“Metal KtF”‘s main activity was the production of metal parts for the automotive industry. It had been making losses since 2012, while the group to which it belonged was profitable as a whole.
The tax authorities conducted an audit and classified “Metal KtF” as a low-risk manufacturing company (contract manufacturer) because the functions and business risks assumed were not the same as those of an independent manufacturing company and the losses were partly the result of decisions taken by the parent company. The tax authorities concluded that “Metal KtF” provided a hidden service to the parent company by tolerating loss-making production. An assessmet was issued where the difference between the operating result (loss) reported by “Metal KtF” and the calculated arm’s length operating result had been added to the taxable income.
“Metal KtF” filed an appeal, which was mostly dismissed by the Administrative Court, and an appeal was then filed with the Supreme Administrative Court.
Judgment
The Supreme Administrative Court ruled predominantly in favour of “Metal KtF” and remanded the case for reconsideration.
Excerpts in English
“[43] On the basis of the above, the Curia emphasises, also in the light of the cited provisions of Article 18 of the Tao. tv., that the defendant, although correctly stating that transactions between unrelated parties are not subject to transfer pricing and that the profit margin achieved in transactions with related parties must therefore be calculated separately, nevertheless, in the merits of its decision, and in a logically contrary manner, accepted the legality of the first instance tax authority’s assessment of 100% of the product sales for transfer pricing purposes. On the record before it, there is no derivation of the arm’s length price for the related party sales referred to by the defendant, which is negatively determined from the sales to unrelated parties. Furthermore, the defendant has also pointed out the correctness of the decision at first instance in relation to the aggregation of sales of goods between related parties with the provision of services between related parties, but there is no factual element in the decision at first instance in this respect, nor is there any data explicitly relating to the aggregation of these two categories of transactions. It is not clear from the decision of the defendant what services the defendant means by these services, the decisions of the tax authorities at first instance only contain data on the licence fee paid by the applicant to related parties, the interest on cash-pool loans and the management services used by the applicant, but not on the definition of the services provided by the applicant. The service provided by the plaintiff was defined in the main proceedings in the sense that the plaintiff provided a (hidden) service to the parent company in order to tolerate loss-making production (and at the same time to keep the plaintiff group profitable), but this argument was rejected by the defendant.
[44] In conclusion, the Curia found that the defendant’s decision violated Section 18(1) of the Tao Act due to the above-mentioned deficiency and contradictory reasoning concerning the precise definition of the related transaction and the basis for transfer pricing, the defendant violated its obligation to state reasons and the annulment of the defendant’s decision became justified. Nor could the court have examined the merits of the decision on the grounds of a defect which could not be remedied in the proceedings before the court and which affected the merits of the case. This can only be remedied in new proceedings against the defendant.
[…]
[48] In the new proceedings, the defendant must proceed in the light of the judgment of the Curia, in that the transaction or arrangement under investigation – between the plaintiff and the related party – must be precisely defined and delimited. It must provide the basis for transfer pricing under the Tao. tv., subject to the Guidelines, which may be used as an aid to application. Only transfer pricing of a related party transaction can be applied, and only for this transfer pricing adjustment by determining the arm’s length price can be applied, transactions with unrelated parties are excluded. The Curia has also emphasised in its case law decision BH2020. 341 that the profit rate in related party transactions should be distinguished from the profit rate in unrelated party transactions. Since no evidentiary procedure was conducted in the case, the applicant will have the opportunity to prove the facts it claims concerning the characterisation and functional analysis in the new procedure by submitting the evidence at its disposal, it being understood that it is for the defendant to assess the facts and evidence and, in particular, to examine the items referred to by the applicant as extraordinary expenses.”
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