The transaction in question involved intercompany sales between Scania Argentina S.A. and its foreign affiliates. To justify the pricing of these controlled transactions, Scania applied the Transactional Net Margin Method (TNMM), using Return on Total Costs (ROTC) as a profit-level indicator. They also made a comparability adjustment for costs relating to extraordinary idle capacity.
However, the tax authorities rejected both the PLI chosen and the comparability adjustments made by Scania. They excluded two comparables from the benchmark study, applying a Return on Capital Employed (ROCE) PLI, and issued an assessment for additional taxes for FY 2003 on this basis.
However, on appeal, the Tax Court overturned the decision, ruling that the transfer pricing analysis was reasonable and adequately justified. The court accepted the use of ROTC over ROCE due to the volatility of Argentina’s market in 2000. It also recognised the legitimacy of the adjustment for extraordinary idle capacity and found that the tax authorities had failed to substantiate their exclusion of the two comparables or justify their challenge under the arm’s length principle.
An appeal was then filed with the Administrative Court of Appeal.
Judgment
The Administrative Court of Appeal upheld the decision of the Tax Court.
The Court found that the tax authorities’ appeal did not establish any error in the factual or technical assessments made by the lower court. The expert evidence showed a verified 40% idle capacity and justified the comparability adjustments and choice of ROTC over ROCE. The tax authorities’ arguments were dismissed as general, unsubstantiated, and lacking in specific evidentiary rebuttal.
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