Hungary vs “Auto Parts Ktf”, May 2019, Administrative Court, Case No. 1.K.27.084 / 2019

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Auto Parts Ktf’s principal activity is the manufacture and sale of passenger cars and spare parts. Between 1 January 2013 and 31 December 2014, it sold its products to its affiliated undertakings and to unrelated parties. Auto Parts Ktf had prepared transfer pricing documentation, in which it determined the arm’s length price using the transaction net margin method (TNMM). Auto Parts Ktf identified 9 comparable companies for 2013 based on a benchmark using the Amadeus database version of 17 April 2014, and based on the financial documents of these companies for 2010-2012, it defined the interquartile range of the normal price range as the market price range between 2.13% and 9.78%. For 2014, it did not update its benchmark, but fixed the minimum-maximum range as in 2013 and considered this as the market price range. For both years, the applicant examined the total operating profit of the manufacturing activity on a consolidated basis, which showed a profit of 2,22 % in 2013 and 1,52 % in 2014. As this fell within the interquartile range for 2013 and 2014, it made no adjustment.

The tax authority examined the applicant’s transfer pricing documentation during the course of its audit, and accepted that the sales of the two products should be treated as a single transaction and priced using the TNMM method. It did not accept, however, that Auto Parts Ktf had examined the arm’s length nature of its overall operating results. The tax authority found that Auto Parts Ktf made a loss of -0.92% on its related party transactions in 2013 and 0.84% in 2014. It recorded that the net profit margin realised on related party transactions was below the lower end of the market price band (lower quartile 2.10%) in both years. In view of this, it increased its corporate tax base by HUF 6,665,000,227 in 2013 and HUF 8,331,347,000 in 2014. It assessed a total of HUF 1,071,880,000 in corporate taxes against the applicant, on top of which it charged a tax penalty and a late payment penalty.

Judgement of the Administrative Court.

The Court allowed the appeal of Auto Parts Ktf.

“The applicant has also duly explained why its pricing mechanism is determined by the local market, a position supported by the applicant’s expert. For example, in countries where own brand cars are available, it can be stated without further proof that … is less able to penetrate the market and that this has an obvious impact on its pricing policy. It can also be stated without further proof that the company’s aim is to be present on as many markets as possible and to sell as many products as possible in order to reduce fixed costs.
The Court also notes that the expert clearly stated that the OECD Guideline 3.57 does not require the normal market value range to be narrowed down to the interquartile range. This is only possible if data on comparable transactions is limited. Defendant used the interquartile range for 2014 on the basis that the overall comparability of the companies included in the comparison was lower because there was no independent car manufacturer in the market. However, this does not justify the application of the above-mentioned statistical method. The companies included in the comparison all have the same activities – otherwise they would not have been included in the screening result – and the screening provided sufficient data, so there was no real reason for the tax authority to narrow the minimum-maximum range based on the operating results of the companies included in the comparison for 2014.
In conclusion, it can therefore be concluded that the applicant correctly treated its operating results as a whole in the context of the determination of the arm’s length price. The correctness of the method applied was clearly confirmed by the expert and it can therefore be concluded that the defendant reached the conclusion, without justification and incorrectly, that only the result of sales to affiliated companies could be examined in the context of determining the arm’s length price and therefore incorrectly adjusted the corporate tax base.
In the light of the above, the court ruled as set out in the operative part, in that the annulment only affects the provisions of the defendant’s decision and the decision at first instance which are challenged in the action.
The tax authority at first instance may not, in the repeated proceedings, adjust the applicant’s corporation tax base on the ground that only its transactions with related parties may be taken into account in determining the arm’s length price. Nor can it adjust the corporate tax base on the ground that the interquartile range applies for 2014. Accordingly, it is obliged to adjust the other tax consequences, such as the amount of the tax penalty and the amount of the late payment penalty.

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