The case concerned whether the tax authorities had been justified in rejecting five out of the sixteen comparable companies that had
been selected by ABB Ltda. in a benchmark study to justify the pricing of its intercompany transactions, which was the basis for a tax assessment that had been issued by the tax authorities.
The court of first instance accepted four of the comparables originally disallowed by the tax authorities, finding that the grounds for their exclusion were not adequately proven. It only upheld the exclusion of Dulhunty Power Ltd., because the company’s intangibles were well over ten percent of its sales, and there was no technical explanation for omitting that portion of its assets from the study. After recalculating the interquartile range with the accepted comparables, the court adjusted upward the sales of produced inventories but recognized the costs linked to purchases for production, as these fell within the arm’s-length range.
Regarding technical assistance and royalty expenses, which were also rejected administratively on the same grounds and over allegations of failing to register contracts, the first-instance ruling observed that only the failure to comply with transfer pricing principles was ultimately sustained by the tax authorities. Once the court established that four of the disputed comparables should indeed be included, those transactions showed a profit margin within the arm’s-length range, and the court reinstated the disallowed expenses.
Judgment
In the appeal, the Council of State affirmed the court of first instance’s decision, reiterating that the existence of additional lines of business or a one-time loss does not, on its own, justify discarding a comparable. It upheld the exclusion of Dulhunty Power Ltd. because the presence of significant intangible assets beyond the threshold established in the company’s selection criteria remained unjustified. It also clarified that each type of transaction subject to transfer pricing must be analyzed separately, so excluding comparables for sales to related parties does not automatically apply to royalty and technical assistance transactions. Finally, the Council of State upheld the inaccuracy penalty, although it remained reduced by applying the principle of favorability.
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