Sandakan Edible Oils SDN BHD principal activity is, amongst others, to carry out the refining and sale of edible oils and related products, and the packaging and sale of cooking oil. It applied the Comparable Uncontrolled Price (CUP) method as the transfer pricing methodology to determine the arm’s length pricing of its controlled transactions. Following an audit for FY 2010-2013 the tax authorities informed Sandakan Edible Oils SDN BHD that it would be invoking section 140A of the ITA to raise an additional assessment. The tax authorities rejected the CUP method and instead applied the Transactional Net Margin Method (TNMM). According to the benchmarking analysis, Sandakan Edible Oils SDN BHD’s financial results was within the interquartile range for all years, but for 2010 the results was below the median. On that basis the tax authorities held that the margin for 2010 should be adjusted up to the median. Sandakan Edible Oils SDN BHD filed a complaint with the Special Commissioners of Income Tax (SCIT) and in a decision issued in 2021 the SCIT set aside the assessment. The tax authorities then filed an appeal with the High Court. Judgement of the High Court The High Court dismissed the tax authorities appeal and upheld the decision of the Special Commissioners of Income Tax. Excerpts “The agreed issues for determination are as follows: – Issue 1: Transfer Pricing Adjustments (YA 2010) In performing transfer pricing adjustment on the Taxpayer for the YA 2010 pursuant to section 140A of the ITA, whether the Revenue is required under the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines and the Revenue’s Transfer Pricing Guidelines to adjust the Taxpayer’s profits to the median in a case where its margin is within the inter­ quartile range?” (…) 64. All in all, I find that the SCIT’s decision is consistent with their earlier decision in Procter & Gamble (supra) that “if the price or profit margin is within the accepted interquartile range then a comparison need not be made (paragraph 3.60 of the 2010 OECD Guidelines). The SCIT’s decision was recently upheld by this Honourable Court on 7.4.2020. 65. The SCIT’s decision is also consistent with RW1’s own evidence that nothing in the Guidelines requires an adjustment to be made to the median, and the legal position in other jurisdictions applying the arm’s length principle under the OECD Guidelines. 66. The finding of facts of the SCIT will only be disturbed by this court when the SCIT was wrong in the evaluation of the It is for the Revenue to establish that there was a misdirection by the SCIT to warrant interference by this court. Unfortunately, the Revenue has not demonstrated any such errors in the facts of this case to warrant appellate interference. 67. I view the SCIT’s findings as rational and cogent and there are no flaws in its reasoning or the conclusions therein. Based on the evidence before the SCIT, it cannot be said that the findings of the SCIT are irrational or perverse. 68. I am of the view that the finding of the SCIT is based on the totality of the evidence adduced before them. To me, the SCIT had scrutinized the evidence of both parties and applied the law to the facts and made a reasonable conclusion. It is not the task of this court to scrutinize every piece of evidence adduced before the SCIT and to make another finding of fact. That task of fact-finding fall within the jurisdiction of the SCIT.“ Click here for other translation ...

Following an audit the tax authorities concluded that ARGO-HYTOS s.r.o. sold goods (valves, blocks and hydraulic aggregates) to related parties at a price that differed from the prices that would have been agreed between unrelated parties under the same or similar conditions. Furthermore, according to the tax authorities ARGO-HYTOS s.r.o. did not satisfactorily document the difference from those normal prices. An appeal was filed by ARGO-HYTOS s.r.o. with the Regional Court which was dismissed the action by the above-quoted judgment No 30 Af 21/2019-46 (‘the contested judgment’). In the judgement, the Regional Court concluded that ARGO-HYTOS s.r.o. had not satisfactorily demonstrated the difference between the prices agreed between it and the companies of the ARGO-HYTOS group and the prices which would have been agreed between unrelated parties under the same or similar conditions. The Regional Court held that, if the tax authorities wished to justify the reasons for the increase in the applicant’s tax liability, it was incumbent on them to prove that the prices agreed between the applicant and its connected persons differed from those which would have been agreed between independent persons in normal commercial relations under the same or similar conditions. Furthermore, it was its duty to inform the applicant of the difference and to give it time to comment and to substantiate its position. In such a case, the burden of proof would shift to the applicant. In order to fulfil its obligation, the tax authorities would have had to establish the normal price at which independent persons trade in order to compare the price agreed between related parties. The Regional Court did not find merit in the applicant’s objection that the tax authorities had wrongly excluded from the analyses carried out companies which had made a negative operating profit in the period in question. The applicant considered that this procedure was unacceptable, since, in its view, it cannot be assumed that if a comparable entity is negative in one year, it is loss-making in the long term and cannot therefore be regarded as a comparable entity. On this issue, the defendant stated that the excluded loss-making companies could not be considered comparable, since the applicant, as a contract manufacturer, could be considered to perform such functions and bear such risks as to make a reasonable stable profit. Moreover, those companies were not only excluded on the ground of loss-making but also on the ground of non-compliance with other criteria such as NACE code, independence or accounting methods. The Regional Court fully shared that view and therefore found the plea unfounded. On the question of the comparability of the sample of independent companies and the method of calculating the interquartile range, the Regional Court stated that the defendant agreed with the tax authorities which, after assessing the entities included by the applicant in the analysis comparing prices between related and unrelated entities in normal relations under similar or comparable conditions, concluded that none of those companies was comparable to the applicant. Therefore, the tax administration prepared its own SA5 analysis, which included seven companies that could be considered as comparable independent entities. For these companies, the interquartile range of EBIT margin values was found to be between 4,10 % and 8,19 % for the tax years under review, based on data for 2011 and 2013. The Regional Court agreed with this conclusion and thus found the procedure followed by the tax administrator and the defendant to be lawful and factually correct. An appeal was then filed with the Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court ruled in favor of ARGO-HYTOS s.r.o. Excerpts (Unofficial English Translation) “[22] The Supreme Administrative Court did not accept the complainant’s arguments that the law does not provide for the obligation to use a specific database for the analysis of compliance with the arm’s length criterion and that the tax administrator should therefore have respected the fact that the complainant chose the AMADEUS database and taken into account the information available to the complainant when negotiating prices for sales of goods within the ARGO-HYTOS group of related parties, that the tax administrator did not carry out a sufficient qualitative analysis and that it rejected the use of another commercial database. From a tax perspective, it is irrelevant whether or not the complainant had the relevant information to carry out its own internal analysis on the basis of which it set the transfer prices. The fact that the prices negotiated between related parties for the sale of goods or the provision of services differ from the prices normally negotiated between unrelated parties under similar or comparable conditions can be established objectively. It is not a subjective criterion for which the degree of prudence or effort of the taxable person could be taken into account. In other words, if the prices between related parties differ from those between unrelated parties, this is an objective fact, a bare fact which has tax consequences. If the taxpayer has assessed, on the basis of the information available to it, that there is no such difference, even though that assessment is contrary to the facts, then it must bear those tax consequences – it is its responsibility to ensure that it has the relevant information on how to set prices between related parties so that the tax base does not have to be adjusted. The complainant must therefore bear the consequences of having used a database for analysis which did not contain the information necessary to meet the comparability criteria in the relevant period under analysis. [23] The Supreme Administrative Court also did not accept the complainant’s objection regarding the calculation of the weighted average. Indeed, the method used by the complainant, according to which the average operating margin is calculated for all the companies together for each individual year and then averaged over the individual years, may not be more revealing than the method actually used by the tax authorities. The tax authorities are obliged to ascertain the prices at which unrelated persons ...

(i) FS, a foreign corporation, produces apparel for USP, its U.S. parent corporation. FS purchases its materials from unrelated suppliers and produces the apparel according to designs provided by USP. The district director identifies 10 uncontrolled foreign apparel producers that operate in the same geographic market and are similar in many respect to FS. (ii) Relatively complete data is available regarding the functions performed and risks borne by the uncontrolled producers. In addition, data is sufficiently detailed to permit adjustments for differences in accounting practices. However, sufficient data is not available to determine whether it is likely that all material differences in contractual terms have been identified. For example, it is not possible to determine which parties in the uncontrolled transactions bear currency risks. Because differences in these contractual terms could materially affect price or profits, the inability to determine whether differences exist between the controlled and uncontrolled transactions will diminish the reliability of these results. Therefore, the reliability of the results of the uncontrolled transactions must be enhanced by the application of a statistical method in establishing an arm’s length range pursuant to § 1.482-1(e)(2)(iii)(B) ...

The methods described in §§ 1.482-2 through 1.482-6 are generally stated in terms of individual transactions. However, because a taxpayer may have controlled transactions involving many different products, or many separate transactions involving the same product, it may be impractical to analyze every individual transaction to determine its arm’s length price. In such cases, it is permissible to evaluate the arm’s length results by applying the appropriate methods to the overall results for product lines or other groupings. In addition, the arm’s length results of all related party transactions entered into by a controlled taxpayer may be evaluated by employing sampling and other valid statistical techniques ...

Amway India is engaged in the business of direct selling of consumer products through multi-level marketing. For FY 2013-2014 Amway paid royalties to a foreign Amway group company. Following an audit, an assessment was issued by the tax authorities where the royalty had been reduced based on a benchmark study resulting in additional taxable income. An appeal was filed by Amway India with the Income Tax Tribunal where the assessment was set aside. An appeal was then filed by the tax authorities with the High Court. In the appeal the tax authorities stated that the Tribunal had failed to appreciate the fact that the royalty payments were excessive considering the Advertisement, Marketing and Promotion (‘AMP’) expenses incurred by Amway India for the benefit of the group’s trademark and brand. According to the tax authorities Amway India created marketing intangibles for the group and should be compensated with a payment from the group rather than having to pay huge royalties. Judgement of the High Court The Court ruled in favor of Amway India. Excerpts “9. A perusal of the above order reveals that the ITAT and CIT (A), both fact finding authorities have concurrently held that the rejection of the two comparables by the TPO is based on conjectures and surmises and thus, deleted the addition made on account of transfer pricing adjustment for transaction related to royalty. Learned Counsel for the appellant concedes that if the rejected two comparables are taken into consideration, the payment made by the assessee to its AEs towards royalty would be at arm’s length and no adjustment would be merited. He also concedes that the said two comparables comply with all the filters prescribed by the TPO. In this view of the matter, we therefore find that the reliance placed by CIT(A) and ITAT on the judgment of this Court in Chrys Capital Investment (supra), was correct. The relevant portion of the said judgment reads as follows, “44. In light of the above findings, this Court concludes as follows: (a) The mere fact that an entity makes high/extremely high profits/losses does not, ipso facto, lead to its exclusion from the list of comparables for the purposes of determination of ALP. In such circumstances, an enquiry under Rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable. …………………..”    (Emphasis Supplied) 10. In this view of the matter, no substantial questions of law arise for consideration and accordingly, the appeal is dismissed” ...