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Malaysia vs PSB, December 2023, Special Commissioner of Income Tax (SCIT), Case No (PKCP(R) 454 – 456/2018)

Posted on December 15, 2023 | By Courts of Malaysia | No comments

Category: Benchmark, Range and Median | Tag: Adjustment to median, Comparability defects, Interquartile range (IQR), Median, Statistical techniques

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PSB is wholly owned by PGEO Group Sdn Bhd and PGEO Group Sdn Bhd is wholly owned by Wilmar International Ltd, a Singapore-based company. Its principal activities are investment holding, processing and marketing of edible oil products and manufacturing of steel drums. PSB sold its products to related companies in Malaysia and abroad.

Following an audit, the tax authorities issued assessments of additional taxable income for FY2010, FY2011 and FY2014. The assessments for FY2011 and FY2014 were adjustments under the transfer pricing provisions of Section 140A of the ITA 1967. According to the tax authorities, PSB’s result for 2011 was below the median of the results found in a benchmark analysis and therefore not at arm’s length. For 2014, the result was outside the interquartile range and therefore also not at arm’s length.

Dissatisfied with the valuations, the PSB appealed the valuations to the Special Commissioner of Income Tax (SCIT).

Decision

The SCIT allowed the appeal and discharged the assessments.

According to the Special Commissioner, no adjustment can be made under Section 140(A) of the ITA if the taxpayer’s result is within the arm’s length range, and in the absence of any comparability defect, there is no need to narrow the range to the interquartile range.

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Related Guidelines

TPG2022 Chapter III paragraph 3.62In determining this point, where the range comprises results of relatively equal and high reliability, it could be argued that any point in the range satisfies the arm’s length principle. Where comparability defects remain as discussed at paragraph 3.57, it may be appropriate to use measures of central tendency to...

TPG2022 Chapter III paragraph 3.65Generally speaking, a loss-making uncontrolled transaction should trigger further investigation in order to establish whether or not it can be a comparable. Circumstances in which loss-making transactions/ enterprises should be excluded from the list of comparables include cases where losses do not reflect normal business conditions, and where the losses...

TPG2022 Chapter III paragraph 3.64An independent enterprise would not continue loss-generating activities unless it had reasonable expectations of future profits. See paragraphs 1.149-1.151. Simple or low risk functions in particular are not expected to generate losses for a long period of time. This does not mean however that loss-making transactions can never be comparable....

TPG2022 Chapter III paragraph 3.63Extreme results might consist of losses or unusually high profits. Extreme results can affect the financial indicators that are looked at in the chosen method (e.g. the gross margin when applying a resale price, or a net profit indicator when applying a transactional net margin method). They can also affect...

TPG2022 Chapter III paragraph 3.61If the relevant condition of the controlled transaction (e.g. price or margin) falls outside the arm’s length range asserted by the tax administration, the taxpayer should have the opportunity to present arguments that the conditions of the controlled transaction satisfy the arm’s length principle, and that the result falls within...

TPG2022 Chapter III paragraph 3.60If the relevant condition of the controlled transaction (e.g. price or margin) is within the arm’s length range, no adjustment should be made....

TPG2022 Chapter III paragraph 3.57It may also be the case that, while every effort has been made to exclude points that have a lesser degree of comparability, what is arrived at is a range of figures for which it is considered, given the process used for selecting comparables and limitations in information available on...

TPG2022 Chapter III paragraph 3.66A similar investigation should be undertaken for potential comparables returning abnormally large profits relative to other potential comparables....

TPG2022 Chapter III paragraph 3.59Where the application of the most appropriate method (or, in relevant circumstances, of more than one method, see paragraph 2.12), produces a range of figures, a substantial deviation among points in that range may indicate that the data used in establishing some of the points may not be as reliable...

Supplemental Guidance

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