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. In 2023 the Tokyo District Court overturned the tax assessment and upheld the E Corp’s claim.
An appeal was filed by the tax authorities with the Tokyo High Court.
Judgment
The Tokyo High Court upheld the district court’s decision and ruled in favour of ‘E Corp’, concluding that the transfer pricing method used by the tax authorities was inappropriate for this case.
Excerpt in English
“The OECD Guidelines (2010 Edition) list the characteristics of the transferred assets or services, the functions performed by the parties, and the economic circumstances of the parties as important attributes to be considered in a comparability analysis. It states that even if transactions involve the same assets or services, Furthermore, in determining the similarity of markets, the guidelines cite economic conditions relevant to the determination of market similarity, including ‘the degree of competition in the market and the relative competitive positions of buyers and sellers in the market,’ as well as ‘the level of supply and demand in the market as a whole and in specific regions.’ Additionally, operating profit indicators are cited as reflecting competitive position, including the competitive position within the industry. In addition, operating profit indicators are noted as potentially directly influenced by the forces acting within the industry, including competitive position, and as a factor that may result in differing profitability even if two companies belong to the same industry.
‘market share (market share ratio)’ and ‘competitive position’ as factors that may result in different profitability even if two companies belong to the same industry. (See the same paragraph 2.1.5.5, 2.72.)‘market share (market share ratio)’ and ‘competitive position’ as factors that may result in differing profitability even if two companies belong to the same industry. (Same paragraph 1.5, 2.72). Furthermore, in accordance with the same guidelines, Article 66-4(3) of the Measures Act states that when selecting comparable transactions, the following factors should be considered: When determining the degree of similarity between related-party transactions and non-related-party transactions, consideration should be given to the similarity of the following elements, such as the nature of the business of the corporation, related parties, and non-related parties, as well as the ‘functions performed by the seller or buyer’ and ‘market conditions’ (see Eth 4-4-975-11-5).
From this, it is clear that when considering comparability (similarity of transactions), it goes without saying that the ‘functions performed by the seller or buyer’ in the transactions to be compared should be taken into account. However, in addition to this, ‘market conditions’ should also be considered, and when considering ‘market conditions,’ factors such as ‘market share’ and ‘demand’ are factors that may be considered.
The foreign related party in this case and the comparable company both manufacture automobile parts, but there are significant differences in the market conditions for each product, such as market share and demand, and it cannot be immediately recognised that these differences do not have a significant impact on the operating profit margin. Therefore, the transactions in question lack similarity in ‘market conditions,’ and while adjustments to account for these differences may be necessary, it is not clear that such adjustments are possible.
Based on the above, it must be concluded that there is no comparability between the transactions of the foreign related party and the comparable entity.
Conclusion
Based on the above, the defendant’s claims are all well-founded and should be granted, and the original judgment to the same effect is appropriate. The appeal is without merit.”
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