SA Exel Industries marketed its products abroad through subsidiaries or independent agents, depending on the territory. In Brazil, India, Argentina, Russia and Portugal it sold its products through subsidiaries under either a buy/sell distributor agreement or a commissionaire agreement. In Iran, Turkey and South Korea it sold through independent agents to whom it paid a commission. The tax authorities considered that the commission paid to the independent agents was a CUP and determined the commission paid to the subsidiaries on that basis. The remuneration of the subsidiaries in excess of the commission (margin) paid to the independent agents was considered to be a transfer of profits abroad. SA Exel Industries appealed against this assessment, arguing that the subsidiaries performed much more important functions than independent agents. It also argued that there were significant market differences, since the subsidiaries operated in highly strategic markets where the major car manufacturers were dominant, while the other markets in which the independent agents operated were anecdotal. The Administrative Court dismissed the appeal and the case was then brought to the Administrative Court of Appeal. Judgement of the Court The Court upheld the decision of the Administrative Court and dismissed SA Exel Industries’ appeal. Excerpt “4. In order to justify the higher amount of remuneration paid to the subsidiaries of the group it heads, compared with the amount paid to independent local intermediaries, SA Exel Industries argues that the geographical markets in which the subsidiaries operated are fundamentally different from those in which the third-party sales agents operated, since they are highly strategic in that they are home to large car manufacturers, whereas the other markets are anecdotal, The subsidiaries responded to major invitations to tender, whereas the local sales agents were involved only in the supply of spare parts and small equipment, and the subsidiaries provided additional marketing, after-sales service, on-site assembly and testing of equipment, and assistance with the collection of debts, as evidenced by the significant human resources at their disposal. 5. Although the turnover achieved in Iran, Turkey and South Korea was generally lower than that achieved through the subsidiaries, it does not appear from the investigation that the characteristics of these markets justify the differences in the remuneration paid to the subsidiaries and to the independent intermediaries, since the turnover achieved by the subsidiaries is not systematically higher than the turnover achieved through independent sales agents. Even supposing that the composition of turnover achieved through independent sales agents is different from that achieved through subsidiaries, the latter including more sales of large equipment through tenders and fewer sales of spare parts and small equipment, which is not apparent from the investigation in the case of certain subsidiaries, it is common ground that the remuneration of independent sales agents does not take account of the nature of the products and equipment sold, since it is invariably set at 20% of turnover, and that the remuneration paid to subsidiaries is, irrespective of the nature of the products, equivalent to the amount of the discount they would have received if they had acted as a buyer-reseller. Finally, it is not apparent from the documents in the files that the services provided by the independent intermediaries are significantly less substantial than the services provided by the subsidiaries in their intermediation activity alone. The mere fact that the subsidiaries have greater material and human resources is not sufficient to presume, in the absence of documents in the file to that effect, that those resources were used in the context of the latter activity. It follows that, contrary to what is maintained, it does not follow from the investigation that the differences in remuneration between subsidiaries and intermediary agents can be explained by the different situation of those suppliers. Although the applicant company argues that the commissions paid to the subsidiaries take account of the margin which they would have made on a purchase/resale of the same product, such an argument is not such as to justify the abovementioned differences in remuneration between the economic agents belonging to the group and those outside it, since they are involved in the same intermediary activity, which is different from the purchase/resale activity. The various doctrines referred to, which are not expressly invoked on the basis of the provisions of Article L. 80 A of the Book of Tax Procedures, do not interpret the tax law differently from the above. 6. It follows that the tax authorities must be regarded as establishing, under the conditions referred to in point 3, the existence of an advantage, and were entitled to reintegrate it into the results of the French company, as the latter did not justify that this advantage would have had at least equivalent counterparts for it.” Click here for English translation Click here for other translation ...

The facts are the same as in Example 5, except that Product X is branded with a valuable trademark that is owned by P. A, B, and C distribute unbranded competing products, while D and E distribute products branded with other trademarks. D and E do not own any rights in the trademarks under which their products are sold. The value of the products that A, B, and C sold are not similar to the value of the products sold by S. The value of products sold by D and E, however, is similar to that of Product X. Although close product similarity is not as important for a reliable application of the resale price method as for the comparable uncontrolled price method, significant differences in the value of the products involved in the controlled and uncontrolled transactions may affect the reliability of the results. In addition, because in this case it is difficult to determine the effect the trademark will have on price or profits, reliable adjustments for the differences cannot be made. Because D and E have a higher level of comparability than A, B, and C with respect to S, pursuant to § 1.482-1(e)(2)(ii), only D and E may be included in an arm’s length range ...

Effect of Geographic Differences. FM, a foreign specialty radio manufacturer, sells its radios to a controlled U.S. distributor, AM, that serves the West Coast of the United States. FM sells its radios to uncontrolled distributors to serve other regions in the United States. The product in the controlled and uncontrolled transactions is the same, and all other circumstances surrounding the controlled and uncontrolled transactions are substantially the same, other than the geographic differences. If the geographic differences are unlikely to have a material effect on price, or they have definite and reasonably ascertainable effects for which adjustments are made, then the adjusted results of the uncontrolled sales may be used under the comparable uncontrolled price method to establish an arm’s length range pursuant to § 1.482-1(e)(2)(iii)(A). If the effects of the geographic differences would be material but cannot be reliably ascertained, then the reliability of the results will be diminished. However, the comparable uncontrolled price method may still provide the most reliable measure of an arm’s length result, pursuant to the best method rule of § 1.482-1(c), and, if so, an arm’s length range may be established pursuant to § 1.482-1(e)(2)(iii)(B) ...