The Revenue raised an additional assessment on gain received from the transfer of technical know-how by Keysight Technologies to Agilent Technologies International for the amount of RM821,615,000.00 being income under section 4(f) of the Income Tax Act 1967 (ITA 1967) together with the penalty under section 113(2) ITA 1967. The Revenue contended that subsection 91(3) of the ITA 1967 provided that the Revenue may issue an assessment after the expiration of the time period of 5 years on grounds of fraud or willful default or negligence. The findings of negligence on the part of Keysight Technologies include failure to support the claim that the gain from the transfer of technical knowhow (i.e. the marketing and manufacturing intangibles) by Keysight Technologies to Agilent Technologies International was an outright sale and failure to furnish the document and information as requested by the Revenue in the audit letter on the valuation of the marketing and manufacturing intangibles. The Revenue found that there was no proof of outright sale of the technical know-how as the Intellectual Property (IP) Agreement and Manufacturing Services (MS) Agreement showed no evidence that the legal rights had been transferred to ATIS since the agreements merely stated of the transfer of beneficial rights. Further, facts have shown that the technical know-how was still used by Keysight Technologies in a similar manner prior to and post the IP Agreement and MS Agreement. Instead, the gain of RM821,615,000.00 million was proven to represent the future income that would have been received by Keysight Technologies for the years 2008-2015 should Keysight Technologies continue to carry out its function as a full-fledged manufacturing company of which the function had subsequently changed to being a contract manufacturing company due to the group’s global restructuring exercise. As such, the gain was taxed as other income under section 4(f) ITA 1967. Keysight Technologies argued that the Revenue was time-barred under section 91(1) ITA 1967 from issuing the Notice of Additional Assessment for YA 2008. Keysight Technologies also argued that the sale of marketing and manufacturing intangibles by Keysight Technologies to Agilent Technologies International was capital in nature and therefore should not subject to tax under section 4(f) ITA 1967. The “badges of trade test” would be applicable in determining whether the income was revenue or capital in nature. Judgment The Court of Appeal overturned the SCIT and the High Court dicisions and allowed Keysight Technologies’ appeal. The Court of Appeal affirmed the application of the “badges of trade” test as argued by Keysight Technologies in determining whether the income was capital or revenue in nature and the test was not confined to disposal of land. The “Badges of Trade test” considers several factors; Subject matter of the transaction, Period of ownership, Frequency of transactions, Alteration of property to render it more saleable, Methods employed in disposing of property, Circumstances responsible for sale. The Court of Appeal held that Keysight Technologies was not in the business of buy and sell of IP and the IP was not its stock in trade. No special effort had been made by Keysight Technologies to attract purchasers. The transfer of technical know-how was due to global restructuring of the group of the company. The Court of Appeal further held that there had been an actual sale by way of agreement. The title to technical know-how was not registrable due to protection of confidential information. The outright sale test thus was not a proper test and the valuation report as requested by the Revenue was irrelevant. There was no failure on the part of Keysight Technologies to adduce valuation report as it was not requested during audit. Thus, there was no negligence and hence the additional assessment was time-barred. Keysight Technologies’ appeal was allowed with cost of RM20,000 to be paid by the Revenue to Keysight Technologies. Click here for translation ...

The Mahou (SAN MIGUEL) S.A Group is active in brewing and sale of beers. Penibética de cervezas y bebidas SL and Andaluza de cervezas y bebidas SL are wholly owned by Cervezas Alhambra SL, which again is owned by MAHOU (SAN MIGUEL) S.A. The main activity of Cervezas Alhambra SL is the distribution and marketing under its own brands of the beer produced by its subsidiaries; that of Penibética de Cervezas y Bebidas SL is the production of beers which, without its own brand, are mainly distributed and marketed by Alhambra and the core activity of Andaluza de Cervezas y Bebidas S.L. is the manufacture of beers which, without its own brand, are distributed and marketed by Alhambra. In 2014, the tax authorities issued two tax assessments to the group: one in relation to FY 2008 and 2009, in the amount of €12,303,526.50 an another in relation to FY 2010, 2011, in the amount of €4,951,701.39. Among the issues raised in these assessments was transfer pricing. The CUP method used by the company was rejected by the tax authorities who instead applied the TNMM method. The tax authorities considered that the pricing of the sales made by Penibética de Cervezas y Bebidas S.L and Andaluza de Cervezas y Bebidas S.L to Cervezas Alhambra SL had been below market price, which could be due to fiscal reasons as the higher taxable income in Cervezas Alhambra SL could be offset by losses from previous years. Dissatisfied with the tax assessment Mahou S.A. filed a complaint which resulted in a decision in favour of the tax authorities. This decision was then appealed to the Audiencia Nacional. Judgement of the Court The National Court dismissed the appeal of Mahou in regards of transfer pricing and upheld the assessment of the tax authorities. Excerpts “As mentioned above, Cervezas Alhambra SL had significant BINs pending offsetting; they were generated in 1996 and subsequent years and at the start of the verification period amounted to 47,485,324.63 euros. And in the years 2010 and 2011 the declared tax bases of Cervezas Alhambra SL amounted to 8,953,184.43 euros and 8,213,717.51 euros. Tax Group 612/09, in which the related parties are taxed, has made the following offsets of tax losses from Cervezas Alhambra SL in years prior to its inclusion in the consolidated group: 2,884,427.23 euros (year of generation: 1996) 6,068,757.20 euros (year of generation. 1997) 2011: 6,781,618.18 euros (year of generation: 1997). Well, in the settlement, as a result of applying the TNMM to the transactions between related parties, the declared operating results are readjusted, increasing the results and bases declared by Penibética de Cervezas y Bebidas SL and Andaluza de Cervezas y Bebidas S.L in 2010 by €1,314,040 and €1,556,860 respectively, and correspondingly reducing the operating result and taxable base of Cervezas Alhambra SL in 2010 by €2,870,900. And here the problem lies in determining which is the (most appropriate) method for establishing the price of related-party transactions. Of the methods regulated in Article 16.4 TRLIS, the dichotomous positions in conflict here are, on the one hand, the CUP method, maintained by the appellant, and, on the other, the TNMM method applied by the Inspectorate. First of all, in the financial year prior to 2010, the TNMM was used to determine the transfer prices between related parties, although it is fair to recognise that in that year the transactions between Cervezas Alhambra and its subsidiaries were not included, since the fiscal group 612/09 had its first financial year in 2010. Be that as it may, Mahou, S.A. provided the Inspectorate with a series of transfer pricing reports of the companies of the group prior to the financial year 2010 carried out by Ernst & Young (manufacture of Cervezas Alhambra S.L. by Mahou S.A. and with San Miguel, Penibética de Cervezas y Bebidas S.L. with San Miguel, Cervezas Anaga S.A. with Mahou and San Miguel, purchase of Mahou branded beers and other brands manufactured by San Miguel and Cervezas Anaga and sale of beers manufactured by Mahou under the San Miguel brand to San Miguel and purchase of own branded beers manufactured by related entities and other brands manufactured by San Miguel and Cervezas Anaga and sale of own branded beers to related entities and sale of Mahou branded goods manufactured by Mahou S. A.) and in all of them the sale of Mahou branded goods manufactured by Mahou S. A. to San Miguel and sale of Mahou branded goods to San Miguel and sale of Mahou branded goods manufactured by San Miguel and Cervezas Anaga S.A. to San Miguel. A.) and in all of them the TNMM was used as it was considered the most appropriate to assess whether the brewing activities are in line with the arm’s length principle, using as an indicator of profitability the operating margin on total costs, selecting the brewing companies as the tested party. As regards the comparables used, Alhambra and Penibética use the AMADEUS and SABI databases, selecting five comparable European brewing companies, using data for 2006, 2007 and 2008. Well, even hypothetically admitting that the use of the TNMM in previous years cannot condition the valuation of the transactions between Cervezas Alhambra and its subsidiaries because in those years they were not included and therefore were not analysed in the reports, we must agree with the Inspectorate that with the information available this is the methodology that allows the transfer prices of brewing operations to be assessed, while the use of the CUP method is unacceptable. In fact, in the report A-02 (in section A.3.d) as well as in the non-conformity report (3.3 d/) and in section 4 of the pricing report of the operations of Penibética, Andaluza and Alhambra, the reasons for opting for this method are sufficiently justified, having used to select the comparable samples those that meet the requirements of activity and independence in accordance with the OECD guidelines obtained from the internationally accredited AMADEUS database. At the same time, the Inspectorate rejects the CUP method in ...