In this case a Korean subsidiary, Photo Corp, sold photo paper, film, and other imports from overseas related parties to local stores.
The Korean Tax Authority had applied the transactional net margin method (TNMM) to derive the arm’s length price. Six comparable companies had been selected and a tax assessment was issued based on the difference between the operating profit margin of the comparable companies and Photo Corp.
Photo Corp disagreed with the assessment and filed an appeal claiming that the selected six companies were not comparable.
The court found the tax authorities had applied the transaction net profit margin method without explaining why the traditional methods (CUP, RSM, CPM) could not be applied. The court also found that five of the selected comparables were retailers, and about ten times larger in terms of sales and company size than the tested party. In addition one of the selected companies manufactured products through separate research and development with the company’s affiliated research institutes and four of the selected companies sold high-end luxury goods to general consumers in department stores and other places. The court concluded that the six companies were not suitable for comparison in calculating the arm’s length price.
The court refered the case back to the authorities with an order to re-examine the basis for applying a CUP-method.
Translation of Korean 2006서1465