Category: Benchmark, Range and Median

In transfer pricing arm’s length prices are often determined based on benchmark studies. These studies produces a range of figures. In some cases, not all comparable transactions will have a relatively equal degree of comparability. Where every effort has been made to exclude points that have a lesser degree of comparability, it may still be the case, that what is arrived at is a range of figures for which comparability defects remain that cannot be identified and/or quantified.

Substantial deviation among points in that range may indicate that the data used in establishing some of the points may not be as reliable as the data used to establish the other points in the range.

In such cases, if the range includes a sizeable number of observations, statistical tools (e.g. the interquartile range or other percentiles) can enhance the reliability of the analysis. It may also be appropriate to use measures of central tendency (for instance the median, the mean or weighted averages) to determine the arm’s length price applied, in order to minimise the effect of unknown or unquantifiable remaining comparability defects.

See on this issue, TPG 2017, para 3.55 – 3.62

Kenya vs Beta Healthcare International Limited, February 2024, Tax Appeals Tribunal, Appeals No 866 of 2022 - [2024] KETAT 143 (KLR)

Kenya vs Beta Healthcare International Limited, February 2024, Tax Appeals Tribunal, Appeals No 866 of 2022 – [2024] KETAT 143 (KLR)

Following an audit of Beta Healthcare International Limited, a Kenyan subsidiary in the Aspen Healthcare Group, the tax authorities issued a notice of additional taxable income relating to controlled transactions, in which they had determined the arm’s length price for controlled transactions using the CUP method instead of the TNM-method as applied by the company. Beta Healthcare International Limited appealed to the Tax Appeals Tribunal, arguing that the tax authorities had failed in its characterisation of the company, failed to consider the comparability factors of the transactions and misapplied the transfer pricing guidelines. Decision of the Tax Appeals Tribunal The Tribunal dismissed the appeal and ruled in favour of the tax authorities. Excerpts “(…) 134. The Tribunal reviewed the parties’ pleadings and established that the Appellant attached the disputed information to its pleadings. However, the Respondent, both in its pleadings and orally at the hearing, ... Continue to full case
Italy vs Terex Italia S.r.l., January 2024, Supreme Court, Cases No 2853/2024

Italy vs Terex Italia S.r.l., January 2024, Supreme Court, Cases No 2853/2024

Terex Italia s.r.l. is a manufacturer of heavy machinery and sold these products to a related distributor in the UK. The remuneration of the distributor had been determined based on application of the TNM-method. Following an audit for FY 2009 and 2010 the tax authorities served Terex a notice of assessment where adjustments was made to the taxable income in respect of a transfer pricing transaction, and in particular contesting the issuance of a credit note, in favour of the English company GENIE UK with the description “sales prices adjustment” recorded in the accounts as a reversal of revenue, in that, according to the Office, as a result of the adjustment made by the note, Terex would have made sales below cost to the English company, carrying out a clearly uneconomic transaction. In the same note, the non-deductibility of costs for transactions with blacklisted countries ... Continue to full case
France vs SAS CFEB Sisley, December 2023, CAA de Paris, Case No. 22PA01528

France vs SAS CFEB Sisley, December 2023, CAA de Paris, Case No. 22PA01528

SAS CFEB Sisley, the head of the Sisley group, which specialises in high-end cosmetic products, was the subject of an accounting audit covering the 2012 and 2013 financial years. At the end of the audit CFEB Sisley was notified of a proposed assessment, as the tax authorities considered that the pricing applied by the group led to a transfer of profits, within the meaning of Article 57 of the General Tax Code, to several of its subsidiaries established in Asia. However, later on the tax authorities limited the assessment to a single subsidiary, based in Hong Kong. A appeal was filed by CFEB Sisley and in a ruling handed down on 2 December 2021, the Montreuil Administrative Court, discharged the taxes resulting from the assessment. According to the court the selection of internal comparables provided by the company showed gross margins equivalent to those achieved ... Continue to full case
Greece vs "Raw Materials Ltd", December 2023, Tax Court, Case No 2129/2023

Greece vs “Raw Materials Ltd”, December 2023, Tax Court, Case No 2129/2023

Following an audit of “Raw Materials Ltd” an assessment was issued by the tax authority regarding pricing of intra-group transactions in FY 2018 and 2019. At issue was the pricing of intra group sales and purschases. A complaint was filed by “Raw Materials Ltd” with the Dispute Resolution Board claming that the tax authority had misapplied the chosen transfer pricing method. Decision of the Board The Board upheld the assessment of the tax authorities and rejected the appeal of “Raw Materials Ltd”. Excerpt in English “Because the tax authority, taking into account the activity, the organisation and the specific characteristics of the audited company itself, chose as more reliable the internal comparables relating to sales to third independent companies, because the internal comparables are more reliable due to their internal nature. In addition, it is ensured that identical accounting practices are followed in relation to ... Continue to full case
France vs (SAS) SKF Holding France, November 2023, CAA de Versailles, Case No. 21VE02781

France vs (SAS) SKF Holding France, November 2023, CAA de Versailles, Case No. 21VE02781

RKS, whose business consists of the manufacture of very large custom bearings for the civil and military industries, is controlled by the Swedish SKF group through (SAS) SKF Holding France. RKS was subject to a tax audit for FY 2009 and 2010, at the end of which the tax authorities took the view that the results reported by SAS RKS (losses since 2005) had not been determined in accordance with the arm’s length principle. It therefore increased SAS RKS’s results from 2006 to 2010 to the median net margin observed in a benchmark of eight comparable companies, equal to 4.17% in 2006, 4.32% in 2007, 3.38% in 2008, 2.33% in 2009 and 2.62% in 2010. SAS SKF France Holding applied to the Administrative Court for a discharge, and in judgment no. 1608939 of April 23, 2018, the Montreuil Administrative Court upheld the claim. In ruling ... Continue to full case
France vs SASU Menarini Diagnostics France, November 2023, CAA de Paris, Case No. 21PA06233

France vs SASU Menarini Diagnostics France, November 2023, CAA de Paris, Case No. 21PA06233

SASU Menarini Diagnostics France (a French subsidiary in the Italian Menarini Group) buys and resells diagnostic equipment and products for self-diagnosis and laboratories. Since its creation it had recurring operating losses, despite the profitability of each business line and irrespective of sales trends, and even though it was no longer in a market penetration phase. An audit was initiated by the tax authorities for fiscal 2011-2013, which revealed that the pricing of intra-group transactions was not at arm’s length and that overpricing of products purchased from two related parties in Italy had resulted in an indirect transfer of profits within the meaning of Article 57 of the French General Tax Code. Menarini Diagnostics France appealed against the assessment with the Montreuil Administrative Court which rejected its request for discharge of these taxes. An appeal was then filed with the Administrative Court of Appeal. Judgement of ... Continue to full case
Denmark vs "Consulting A/S", August 2023, Eastern High Court, Case No B-0956-16 and BS-52532/2019-OLR (SKM2023.628.ØLR)

Denmark vs “Consulting A/S”, August 2023, Eastern High Court, Case No B-0956-16 and BS-52532/2019-OLR (SKM2023.628.ØLR)

The cases concerned whether the tax authorities had been entitled to exercise an assessment of two types of intra-group transactions made between H1 A/S and a number of group companies. The cases also concerned whether, if so, the tax authorities’ judgement could be set aside. The two types of controlled transactions were employee loans (IAA) and royalty payments for access to and use of intangible assets. The employee loans (IAA) were temporary intra-group loans of “idle” employees who were not in the process of or were about to perform specific tasks for the operating company in which they were employed. To a large extent, these were cross-border employee loans. In the employee loans, the borrowing operating company provided a consultancy service to a customer, and it was also the borrowing operating company that bore the business risk. The TP documentation stated that the lending operating ... Continue to full case
South Africa vs FAST (PTY) LTD, August 2023, Tax Court, Case No IT 14305

South Africa vs FAST (PTY) LTD, August 2023, Tax Court, Case No IT 14305

FAST (PTY) LTD is in the business of manufacturing, importing, and selling chemical products. It has a catalyst division that is focused on manufacturing and selling catalytic converters (catalysts) which is used in the abatement of harmful exhaust emissions from motor vehicles. To produce the catalysts, FAST requires some metals known as the Precious Group of Metals (PGMs). It purchases the PGMs from a Swiss entity (FAST Zug). The PGMs are liquified and mixed with other chemicals to create coating for substrates, all being part of the manufacturing process. Once the manufacturing is complete, the catalysts are sold to customers in South Africa known as the original equipment manufacturers (OEMs). FAST (PTY) LTD and FAST Zug are connected parties as defined in section 1 of the ITA. Following an audit carried out in 2014 the revenue service issued an assessment for FY 2009-2011 by an ... Continue to full case
Czech Republic vs. Eli Lilly ČR, s.r.o., August 2023, Supreme Administrative Court, No. 6 Afs 125/2022 - 65

Czech Republic vs. Eli Lilly ČR, s.r.o., August 2023, Supreme Administrative Court, No. 6 Afs 125/2022 – 65

Eli Lilly ČR imports pharmaceutical products purchased from Eli Lilly Export S.A. (Swiss sales and marketing hub) into the Czech Republic and Slovakia and distributes them to local distributors. The arrangement between the Czech company and the Swiss company is based on a Service Contract in which Eli Lilly ČR is named as the service provider to Eli Lilly Export S.A. (the principal). Eli Lilly ČR was selling the products at a lower price than the price it purchased them for from Eli Lilly Export S.A. According to the company this was due to local price controls of pharmaceuticals. However, Eli Lilly ČR was also paid for providing marketing services by the Swiss HQ, which ensured that Eli Lilly ČR was profitable, despite selling the products at a loss. Eli Lilly ČR reported the marketing services as a provision of services with the place of ... Continue to full case
Denmark vs "Soy A/S", June 2023, Eastern High Court, SKM2023.316.ØLR

Denmark vs “Soy A/S”, June 2023, Eastern High Court, SKM2023.316.ØLR

Two issues were adressed in this case – transfer pricing and withholding taxes. The transfer pricing issue concerned whether the Danish tax authorities (SKAT) had been entitled to issue an assessment on controlled transactions made between “Soy A/S” and a flow-through company in the group located in a low tax jurisdiction. The withholding tax issue concerned whether the 13 transfers actually constituted taxable dividends under section 31, D of the Danish Corporation Tax Act, which “Soy A/S” was subsequently liable for not having withheld tax at source, cf. section 69(1) of the Danish Withholding Tax Act. Judgement of the High Court In regards of the transfer pricing issue, the High Court found that the company’s TP documentation was subject to a number of deficiencies which meant that the documentation did not provide the tax authorities with a sufficient basis for assessing whether the transactions were ... Continue to full case
Panama vs Banana S.A., June 2023, Administrative Tribunal, Case No TAT-RF-048

Panama vs Banana S.A., June 2023, Administrative Tribunal, Case No TAT-RF-048

Banana S.A. sold bananas to related parties abroad. These transactions were priced using the TNMM method and the result of the benchmark analysis was an interquartile range of ROTC from 0.71% to 11.09%. However, Banana S.A. had continuous losses and for 2016 its return on total costs (ROTC) was -1.83%. To this end, an “adjustment” was made by adding “unearned income” related to storm damage to the actual results, which increased the company’s ROTC from -1.83% to 3.57%. The tax authorities disagreed with both the transfer pricing method used and the “adjustment” made to the results. An assessment of additional taxable income in an amount of B/.20,646,930,51. was issued, where the CUP method (based on quoted commodity prices for bananas) had been applied. Judgement of the Court The Court agreed with the tax authorities that the “adjustment” for “unearned income” was not allowed. “….In this ... Continue to full case
Portugal vs R... Cash & C..., S.A., June 2023, Tribunal Central Administrativo Sul, Case 2579/16.6 BELRS

Portugal vs R… Cash & C…, S.A., June 2023, Tribunal Central Administrativo Sul, Case 2579/16.6 BELRS

The tax authorities had issued a notice of assessment which disallowed tax deductions for royalties paid by R…Cash & C…, S.A. to its Polish parent company, O…Mark Sp. Z.o.o. R… Cash & C…, S.A. appealed to the Administrative Court, which later annulled the assessment. The tax authorities then filed an appeal with the Administrative Court of Appeal. Judgement of the Court The Court of Appeal revoked the judgement issued by the administrative court and decided in favour of the tax authorities. Extracts “It is clear from the evidence in the case file that the applicant has succeeded in demonstrating that the agreement to transfer rights is not based on effective competition, in the context of identical operations carried out by independent entities. The studies presented by the challenger do not succeed in overturning this assertion, since, as is clear from the evidence (12), they relate ... Continue to full case
Hungary vs "Electronic components Manufacturing KtF", June 2023, Supreme Court, Case No Kfv.V.35.415/2022/7

Hungary vs “Electronic components Manufacturing KtF”, June 2023, Supreme Court, Case No Kfv.V.35.415/2022/7

“Electric Component Manufacturing KtF” is a Hungarian subsidiary of a global group that distributes electronic components in more than 150 countries worldwide. The tax authorities had conducted a comprehensive tax audit of the Hungarian company for the period from 1 October 2016 to 30 September 2017, which resulted in an assessment of additional taxable income. The transfer pricing issues identified by the tax authorities were the remuneration received by the Hungarian company for its manufacturing activities and excessive interest payments to a group company in Luxembourg. Judgement of the Supreme Court The Supreme Court set aside the judgment of the Court of Appeal and ordered the court to conduct new proceedings and issue a new decision. In its decision, the Court of Appeal had relied on an expert opinion, which the Supreme Court found to to be questionable, because there were serious doubt as to ... Continue to full case
Spain vs Ferroli España, S.L.U., May 2023, Audiencia Nacional, Case No 3400/2023 - ECLI:EN:AN:2023:3400

Spain vs Ferroli España, S.L.U., May 2023, Audiencia Nacional, Case No 3400/2023 – ECLI:EN:AN:2023:3400

Ferroli España, S.L.U. is a Spanish manufacturer manufacture of cookers and heaters. In FY 2010 and 2011 the company had various transactions with other companies in the Ferroli Group and reported negative profit margins on these transactions. According to the company this was due to the financial crises in Spain. Following an audit, the tax authorities issued a notice of assessment where the profit of Ferrolia had been adjusted resulting in additional taxable income. The TNN method had been used and profits were adjusted to the median. An appeal was filed by Ferroli. Judgement of the Court The Court largely ruled in favor of the tax authorities, but according to the Court, an adjustment to the median could only be made where the tax authorities established the existence of comparability defects. Since sufficient proof of such defects had not been established, the adjustment was reduced ... Continue to full case
India vs Auronext Pharma Private Limited, May 2023, Income Tax Appellate Tribunal, ITA-TP No. 486/Hyd/2022

India vs Auronext Pharma Private Limited, May 2023, Income Tax Appellate Tribunal, ITA-TP No. 486/Hyd/2022

An assessment had been issued by the tax authorites in regards of Auronext Pharma’s pricing of purchase and sales transactions with related parties. The tax authorities had rejected the CUP method applied by Auronext Pharma. “Since the comparable transactions were with related parties those transactions cannot be considered under CUP method for the purpose of benchmarking the taxpayers transactions.” Instead, the tax authorities used the Transactional Net Margin Method (TNMM). An appeal was filed by Auronext Pharma with the ITAT. Judgement of the Income Tax Appellate Tribunal The ITAT remanded the case to the tax authorities to examine afresh the data available with respect to un-related parties and find out whether the transaction of the assessee are at arm’s length or not by applying the CUP method. Excerpt ” (…) The sole basis of rejecting the method adopted by the assessee was the transactions were ... Continue to full case
France vs SAS Weg France, May 2023, CAA, Case N° 21LY03690

France vs SAS Weg France, May 2023, CAA, Case N° 21LY03690

SAS Weg France is owned by the Spanish company Weg Iberia, which in turn is wholly owned by the head company of the Weg Equipamentos Electricos SA group, based in Brazil. At the end of an audit covering the financial years 2010, 2011 and 2012, the tax authorities noted that SAS Weg France, which had not provided any documentation justifying the transfer pricing policy within the group, paid its suppliers, who were members of the group, within a maximum of 30 days of shipment of the goods, whereas delivery times averaged two months from Brazil and three months from China, and that its customers paid its invoices between 45 and 90 days after invoicing. According to the tax authorities SAS Weg France thus performed a gratuitous financial function which constituted an indirect transfer of profits within the meaning of Article 57 of the General Tax ... Continue to full case
Czech Republic vs ESAB CZ, s. r. o., May 2023, Regional Court , Case No 31 Af 21/2022 - 99

Czech Republic vs ESAB CZ, s. r. o., May 2023, Regional Court , Case No 31 Af 21/2022 – 99

ESAB CZ was a contract manufacturer for ESAB Europe. The contract set ESAB CZ’s target profit margin for 2014 and 2015 at between 2,5 % and 3,5 %, with an adjustment to 3 % if the actual profit margin achieved was outside that range. Those values were determined on the basis of a benchmarking analysis which produced a minimum profit margin of 0,41 % and an interquartile range of profit margins between 2,14 % and 5,17 %. The benchmarking analysis were not disputed, but the tax authorities held that the cost base on which the markup was calculated should have included annual amortisations/depreciations. ESAB CZ disagreed and filed a complaint with the Regional Court. Judgement of the Court The court ruled in favour of the tax authorities. Excerpts “51. Furthermore, it should be emphasised that the applicant has not demonstrated that the asset allowance does ... Continue to full case
Italy vs Menfi Industria s.p.a., December 2022, Supreme Court, Cases No 11252/2023

Italy vs Menfi Industria s.p.a., December 2022, Supreme Court, Cases No 11252/2023

Menfi Industria s.p.a. is a manufacturer of household goods – appliances, crockery, stainless steel items. Following an audit the tax authorities served Menfi Industria a notice of assessment for FY 2008. According to the tax authorities the company had sold products to another group company, at a price lower than the normal value. The adjustment was determined using the TNMM method. Other non-transfer pricing adjustments were also made in the assessment. An appeal was filed by Menfi Industria, which the court of first instance found to be well-founded in regards of leasing fees, depreciations etc., but in regards of the transfer pricing adjustment the appeal was dismissed. Subsequently, the Lombardy Court of Appeal confirmed the decision of the first instance court. Menfi Industria then appealed to the Supreme Court. In its appeal Menfi Industris pointed out that, with regard to the issue of the sale ... Continue to full case
Malaysia vs Sandakan Edible Oils SDN BHD,  April 2023, High Court, Case No WA-14-2-02/2021

Malaysia vs Sandakan Edible Oils SDN BHD, April 2023, High Court, Case No WA-14-2-02/2021

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 ... Continue to full case
Ukrain vs "LK Ukraine Group",March 2023, Supreme Court, Case No. 1340/3525/18 (proceedings No. K/9901/11787/19)

Ukrain vs “LK Ukraine Group”,March 2023, Supreme Court, Case No. 1340/3525/18 (proceedings No. K/9901/11787/19)

The tax authority, based on the results of an audit, found that the prices in controlled export transactions of goods, carried out between “LK Ukraine Group” and related parties, did not comply with the arm’s length principle, i.e. the selling prices of the goods were lower than the minimum values of the arm’s length range. Disagreeing with this conclusion, “LK Ukraine Group” stated that the the method applied by the tax authority during the audit of prices in controlled transactions was unlawful and inappropriate due to the lack of information on all possible costs. At the request of the supervisory authority, “LK Ukraine Group” provided evidence that when determining the prices of goods, the group was guided by information based on monitoring, in particular, prices on the Euronext exchange, namely, the average selling prices of agricultural products on the terms of delivery EXW-port, which refuted ... Continue to full case