Malaysia vs Sandakan Edible Oils SDN BHD, April 2023, High Court, Case No WA-14-2-02/2021

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Category: Benchmark, Range and Median, Transfer Pricing Methods | Tag: , , , , , , , ,
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Sandakan Edible Oils SDN BHD principal activity is, amongst others, to carry out the refining and sale of edible oils and related products, and the packaging and sale of cooking oil. It applied the Comparable Uncontrolled Price (CUP) method as the transfer pricing methodology to determine the arm’s length pricing of its controlled transactions.

Following an audit for FY 2010-2013 the tax authorities informed Sandakan Edible Oils SDN BHD that it would be invoking section 140A of the ITA to raise an additional assessment. The tax authorities rejected the CUP method and instead applied the Transactional Net Margin Method (TNMM). According to the benchmarking analysis, Sandakan Edible Oils SDN BHD’s financial results was within the interquartile range for all years, but for 2010 the results was below the median. On that basis the tax authorities held that the margin for 2010 should be adjusted up to the median.

Sandakan Edible Oils SDN BHD filed a complaint with the Special Commissioners of Income Tax (SCIT) and in a decision issued in 2021 the SCIT set aside the assessment.

The tax authorities then filed an appeal with the High Court.

Judgment of the High Court

The High Court dismissed the tax authorities appeal and upheld the decision of the Special Commissioners of Income Tax.

Excerpts

“The agreed issues for determination are as follows: –

Issue 1: Transfer Pricing Adjustments (YA 2010)

In performing transfer pricing adjustment on the Taxpayer for the YA 2010 pursuant to section 140A of the ITA, whether the Revenue is required under the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines and the Revenue’s Transfer Pricing Guidelines to adjust the Taxpayer’s profits to the median in a case where its margin is within the inter­ quartile range?”

(…)

64. All in all, I find that the SCIT’s decision is consistent with their earlier decision in Procter & Gamble (supra) that “if the price or profit margin is within the accepted interquartile range then a comparison need not be made (paragraph 3.60 of the 2010 OECD Guidelines). The SCIT’s decision was recently upheld by this Honourable Court on 7.4.2020.

65. The SCIT’s decision is also consistent with RW1’s own evidence that nothing in the Guidelines requires an adjustment to be made to the median, and the legal position in other jurisdictions applying the arm’s length principle under the OECD Guidelines.

66. The finding of facts of the SCIT will only be disturbed by this court when the SCIT was wrong in the evaluation of the It is for the Revenue to establish that there was a misdirection by the SCIT to warrant interference by this court. Unfortunately, the Revenue has not demonstrated any such errors in the facts of this case to warrant appellate interference.

67. I view the SCIT’s findings as rational and cogent and there are no flaws in its reasoning or the conclusions therein. Based on the evidence before the SCIT, it cannot be said that the findings of the SCIT are irrational or perverse.

68. I am of the view that the finding of the SCIT is based on the totality of the evidence adduced before them. To me, the SCIT had scrutinized the evidence of both parties and applied the law to the facts and made a reasonable conclusion. It is not the task of this court to scrutinize every piece of evidence adduced before the SCIT and to make another finding of fact. That task of fact-finding fall within the jurisdiction of the SCIT.“

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Related Guidelines

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 3.65Generally 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 3.62In 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 3.61If 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 I paragraph 1.9The arm’s length principle has also been found to work effectively in the vast majority of cases. For example, there are many cases involving the purchase and sale of commodities and the lending of money where an arm’s length price may readily be found in a comparable transaction undertaken by...
TPG2022 Chapter II paragraph 2.112A similar approach may be required when there are differences in functions performed by the parties being compared. Assume that the facts are the same as in the example at paragraph 2.44 except that it is the comparable independent enterprises that perform the additional function of technical support and not...
TPG2022 Chapter II paragraph 2.111By way of illustration, the example of cost plus at paragraph 2.59 demonstrates the need to adjust the gross mark-up arising from transactions in order to achieve consistent and reliable comparison. Such adjustments may be made without difficulty where the relevant costs can be readily analysed. Where, however, it is...
TPG2022 Chapter II paragraph 2.110See in particular paragraphs 3.18-3.19 for guidance on the tested party, paragraphs 3.55-3.66 for guidance on the arm’s length range, and paragraphs 3.75-3.79 for guidance on multiple year data....

Supplemental Guidance

Poland issues tax clarifications on transfer pricing – No. 4: Transactional Net Margin Method (TNMM)1 December 2021 the Polish Ministry of Finance issued Tax clarifications on transfer pricing No. 4: Transactional Net Margin Method (TNMM) Clarification on application of the TNMM is provided in these areas: A. Principles of TNMM use A.1. Scope of application of the method A.2. Tested party A.3. Determination of...
Malaysia issues new Transfer Pricing Rules for 2023On 29 May 2002, Malaysia updated its existing TP rules. The new rules are largely in line with the OECD Transfer Pricing Guidelines, but there are minor differences. For example, the new rules state that the arm’s length range is defined as the range between the 37.5th and 62.5th percentiles...

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