This case concerns a transfer pricing dispute between the Latvian tax authorities (SRS) and a Latvian manufacturing company, “Snickers Production Latvia”, related to a credit notes issued to Snickers Europe AB, reducing its taxable profits.

For the purpose of establishing the pricing of controlled transactions the company had used the TNMM method and performed a benchmark analysis based on a 2004 version of AMADEUS.

To verify the benchmark analysis the tax authorities had used a 2007 version of AMADEUS and concluded that many of the selected comparables did not meet the qualitative criteria. The benchmark was adjusted and an assessment issued were the reduction of profits resulting from the credit note was denied.

An appeal was filed by the company with the Court. The appeal was dismissed by judgment of the Administrative District Court of 30 September 2009 and later by judgment of the Administrative Regional Court of 8 September 2010.

Judgement of the Supreme Administrative Court

The Supreme Court remanded the case for reconsideration.

Excerpts

“In the present case, the applicant and the Authority used data available at different points in time for the selection of comparators. The Authority concluded, and the Court agreed, that the comparable undertakings used by the applicant in 2004 could not be found in 2007. However, the Court failed to note that, first, the applicant used different criteria for the selection of comparators and, second, the eligibility characteristics of the comparators may have changed over a three-year period in relation to the selection criteria in 2004. In order to find that the applicant has not cooperated with the Authority and that the data provided by the applicant cannot be verified, the Court must first examine whether the Authority’s arguments that the comparable undertakings should be selected only from the workwear sector are well-founded. Furthermore, the Court must examine whether the applicant has not indicated, at least at the contestation stage, the criteria on the basis of which it selected the comparators. If such criteria are indicated, there is no basis for finding that the applicant failed to cooperate with the service and to provide the information necessary for the examination.

In assessing the application of transfer pricing, the Court noted that the credit invoice did not contain information from which it could be inferred as to the conduct of the transaction, the specific transactions in connection with which the document was drawn up; the credit invoice did not contain information which would enable the conduct of the transaction to be traced; and it was not possible to identify the transaction in question with the specific transactions carried out in 2004. However, the Court of First Instance did not state any reasons why the transaction reflected in the credit invoice (the transfer pricing cost adjustment) could not be identified with the specific transactions carried out in 2004, when it is apparent from the grounds of the credit invoice that it was drawn up for the applicant’s supplies of goods to Snickers Europe AB in 2004. The contract states that the applicant produces workwear and that Snickers Europe AB buys it all at a price set for the total production during the calendar year (page 189 of Volume 1 of the file). The applicant’s 2004 export report is also in the file, which shows that the entire production was exported exclusively to Snickers Europe AB (pages 68-71 of the first volume of the file). Furthermore, paragraph 1.42 of the OECD Transfer Pricing Guidelines states that there are situations in which individual transactions are so closely linked or continuous that it is not possible to assess them separately (e.g. long-term supply contracts). Such transactions should be considered together rather than individually.”

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