“Tobacco S.A.” is the parent company of a group active in the tobacco industry. C. SA is a subsidiary of the group and operates as a toll manufacturer (Toller) on behalf of another subsidiary, B S.A. For the manufacturing services provided C S.A receives a “toll fee” from B S.A. According to the manufacturing service agreement the toll fee is calculated, based on Toller’s production costs plus and the capital invested by Toller in the production. Following an audit the tax authorities issued an additional assessment of corporate income tax and compensatory interest, relating to FY 2009, in the amount of EUR 1,395,039.79. The tax authorities considered that i) to correct the value of the production costs of the year 2009, in the amount corresponding to the deduction of the income with the “Write Off” of several credit balances of third parties over the company, since these deductions were not provided for in the contract; ii) to correct the value of the return on invested capital [which in the contract and also in the sentence is designated by the acronym ROCE] because the rules of the contract for its determination were not respected, which resulted in a lower remuneration by C. S.A. and in a cost saving by its contractual counterpart, leading to a result that is not compatible with the arm’s length principle. An appeal was filed against the assessment, but the tax tribunal of Lisbon dismissed the appeal and upheld the assessment. An appeal was then filed with the Supreme Administrative Court. Tobacco S.A. claimed that it did not in any way breach the contract for the provision of production services as it applied the POC rules when calculating the toll fee. Thus, it must be concluded that the correction made by the Tax Authority and confirmed by the Court of Appeal and which is claimed to be exclusively based on the incorrect interpretation of the contract by the Appellant is illegal due to the violation of the law. Moreover, according to Tobacco S.A, the tax authorities made an error on the assumptions, since it corrected the calculation of the value of the return on invested capital based on different rules from those which, in its interpretation, result from the contract. The appellant had made the calculations according to the statutory accounts (POC accounts), in compliance with the provisions of Annex B to the contract, and the Tax Authorities decided to correct those values by applying the values contained in Annexes C and D (US GAAP accounting classifications), which, according to the appellant, have the sole function of “allowing uniform intra-group reporting, essentially of a management nature”. “(…) as to the corrections to the ROCE, in the amount of €2,965,761.08, the appellant claims that, by disregarding the POC accounts and considering the US GAAP accounts, the Tax Authorities followed an understanding that does not prove to be correct and is distant from that provided for in the agreements entered into. Judgement of the Supreme Administrative Court The Supreme Administrative Court dismissed the case, as it considered to lack jurisdiction in regards to a judgment on the factual matter. The case was therefore officially transferred to the South Administrative Central Court. Excerpt “… Therefore, the Supreme Administrative Court is reserved the role of a review court, with intervention only in cases where the matter of fact in dispute in the case is stabilised and only the law remains under discussion. In order to assess the competence of the Supreme Administrative Court on the grounds of hierarchy, it is necessary to consider, in principle, only the content of the conclusions of the appeal statements (since these define the object and delimit the scope of the appeal – cf. It is necessary, in principle, to look only at the content of the conclusions of the appeal statement (since the object and scope of the appeal are defined by those conclusions – see Article 635 of the CPC) and check whether, in the light of those conclusions, the questions in dispute are resolved exclusively by applying and interpreting legal norms or whether, on the contrary, consideration of them implies the need to settle questions of fact (either because the appellant maintains that the facts presented as proved in the judgment have not been proved, or because he disagrees with the conclusions of fact to be drawn from them, or, still, because he invokes facts which have not been presented as proved and which are not, in the abstract, irrelevant for the judgment of the case). But not only this, it may also be necessary to compare the conclusions with the very substance of the allegations in the appeal, in particular to check whether they expressly contradict the facts on which the decision is based. And if the appellant raises any issue of fact, the appeal will no longer be based exclusively on points of law, and the competence of the Central Administrative Court will be defined from the outset, regardless of the possibility that this Court may eventually conclude that the disagreement on the factual issue is irrelevant for the decision of the appeal. However, the problem, in this case, of the correct interpretation of the contractual clauses on the basis of which the accounts (the accounting system) that are to serve as the basis for the calculation of the taxable amount are defined, is still a matter of fact. Although it is accepted that it may be qualified as a mixed matter (of fact and law), as it involves, on the one hand, the interpretation of the will of the contractual parties in determining the accounts that they intended to use in the calculation of the taxable amount for the purposes of taxation in Portugal of C……… (factual judgment) and, on the other hand, the normative interpretation of the contractual and legal clauses that define the arm’s length principle in the scope of legal transactions between persons that are in a special relationship with each other (transfer pricing), the truth is ...