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Database of Transfer Pricing Case Laws

Japan vs “E Corp”, December 2023, Tokyo District Court, Case No 令和２年（行ウ）第３７２号, 372 of 2020

Posted on December 7, 2023 | By Courts of Japan | No comments

Category: Benchmark, Range and Median, Comparability Analysis, Transfer Pricing Methods | Tag: Aggregated transactions, Automotive industry, Comparability factors, Licence agreement, Most appropriate method (MAM), Profit split method (PSM), Resale Price Method (RPM), Transactional net margin method (TNMM), Use of other methods

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Plaintif, “E Corp” is a Japanese corporation whose business activities are focused on four business fields: resources and energy, public infrastructure, industrial machinery, and aeronautics and space. Through company B, E Corp owned the shares in Company A located in Thailand.

Company A purchased vehicle turbocharger parts or components from “E Corp” or local suppliers, manufactured vehicle turbochargers under a licence agreement with E Corp and also recieved services from E Corp. It sold the turbochargers mainly to Japanese automobile manufacturers, and also both finished products and parts to E Corp’s other affiliated companies.

Following an audit a dispute arose between E Corp and the tax authorities as to what transfer pricing method to apply. An assessment was issued where the tax authorities applied a “method equivalent to the Transactional Net Margin Method”

“E Corp” filed a complaint which the district court alleging that the method used by the tax authoritis was not equivalent to a TNMM, and therefore the amount calculated by the tax authorities could not be considered at arm’s length.

Judgment of the Court

The Tokyo District Court overturned the tax assessment and upheld the E Corp’s claim.

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Related Guidelines

TPG2022 Chapter I paragraph 1.9The arm’s length principle has also been found to work effectively in the vast majority of cases. For example, there are many cases involving the purchase and sale of commodities and the lending of money where an arm’s length price may readily be found in a comparable transaction undertaken by...

TPG2022 Chapter II paragraph 2.133Although most MNE groups are integrated to some extent, a particularly high degree of integration in certain business operations is an indicator for the consideration of the transactional profit split method. A high degree of integration means that the way in which one party to the transaction performs functions, uses...

TPG2022 Chapter III paragraph 3.20In order to select and apply the most appropriate transfer pricing method to the circumstances of the case, information is needed on the comparability factors in relation to the controlled transaction under review and in particular on the functions, assets and risks of all the parties to the controlled transaction,...

TPG2022 Chapter II paragraph 2.152Where the contributions of the parties are such that some can be reliably valued by reference to a one-sided method and benchmarked using comparables, while others cannot, the application of a residual analysis may be appropriate. A residual analysis divides the relevant profits from the controlled transactions under examination into...

TPG2022 Chapter II paragraph 2.145This section has described certain characteristics of the transactional profit split method and provided a number of potential indicators as to when it may be found to be the most appropriate method, as well as a number of factors which may point in the opposite direction. The guidance in this...

TPG2022 Chapter II paragraph 2.143In general, it will tend to be the case that the presence of factors indicating that a transactional profit split is the most appropriate method will correspond to an absence of factors indicating that an alternative transfer pricing method – one which relies entirely on comparables – is the most...

TPG2022 Chapter II paragraph 2.140A transactional profit split may also be found to be the most appropriate method where, according to the accurately delineated transaction, the various economically significant risks in relation to the transaction are separately assumed by the parties, but those risks are so closely inter-related and/or correlated that the playing out...

TPG2022 Chapter II paragraph 2.139A transactional profit split may be found to be the most appropriate method where, according to the accurately delineated transaction, each party to the controlled transaction shares the assumption of one or more of the economically significant risks in relation to that transaction (see paragraph 1.95)....

TPG2022 Chapter II paragraph 2.137Where a party contributes to the control of economically significant risk, but that risk is assumed by the other party to the transaction, this may, in some cases, demonstrate that it is appropriate for the first party to share in the potential upside and downside associated with that risk, commensurate...

TPG2022 Chapter II paragraph 2.136Where business operations are highly integrated, the extent to which the parties share the assumption of the same economically significant risks or separately assume closely related economically significant risks will be relevant to the determination of the most appropriate method and, if a transactional profit split is considered the most...

Supplemental Guidance

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