“Poly Corp”, a manufacturer of polypropylene products, had an export marketing contract with an group company for overseas sales. The products were sold to unrelated third parties or foreign group companies through this arrangement.
Following an audit, the tax authority claimed that “Poly Corp” sold its products to foreign group companies below the arm’s length price. An assessment of additional taxable income was issued and the amount was treated as dividends to the foreign group companies.
“Poly Corp” appealed.
Judgment
The Administrative Court determined that even though the transfer prices were agreed upon by shareholders without special relationships, they did not automatically qualify as arm’s length prices.
For transactions with certain group companies, the tax authority failed to account for sales volume in their comparability analysis, rendering the assessments invalid. However, for transactions with another related companies, the criteria applied were deemed reasonable, and using a single comparable transaction to determine the arm’s length price was sufficient.
The court concluded that the tax assessments related to transactions with certain group companies were invalid due to lack of comparability, while those for another group companies were upheld as lawful.
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