ST Microelectronics Pvt. Ltd. is a subsidiary of ST Microelectronics Pte. Ltd. which in turn is a wholly owned subsidiary of ST Microelectronics NV, Netherlands. ST Microelectronics Pvt. Ltd. is into the business of Integrated Circuit Design, CAD Tools and software development for its overseas group concerns. It also provides marketing support services to a group company and software development services related to design implementation and maintenance with respect to Integrated Circuits as required by guidelines/instructions. During the year under assessment, the taxpayer entered into various transactions with its Associated Enterprises. In order to benchmark its international transactions qua provision of software development services and qua provision of marketing support services ST Microelectronics used Transactional Net Margin Method (TNMM) with Operating Profit/Operating Cost as the Profit Level Indicator (PLI) being the Most Appropriate Method (MAM), computed its own margin at 11.11% as against weighted average arithmetic mean margin of 19 comparables at 11.31% and found its international transactions at arm’s length. The Transfer Pricing Officer by applying qualitative and quantitative filters finally selected 13 comparables and computed their margin at 23.20% and thereby computed the adjustment of Rs.38,30,91,011/-. The taxpayer carried the matter before the Disputes Resolution Panel by way of filing objections who has excluded one comparable and included another comparable in the final list which resulted in a margin of 21.53%. On that basis the adjustment was revised to Rs.33,01,81,949/-. ST Microelectronics filed an appeal with the Income Tax Tribunal. Judgement of the Tribunal The Tribunal allowed the appeal filed by ST Microelectronics. Click here for other translation ...

LCF Zimbabwe LTD manufactures cement and similar products from limestone extracted at a mine in Zimbabwe. It also manufactures adhesives and adhesive paints and decorative paints, construction chemicals and agricultural lime. It is a wholly owned subsidiary of a large European group, which manufactures and sells building and construction materials. The issues in this case concerned tax deductibility of “master branding fees”, consumable spare parts not utilised at the tax year end, quarry overburden expenses and computer software. Furthermore there were also the question of levying penalties. Judgement of the Tax Court The Court decided in favour of the tax authorities. Excerpts: “The corollary to the finding of indivisibility is that the disallowance by the Commissioner of the 1.5% master branding fees of US$ 863 252.70 in the 2012 tax year and US$ 1 140 000 in the 2013 tax year was correct while the split of the 2% rate in respect of the first franchise agreement was wrong. I will direct the Commissioner to deduct the amounts he added back to income on the basis that they constituted non-deductible master branding fees, the sum of US$ 212 356.13 from the 2009 tax year, US$ 312 636 from the 2010 tax year and US$370 913.85 from the 2011 tax year.” “Accordingly, the Commissioner correctly disallowed the deduction of the amortised quarry development costs of US$ 3 782 791 claimed by the appellant in the 2013 tax year.” “I, therefore, hold that the appellant improperly claimed for the deductions of the special initial allowances in each of the 3 years in question.” “In the exercise of my own discretion I would impose the same penalty as the Commissioner in the present matter. Accordingly, the 60% penalty imposed by the Commissioner stands.” Click here for translation ...

The tax authorities of the Czech Republic issued an assessment of additional income taxes and penalties for FY 2010 and 2011, because AZETKO s.r.o. according to the tax authorities did not receive an arm’s length remuneration for administration and operation of a website and e-shop on behalf on a related party, Quantus Consulting s.r.o. AZETKO disagreed with the assessment and brought the case to court. The regional court ruled in favor of AZETKO, but the tax administration appealed the decision to the Supreme Administrative Court. Judgement of the Supreme Court The Supreme Court found the tax administrations change in pricing method under the appeal of the case unsubstantiated. The tax administration had originally applied the CUP method, but in the appeal proceedings instead used the net margin transaction method (TNMM). On that basis, the appeal was dismissed by the Court. The conditions for application of the transfer pricing provisions in Section 23(7) of the Czech Income Tax Act was summarised by the Court as follows If it is proved that the parties are related persons within the meaning of Section 23(7) of the Income Tax Act, it is for the tax administrator to prove that the prices agreed between these persons differ from the prices that would have been agreed between independent persons in normal business relations under the same or similar conditions. Therefore, the principle that in tax proceedings it is the tax subject who bears the burden of allegations in relation to its tax liability and the burden of proof in relation to these allegations does not apply (cf. The tax administrator must therefore carry out a comparison in which it must establish both the price agreed between the related parties and the normal price (compared with the average price, the so-called reference price) at which independent persons trade in a comparable commodity. A necessary (but not sufficient) condition for the adjustment of the tax base under Section 23(7) of the Income Tax Act is the existence of a price difference. In order to establish the ‘normal’ nature of the price, the administrator must be able to bear the burden of proof in relation to all relevant aspects. The tax authorities can, and usually will, determine the normal price by comparing the prices actually obtained for the same or similar commodity between genuine independent operators. However, it may determine it, in particular because of the absence or unavailability of data on such prices, only as a hypothetical estimate based on logical and rational reasoning and economic experience. On the issue of business strategy the court provided the following insights “According to the above-mentioned guidelines, a business strategy is understood as an attempt to penetrate a new market, where prices can be significantly distorted by higher costs of introducing a product to the market while applying a lower final selling price of this product, but it can also be different circumstances. In assessing this factor, the SAC agrees with the regional court that the administrative authorities assessed the business strategy only for the applicant, namely that it is an established company with an established business program. However, for the companies being compared, they did not assess this factor, and the influence of this question on the assessment of the present case cannot be ruled out without further ado.” Click here for translation ...

A GmbH (“Sport Data GmbH”) was founded in 2006 as a wholly-owned subsidiary of A Holding AG, which had been founded shortly before and had its registered office in Switzerland. A AG, Switzerland was also founded as a sister company of A GmbH. A AG is A GmbH´s only customer. The business of A GmbH is the development and support of software for A AG, the maintenance of hardware, the training of employees and the forwarding of information. A AG, Switzerland sells the information provided by A GmbH. For these services A GmbH receives a remuneration from A AG determined as actual costs plus a profit surcharge of 5 %. The tax authorities noted that A AG did not initially have any active business activities. Against this background, the tax office had doubts about the arm’s length nature of the transfer prices. The tax authorities concluded, there were also no “simple services” by A GmbH for which, according to international accounting principles (services of a routine nature), procedures with profit mark-ups in the range of 5% to 15% could be considered. A high quality service should not be compensated by a 5% mark-up, especially if the service is performed using self-created intangible assets. In such cases, the profit split method should instead be applied. An assessment of estimated additional profits was issued. Judgement of the Court The court decided that the remuneration should be based on the cost plus method, but that the margin should be changed from 5 % to 10 % due to the advanced functions performed by A GmbH. Excerpts: “The contacts with the international sports organisers such as the IFA and the customers (companies) are again (only) with A AG, Switzerland. This picture also shows the overall profit situation of the group of companies in comparison: In the first year in dispute, the 5% mark-up applied by the Bf. amounted to 276,214.58 euros, while the share of the company’s profit applied by the tax office (in the context of the BVE) was “only” 195,120 euros. In the following year, the ratio changed in such a way that the surcharge of the complainant amounted to approximately 150,000 euros, while the part assessed by the tax office amounted to approximately 270,000 euros, and in the third year, with the same accounting of the complainant, even approximately 840,000 euros, and in the following years much more. While the performance of the complainant thus remained relatively constant (in the first year longer periods were affected due to a different business year), A AG, Switzerland was able to increase its business results enormously through efficient marketing on the basis of the good functioning of the EDP and/or the training of the employees working worldwide. Even if the business idea and the IT implementation of the same originated with the complainant, the economic success of the group of companies is not least due to the marketing activities of A AG, Switzerland, under the motto “even the best product must first find a buyer”. In this situation, the appropriateness can only be checked using the standard cost+ method.” “As far as a profit mark-up of 5% is charged for this routine activity, a higher profit mark-up must be applied for the services of the complainant in comparison. Determining the amount of the appropriate mark-up within the range of 5 – 15% is naturally associated with uncertainties. One indication in the case of a complaint can be the mark-up rates for IT programming of between 4.78% and 13.95% determined in the transfer pricing study by PwC. Another indication is the assessment of the complainant herself, who had to concede at the hearing that the 5% mark-up may be too low. In a detailed discussion, she was unable to offer any substantive arguments against a 10% mark-up rate. Considering that the defendant’s activities after the development and sale of the software “A Live System”, which is not in dispute here, consist of very different services, a mixed mark-up rate of 10% seems appropriate:” Click here for English translation Click here for other translation ...