“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.
Judgment 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 its correctness. Therefore, according to the order issued by the Supreme Court, the Court of Appeal may not undertake a professional assessment of the expert opinion that goes beyond the interpretation of the applicable legislation, nor may it review the expert opinion in the new proceedings in the absence of expertise.
Excerpt
“[58] In relation to the adjustment of the profit level indicator for manufacturing activities, the expert found that comparable companies do not charge taxes such as the local business tax and the innovation levy as an expense to operating profit, the amount of which distorts comparability, this is a clearly identifiable difference in the cost structure of the company under investigation and the comparable companies, so an adjustment should be made in accordance with the OECD guidelines and the Transfer Pricing Regulation, because the statistical application of the interquartile range restriction cannot be used to increase comparability. However, the Court of First Instance held that it was not disputed that, even if the interquartile range as a statistical method was used, it might be necessary to apply individual adjustments, but that the applicant had not provided the audit with a detailed analysis of the justification for the adjustment and had not provided any documentary evidence in the course of the two administrative proceedings to show how the adjustment applied served to increase comparability. However, the application for review relied on the contradictory nature of the reasoning in this respect, since, while the Court of First Instance criticised the lack of documentation to support the adjustment {Ist judgment, paragraph 34}, it shared the expert’s view that this would indeed require an investment of time and energy which taxpayers could not reasonably be expected to make {Ist judgment, paragraph 35}.
[59] On the other hand, the judgment at first instance explained that the applicant had only carried out research in the course of the administrative proceedings into whether the countries of the undertakings used as comparators had a similar type of tax burden to the Hungarian local business tax, and the expert had referred in his expert opinion to the fact that the applicant had only identified this one difference when carrying out the comparative analysis, but, if a detailed analysis is carried out, each difference can be individually identified and quantified and it is for this reason that the OECD guidelines also allow a range of results to be taken into account, because it reduces the differences between the business characteristics of the associated enterprises and the independent companies involved in comparable transactions and also takes account of differences which occur in different commercial and financial circumstances. Thus, the expert did not share the expert’s view that, while the narrowing to the interquartile range includes differences that are not quantifiable or clearly identifiable, individual adjustments should always be applied in the case of clearly identifiable and quantifiable significant differences. Thus, the trial court took a contrary view to the expert on this issue.
[60] Nor did the Court of First Instance share the expert’s view in relation to the interest rate on the intercompany loan granted to the applicant by its affiliate and did not accept the expert’s finding that the MNB’s interest rate statistics were an averaging of the credit spreads of the debtor parties involved in the financing transactions, on an aggregated basis and, consequently, the use of the MNB interest rate statistics is not in itself capable of supporting or refuting the arm’s length principle of the interest rate applied in intra-group lending transactions, whether long or short-term. Nor did it accept the method used and described by the applicant in the comparability field, since it did not consider that the applicant should have used an international database to look for comparative data, since comparability was questionable. Furthermore, it considered irrelevant the expert’s reference to the fact that the average loan interest rates in Hungary in 2016 were strongly influenced by the low interest rates on subsidised loans to businesses and criticised the fact that the expert did not consider it necessary to examine the applicant’s current account loans under the cash-pool scheme.
[61] It can thus be concluded that the Court of First Instance, in its judgment, did not accept the reasoning of the private expert’s opinion and made professionally different findings from those of the expert on both substantive points.
[62] The opinion of the appointed expert is questionable if a) it is incomplete or does not contain the mandatory elements of the opinion required by law, b) it is vague, c) it contradicts itself or the data in the case, or d) there is otherwise a strong doubt as to its correctness [Art. 316 (1) of the Civil Code]. The private expert’s opinion is questionable if a) the case specified in paragraph (1) is present [Art. 316 (2) a) of the Civil Code]. Section 316 of the Private Expert Act specifies and indicates precisely in which cases the expert’s opinion is to be considered as a matter of concern. Thus, the expert’s opinion is of concern if it is incomplete, vague, contradictory or otherwise doubtful. The latter case means that the expert’s opinion is also of concern if, although it is not incomplete, not unclear, not contradictory, the court has serious doubts as to its correctness, taking into account the facts of the case and the specific characteristics of the expert’s opinion, on the basis of the evidence, and therefore the court must always take a position on the question whether the expert’s opinion is of serious doubt, on an individual basis, assessing the circumstances and the expert’s opinion.
[63] However, it should be stressed that the court will draw the party’s attention to the fact that the private expert’s opinion or the opinion of the appointed expert is of doubtful quality [Art. Due to the court’s obligation to inform the party about the evidence, the party cannot learn only from the judgment that the court excluded the expert opinion from the evidence – due to its error – without informing the party about the specific reason for the expert opinion’s concern (KGD2016.70., Kúria Kfv.V.35 .256/2014/9., Kfv.I.35.025/2020/8.). 307 (1) (b) of the Civil Procedure Act. In accordance with Art. Section 78(3)(c) of the Act allows for the submission of a motion for evidence or the provision of evidence after the first hearing, if it became necessary as a result of the material circumstances of the case.
[64] However, the court of first instance did not provide any information, in the context of its substantive review, following the supplementation of the expert opinion or the hearing of the expert at the hearing, that the expert opinion had been provided in accordance with the provisions of the Hungarian Civil Procedure Code. 316(1) of the First Chamber, but at the same time delivered a judgment which reflected a different view from the expert’s opinion and a contrary view. The parties to the proceedings could only have become aware of this dissent from the judgment at first instance.
[65] If, for whatever reason, the court of first instance considered the expert’s opinion to be questionable, it should have informed the parties to the proceedings of that fact in the context of the substantive proceedings, in compliance with the procedural rules, and should have given them the opportunity to submit observations and to provide any further evidence.
[66] The request for review is also well founded in that the statements of the court of first instance which take a position contrary to the expert opinion require expertise, the court of first instance having expressed its opinion on professional matters which go beyond the interpretation of the applicable legislation and the OECD Guidelines and fall within the competence of experts. The Court of First Instance therefore undertook to assess the expert opinion from a technical point of view and overruled the expert’s opinion on a number of points which it could not lawfully have done.
[67] On the basis of the above, the Curia has set aside the final judgment of the Court of Appeal of the Republic of Hungary. 121 (1) and ordered the court of first instance to conduct new proceedings and issue a new decision.”
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