Yazaki Bulgaria Ltd is active in the automotive industry and is part of the Japanese Yazaki Group. It had used the transactional net margin method (TNMM) to demonstrate that prices for the sale of products to related parties were at arm’s length.
Following an audit, the tax authorities found that the company’s profit was outside the arm’s length range and issued an assessment of additional income for FY2014-2016. According to the tax authorities, Yazaki Bulgaria Ltd had not included all its costs when calculating its profit margin.
Administrative Court Judgement
The Administrative Court annulled the tax authority’s assessment and ruled in favour of Yazaki Bulgaria Ltd.
“It is undisputed in this case that the adjustments made by the appellant for comparability with the amounts of additional labour costs in individual years are as follows:
For 2014, the reported operating loss of £2,192,845.67 was adjusted upwards to a net profit of £4,837,402.79 as a result of the elimination for comparability purposes of costs of £7,030,248. 46 leva; before adjustments a net profit margin of -1.02% is calculated and after adjustments the net profit margin indicator is +2.34% and falls above the lower quartile value which is 2.27;
For 2015 – the reported net profit from operations of £4,086,310.44 has been adjusted upwards to a net profit of £11,832,352.26 as a result of eliminating for comparability purposes expenses of £7,746,041. 82 leva; before adjustments, the net profit margin is calculated at 1.43% and after adjustments, the net profit margin indicator is 4.26% and falls above the lower quartile value of 1.68%;
for 2016 – the reported net profit from operations of £1,259,468.30 has been adjusted upwards to a net profit of £6,815,444.19 as a result of eliminating for comparability purposes expenses of £5,555,975. 89; Before adjustments, the net profit margin is calculated at 0.46% and after adjustments, the net profit margin indicator is 2.56% and falls above the lower quartile value which is 2.22% .
In summary of the foregoing, the court finds that after the audited entity’s elimination of net profit comparability expenses, Y.B.’s net profit margin indicator falls within the interquartile range, and therefore, the conclusion that the company’s net profit margin indicator is below market values is not warranted. The adjustments made were to eliminate the effect of additional staff and training costs which affected the auditee’s net profit margin and, in the Court’s view, were consistent with the purpose of Article 4 N-9 of 14.08.2006 – to achieve a result that would have been achieved in an ordinary commercial or financial relationship between independent persons under comparable conditions. The additional costs have been recognized by the tax administration as actually incurred and are part of the costs taken into account in the declared financial result of the company. There is no basis for transformation of the financial result of the company, as done by the audit on the basis of Art, Article 16 and Article 78 of the Income Tax Act, since the net profit of the company falls within the market values when adjustments are made for comparability, i.e. there is no conduct on the part of the audited entity aimed at tax evasion.
For the reasons set out above, the Court considers that the appeal should be upheld by annulling the contested revision act.”