SAS Itron France (a manufacturer and distributor of water, electricity and gas meters) was the subject of a tax audit for the financial years 2012 and 2013, which resulted in an assessment. The tax authorities considered that the transfer pricing applied by the group had resulted in an understatement of taxable income in France and a transfer of profits to a Hong Kong-based distributor of the group. An appeal was filed by SAS Itron France and in a ruling handed down on 2 December 2021, the Administrative Court annulled the assessment. The tax authorities filed an appeal against this ruling. Judgement of the Court The Administrative Court of Appeal dismissed the appeal and decided in favor of SAS Itron France. Excerpt in English “…In order to calculate the transfer price to be set by SAS Itron France in its relations as a producer with its group distributors, the tax authorities followed the profit-sharing method defined at group level, applicable to relations between its various entities, and, after a functional analysis of the company and taking into account the respective contribution of the producer and distributor to the costs and risks for each of the eight functions defined and for each of the three main product lines (water-gas-electricity), it finally retained a distribution of the margin between producers and distributors of 53% and 47% respectively for the “gas” product line and 51% and 49% for the other two lines. By comparing the respective turnover of SAS Itron France as a producer and that of the group’s foreign distributors relating to sales of SAS Itron France products, it estimated that the respondent’s turnover as a producer, determined by applying a cost-plus method with margin rates differentiated according to product category, ranging from 14% to 35%, showed that SAS Itron France’s profit was insufficient in relation to the overall margin sharing targets (producer and seller) mentioned of 51% or 53%, constituting an advantage within the meaning of Article 57 of the General Tax Code. It also noted that no correction, as provided for by the transfer pricing method at group level, had been implemented. In the absence of any alleged quid pro quo, and despite the adjustments determined on appeal in respect of the benefits granted to SAS Itron France by certain group companies and the neutralisation of benefits granted to distributors in an amount of less than 30,000 euros, the tax authorities consider that they have demonstrated the undervaluation of transfer prices to the detriment of the company as a producer, and the undue reduction in its tax base. 5. However, it appears from the investigation that, in order to reconstitute the transfer prices between SAS Itron France as a producer and its other partners, distributors, in the Itron group, the tax authorities used, on the one hand, the margin of the distributing entities after deducting the sale price of SAS Itron France’s products, without taking into account the distributor’s own operating expenses (cost of discounting ; commissions paid to agents; rebates and discounts; product shipping costs; insurance costs incurred in transporting products; customs duties; product packaging costs), even though these expenses contribute to the distributors’ share of the Group’s net margin to which they should be entitled. On the other hand, it deducted their direct expenses from the margin of the manufacturing entities, including SAS Itron France, to which the gross margin rates mentioned in the previous point apply under the cost plus method. Without calling into question the parameters used by SAS Itron France to determine its transfer prices as a producer (costs used and margin rates mentioned, determined within an arm’s length interval), it thus carried out a comparison of different margins, gross for the distributing entities and net for the producing entities. If, as stated in point 3 of this judgment, the existence of a shortfall in the net margin accruing to the producer, compared with the net margin target assigned to it under the profit split method defined at group level, is likely to give rise to a presumption of the existence of an advantage granted by the producer to the distributors within the meaning of Article 57 of the General Tax Code; in the present case, as its criticism of the calculation of the net margins of SAS Itron France was unfounded, the administration did not establish the existence of such an advantage. 6. Furthermore, although the tax authorities maintain that SAS Itron France’s documentation setting out the group’s transfer pricing policy requires adjustments to be made in the event of a significant difference between the transfer price resulting from this method and the economic reality, such adjustments, as the respondent points out, are provided for only in exceptional circumstances and under a procedure that derogates from the cost-plus method. According to appendix 5 of the document on the group’s transfer pricing method provided by SAS Itron France, they are lawful only in the presence of an exceptional flow of a regular amount, i.e. over a period of time, and if three conditions are met: existence of new markets or invitations to tender; existence of a turnover exceeding 10% of the distributor’s revenue; existence of a variation in the distributor’s turnover of at least 500,000 euros. In this respect, it is not clear from the investigation that exceptional circumstances of the kind mentioned above arose during the period in dispute, requiring an adjustment to the margin charged by Itron France. Consequently, the tax authorities have not provided any evidence that the adjustments should have been made in order to justify the appropriateness of the method used and the resulting transfer prices. 7. In view of the foregoing, the plea that the pricing method defined at group level was wrongly disregarded in favour of the cost-plus method applied by SAS Itron France has no bearing on the outcome of the present dispute.” Click here for English translation Click here for other translation ...

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A range of figures may also result when more than one method is applied to evaluate a controlled transaction. For example, two methods that attain similar degrees of comparability may be used to evaluate the arm’s length character of a controlled transaction. Each method may produce an outcome or a range of outcomes that differs from the other because of differences in the nature of the methods and the data, relevant to the application of a particular method, used. Nevertheless, each separate range potentially could be used to define an acceptable range of arm’s length figures. Data from these ranges could be useful for purposes of more accurately defining the arm’s length range, for example when the ranges overlap, or for reconsidering the accuracy of the methods used when the ranges do not overlap. No general rule may be stated with respect to the use of ranges derived from the application of multiple methods because the conclusions to be drawn from their use will depend on the relative reliability of the methods employed to determine the ranges and the quality of the information used in applying the different methods ...