Neopost Italia s.r.l. had paid service fees and royalties to its French parent. Following an audit, deductions for these intra-group transactions was adjusted by the tax authorities due to non compliance with the arm’s length principle and lack of documentation. However, for the purpose of determining an arm’s length remuneration a benchmark study had been performed by the tax authorities in which one of the comparables was not independent. The Court of Appeal upheld the decision of the tax authorities. Judgement of the Supreme Court The Supreme Court set aside the decision of the Court of Appeal and remanded the case to the court of first instance. In regards to the comparable company in the benchmark that was not independent, the Supreme Court found that: “it is entirely arbitrary, in comparing the two companies, to assert that the price charged by one of the two is the market price while the other is not”; this is a ruling that affects the unlawfulness of the method used by the Office (or, rather, the identification of the comparator), which is a prerequisite for the tax assessment.” In regards to the plea of “failure of the Court of Appeal to examine decisive facts of the case” the Supreme Court found that this was not grounds for setting aside a judgement: “…failure to examine the evidence does not in itself constitute a failure to examine a decisive fact if the historical fact relevant to the case was nevertheless taken into consideration by the court, even though the judgment did not take account of all the evidence. “…the reasoning, albeit brief, exists and is legitimately made by reference to the judgement of the first instance, while the impeachment does not even identify the historical fact whose examination was omitted by the appeal judge.” Click here for English translation Click here for other translation ...

In regards of transfer pricing A. SA had two activities – production of dairy products and distribution of milk – that had been subject to an audit by the tax authorities which resulted in an assessment of additional taxable income. The transfer pricing assessment had been upheld by the court of first instance and A. SA then filed an appeal to the Supreme Court. In regards of production activities the main criticism by A. SA was that the tax authorities had replaced one market price with another price considered convenient by tax authorities, without legal basis, although the tax inspection accepted the list of companies and comparable transactions for all three sections of the file. The judge of the merits did not motivate his choice in law and supports the maintenance of the median according to the RIF, but does not specify how he reached this conclusion, the data for which the cost plus method is substituted and the legal grounds are not analysed. In regards of distribution activities the criticism was that the forensic accountant reached the same conclusion as the company under review, but the court did not retain it, stating that it would require the tax authority to request a change in the transfer pricing file. The court also noted that the expert “commented lapidarily” in his analysis and in his conclusion. It considers that the court’s conclusion to rely strictly on the tax authority’s interpretation is erroneous, since the tax authority does not regularly carry out price analyses on affiliated companies in the geographical area in which the company is located. In practice, as long as the tax body cannot be suspected of having business ideas, it also follows that the tax body cannot correctly and consistently analyse pricing in an independent market as well as in a controlled market; in the present case, however, the method was chosen by the tax inspectorate with the intention of maximising the amounts set for additional payment, without taking into account, as it should have, the objective factors and the legal provisions applicable in the case, which were interpreted erroneously, without taking into account the principles of the OECD Guidelines. The tax body has access to databases on transfer pricing practices within the ANAF central unit. In this respect, the query of the database by the tax authority is absolutely necessary in order to determine both the transfer pricing method and the prices charged, and not the arbitrary determination of a random method without any reasoning. Judgement of Supreme Court The Supreme Court dismissed the appeal of A. SA and upheld the decision of the court of first instance. Excerpts “7.3.3.1. Production activity. The main criticism on this aspect concerns the re-framing of all market prices in the comparison range with the median price. The tax authority removed two companies from the comparison list which did not meet the independence criteria and calculated separately for each of the years under review at the median level resulting from this recalculation. The first court held that the tax authority correctly referred to the median resulting from the comparison of the 4 companies that met the independence criteria and did not make an estimate in accordance with Article 3 of OPANAF No 222/2008, since formally, F. met the conditions to be used for the price comparison, but the median resulting from the analysis of the 6 companies is different from the one resulting from the removal from the comparison of the companies that did not meet the independence criteria, and the new C. pen. The new C.C. had been established in the abstract, ignoring the above calculation formula. In accordance with Article 2 of Order No 222/2008 on the contents of the transfer pricing file: “(1)The margin of comparison is the range of price or profit values for comparable transactions between comparable independent companies. (2) For the determination of extreme values, the comparison margin shall be divided into 4 segments. The maximum and minimum segments represent the extreme results. For the purpose of determining the comparator range, the extreme results within the comparator range will not be used. (3) If the transfer price consideration established by the taxpayer is not included in the comparison range, the competent tax authority shall establish the median value as the transfer price at market price. The median value shall be the value which is in the middle of the comparison range. (4) If the median value cannot be identified, the arithmetic mean of the two middle values of the comparison range shall be taken. (5) The benchmarking will consider territorial criteria in the following order: national, European Union, international.” The tax authority justified the measure taken by the fact that the adjustment occurred in the case of years for which the indicator in question was found to be lower than the minimum limit of the quartile range, and that applying the calculation of the adjustment to the median of the quartile range is correct and logical, because just as the indicator in question can have values lower than the median, so it can also have values higher than the median. The High Court finds that the first court applied the law correctly, validating the measure ordered by the tax authority. The applicant’s claim that the tax inspection team accepted the list of companies and comparable transactions for all three sections (concerning the activity of selling raw milk as a raw material, concerning the activity of producing dairy products and concerning the activity of distributing goods) cannot be upheld, so that it was not necessary to apply the median value for the transfer price at market price. The acceptance referred to by the tax authority concerned only the fact that the transfer pricing file submitted to the tax inspection met the minimum requirements in terms of content (comparative lists, calculation of profit indicators for the companies included in those lists, information from the accounting records). Otherwise, a tax audit would be pointless if the actual handing over ...