The tax authorities had issued tax assessments to two companies, “LLC …AS” and “LLC Sp…as”. The tax authorities determined that these companies had engaged in transactions with related parties and applied Article 18 of the Tax Code to adjust their taxable income, arguing that the products were sold at below-market prices.
The core issue in the dispute was whether these transactions constituted internationally controlled transactions under Chapter XVII (Articles 126-1291) of the Tax Code, which requires transfer pricing principles to be applied, or whether the general provisions of Article 18 on market price determination were sufficient. The companies argued that the tax authority had improperly applied Article 18 instead of the specialized transfer pricing rules.
The Court of Appeal ruled in favor of the companies, finding that the tax authorities had incorrectly assessed the transactions. It held that the transactions should have been evaluated based on transfer pricing rules and OECD guidelines, as mandated by Article 129 of the Tax Code and the Georgian Instruction on the Valuation of International Controlled Transactions. Furthermore, the court found that the tax authorities failed to properly substantiate their claim that the companies were related parties, relying only on information from a website rather than conducting a thorough analysis under Article 126.
Judgment
The Supreme Court upheld the decision of the Court of Appeal, rejecting the cassation appeals. It found no substantial legal errors or grounds for review, confirming that the tax authorities’ approach had been flawed. Internationally controlled transactions should be assessed using the specific provisions of the Tax Code and not general market price rules. As a result, the disputed tax assessments were invalidated, and the tax authorities was ordered to reissue an assessment in compliance with the proper transfer pricing methodology.
Click here for English Translation
Click here for other translation