to issue the contested acts. Thus, although it is wrong to state as part of the reasoning that the taxpayer’s accounts are irregular and contradictory, the fact is that it is also expressly stated, and implicitly found throughout the content of the various contested decisions, that the reason for the administration’s intervention, and its unofficial determination action, was precisely the fact that the taxpayer’s accounts were irregular and contradictory, and that the taxpayer’s accounts were irregular and contradictory, was precisely the fact that it was able to determine the existence of related operations that, by selling at prices below the cost of sales, caused damage to the Treasury by reducing the size of the tax obligation of the taxpayer, conduct that is due to tax planning, and for which the law offers a solution through sections 8 and 12 of the Tax Code, as we will see below.” “Consequently, it was not possible in this hypothesis to resort to the determination by the presumptive basis method, and the partial annulment claimed in this respect had to be upheld. Indeed, in the opinion of the undersigned, the ATGC should have proceeded by the method of certain basis, which, since we are in a transfer pricing scenario, implied carrying out the corresponding analysis based on the technical rules of the OECD, mentioned above, which was perfectly possible based on the theoretical and legal framework set out in Interpretative Guideline number 20-03, already in force at the time. Although in the complaint the plaintiff claims that the content and justification of the aforementioned Guideline is erroneous and even illegal, the fact is that it does not challenge it, so that there is no impediment in this respect, particularly in light of the related constitutional ruling.” “The legal situation of the plaintiff is restored to the date on which the first of the contested acts was issued, so that if it is legally appropriate, the Tax Administration may issue it again, in accordance with the guidelines set out in this ruling.” Click here for English translation Click here for other translation ...

SC Enviro Agro India is a manufacturer of household insecticides and pesticides and had entered into a technology license agreement with a related party – SCCL Japan – and it also purchases the requirement of intermediates from the said company only.  In the years in question, it has purchased intermediates and sold the products to the entities that approved by the SCCL. One of the company to whom most of the products were sold was SCI, a 100% subsidiary of SCCL. In the transfer pricing report SC Enviro Agro India stated that the arrangement with SCCL and SCI was in the nature of contract manufacturing. Following an audit, the tax authorities accepted the price paid/received as arm’s length price for purchase of insecticides and pesticides, intermediates from SCCL and sale of insecticides and pesticides to SCI. But in regards of the royalty payment of 5% to SCCL as per the technology license agreement, the authorities were of the opinion that since the purchase and sales are only from/to associate concerns and not to anybody else, there is no commercial exploitation of technical knowhow. SC Enviro Agro India was nothing but contract manufacturing and as such there was no basis for payment of royalty. Accordingly, deductions for royalty payments were disallowed in assessment year 2003-04 and assessment year 2004-05.  SC Enviro Agro India submitted that it has not paid royalty on entire sales price, but only on the value addition made to the intermediates purchased from the principal company, therefore, no royalty was paid on purchase cost of the raw material and only on the value addition. Furthermore, details of sales made to outside parties i.e. third parties was submitted so as to counter the observations that it has sold only to the related parties. On that basis the tax authorities allowed royalty payment on the sales made to third parties and reduced the assessment. An appeal was filed by SC Enviro Agro India in which it stated that since it had obtained technical knowhow from SCCL, 5% royalty on the entire value addition made should have been allowed rather than restricting to sales made to third parties. SC Enviro Agro India also stated that it was not a contract manufacturer. It was also further stated that since royalty was paid at 5%, it could not be disallow since it was within the safe harbor range of (+)/(-) 5% Judgement of the Court The Court decided in favour of SC Enviro Agro India and dismissed the assessment issued by the tax authorities. Excerpts “…Till assessment year 2003-04 there was no dispute with reference to the payment of royalty and even in the original assessment completed the royalty was allowed as eligible expenditure in the order under section 143(3). In assessment year 2004-05 this issue for the first time was examined by the TPO on the basis of the TP report of assessee wherein assessee submitted that the arrangement is in the nature of contract manufacturers in the FAR analysis. Since this was admitted by assessee, the TPO without examining the nature of agreement or the manufacturing activity of assessee or any other incidental factor came to a conclusion that since assessee admitted to be a contract manufacturer, there is no need to pay any royalty. In his order the TPO also mentions that assessee was not making any sales to outside parties, the fact of which is not correct. On the basis of his observations, he arrived at the royalty arm’s length price at Nil.” “The TPO has to examine whether the price paid or amount paid was at arm’s length or not under the provisions of Transfer Pricing and its rules. The rule does not authorize the TPO to disallow any expenditure on the ground that it was not necessary or prudent for assessee to have incurred the same. On that principle alone, we cannot approve the order of the TPO as it not only considered the facts wrongly but also exceeded the jurisdiction available to the TPO in examining the arm’s length price on a transaction.” “Even though admittedly assessee mentioned in the TP report that the arrangement is in the nature of contract manufacturing, the facts indicates otherwise. The royalty was paid as per the agreement on the value-added price to the SCCL for providing the license and technical knowhow. This payment is independent of whether assessee is full fledged manufacturer or a contract manufacturer or a toll manufacturer and the nature of manufacturing activity cannot have any bearing on the payment of royalty. “ “Since we do not find any reason to restrict the royalty to Nil, we are not in a position to approve the order of the CIT (A) on this issue. Without going into the nitty-gritty of determining whether assessee is a contract manufacturer or a full-fledged manufacturer, since royalty is paid for allowing assessee in utilizing the technical knowhow and the license for manufacturing activity, we are of the opinion that the payment of royalty is wholly and exclusively for the purpose of business. In view of this, we allow assessee’s ground and direct AO to allow the royalty as claimed.” ...