C. spółka z o.o. is part of a larger group and mainly (95%) sells products (metal containers) and related services to related parties. According to its transfer pricing documentation the “cost-plus” method had been used to determine the prices of products sold to related parties.
The company was audited for FY 2016. According to the tax authorities, the company did not provide enough evidence to support the cost-plus method. The tax authority instead used the transactional net profit method to estimate the company’s income for the year 2016, taking into account factors such as characteristics of goods or services, functional analysis, contractual conditions, economic conditions, and economic strategy by comparing the company’s performance with similar companies over a 3 year period by using EBIT margin. As a result, the authority adjusted the company’s loss and established income based on a EBIT margin of 3.66%, resulting in additional taxable income of PLN 1,803,592.08.
Judgement of the Administrative Court
The Court found that the TNMM was the most appropriate method to determine the company’s income in 2016, and that the comparability analysis was carried out in accordance with the regulations and data available to the authority.
However, the tax authorities have wrongly determined the income of the complainant, by referencing to its entire activity, despite the fact that 5% of the transactions are not subject to regulation under Article 11(1)-(3) of the A.p.d.o.p. Because of this, the court repealed the decision of the first-instance authority and stated that when re-examining the case, the authority should take into account the position expressed in the court’s decision.
Excerpt from the judgement regarding adjustments where the result is within the inter quartile range
“It is also necessary to share the Applicant’s position regarding the use of the median average, well, the authority of first instance, which was accepted by the Appellate Body, stressed on page 151 of the issued decision that the statistical analysis conducted by it used positional measures, as the comparative analysis is an approximation of the prices used in transactions between unrelated parties. In order to determine the range of prices, statistical tools in the form of quartiles (…) were used to analyse the results, the analysis carried out assuming that the appropriate range of results is the interquartile area (first quartile, median, third quartile). Hence, according to the authority, in practice, the most common assumption is that the market values are those that fall between the value of the lower quartile and the upper quartile of the sample population. The inter-quartile range is used to define the rules generally applicable in the market.
It should be noted here that the inter-quartile area for 2016, ranges from 1.61% to 3.89%, so since the market value of the EBIT(2) operating margin is already the value of the bottom quartile of 1.61%, and the estimation made is to determine the margin obtained in comparable transactions by independent entities – §18 of the MF Regulation (and such market transactions are already at the level of the bottom quartile), there is no legal basis for determining the market values of EBIT(2) using the arithmetic average of the median operating margin.”I SA_Go 103_22 - Wyrok WSA w Gorzowie Wlkp. z 2022-06-09