In this case a Japanese company had entered into a series of controlled transactions with foreing group companies granting services and licences to use intangibles – know-how related to manufacturing and sales, training, and provided support by sending over technical experts. The company had used a CUP method to price these transactions based on select “internal comparables”.
Tax authorities disagreed with the company and found that the residual profit split method should be applied to price the transactions.
The court found the transactions should be aggregated and that the price should be determined for the full packaged deal – not separately for each transaction.
The foreign related-party transactions were compared – as a whole – to the comparable transactions selected by the company and the court found that the product lines, how to use them and frequency of dispatching employees to support the foreing group company were not comparable. This could have resulted in differences the value of the intangibles and services provided. The court also found that the circumstances had been different in terms of the countries or areas where products were manufactured or sold and whether or not the license was exclusive or not.
On use of the CUP method the court concluded that there were significant differences between the controlled transactions and the selected “comparable” transactions in terms of licences, services and circumstances in which the transactions were took place. Therefore the CUP method was not the best method to price the controlled transactions. The court instead supported the application of the RPSM and ruled in favour of the tax authority.
The taxpayer later appealed the decision to the Tokyo High Court.