The tax authorities (AFIB) had rejected certain expenses (research and development, advertising, and commercial costs) from the financials of independent companies used as comparables in Nestlé’s transfer pricing analysis for FY 2009, on the basis that Nestlé had not incurred such expenses. This led to an upward adjustment of the comparables’ operating margins and a corresponding upward adjustment to Nestlé’s taxable income.
Nestlé appealed, arguing that the adjustment artificially inflated the comparables’ profitability and thus distorted the arm’s length comparison, contrary to applicable regulations. Nestlé also claimed that the lower courts failed to properly address its arguments, misinterpreted expert evidence, and unjustifiably dismissed its constitutional challenge to certain provisions of the transfer pricing rules.
Judgment
The Supreme Court focused on whether the lower court ruling was arbitrary. It held that the appellate court had failed to properly engage with key issues raised by Nestlé, especially the allegation that the tax authorities’ adjustments had created fictitious margins that undermined comparability. The Court emphasized that such omissions amounted to a denial of Nestlé’s constitutional right to defense, rendering the judgment invalid under the doctrine of arbitrariness.
Without ruling on the substantive merits of the transfer pricing dispute, the Supreme Court granted Nestlé’s extraordinary appeal, annulled the lower court’s decision, and returned the case for a new judgment that properly considers the arguments and evidence presented.
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