In this case “A. Median S.R.L.” had appealed a decision of the court of first instance where the income had been determined to the median value. According to the company the median is not the only value corresponding to the market value, when both the lower limit and the upper limit of the range of comparison in turn reflect the market value of the goods or services supplied. The provisions of Article 2.7 of the Guidelines were relied on in that regard.
“…the assessment must be made in a manner which does not contravene Article 2.7 of the OECD Guidelines, that is to say, does not lead to overtaxation. However, given that the court of first instance assumed that the only value which may be taken into account in determining the transfer price is the median value, any other value within the margin established is excluded, which is contrary to the Tax Code and the OECD Guidelines.”
The Tax authorities requested that the appeal be dismissed as unfounded. In its grounds, it states that the provisions of the Code do not reveal the priority applicability of the rules set out in the OECD Guidelines, but highlight the fact that, depending on the circumstances of the case, the relevant guidelines which the Guidelines develop are taken into account. The Guide is a practical tool and its incorporation into national legislation has been left to the discretion of the States. Although Romania is not a member of the OECD, there has been concern to align with international standards in this area. However, it should be borne in mind that the provisions of the Guide can only be invoked domestically if they are incorporated into national legislation.
Judgement of Court
The Court dismissed the appeal of “A. Median S.R.L.” and decided in favor of the tax authorities.
“Having analysed the documents and the case-file and the judgment under appeal in the light of the grounds for annulment, the High Court finds that the appeal brought by the applicant A. S.R.L. is unfounded….”
Excerpts (Unofficial English translation)
“The Court of First Instance correctly held that the provisions of the Order, which state that the adjustment/estimation of transfer prices is to take place at the median value of the comparison range, fully correspond to the provisions of the Tax Code.
Compliance with the market price in transactions between related persons is verified on the basis of the transfer pricing file and involves an analysis under conditions of comparability of controlled transactions in relation to uncontrolled ones, using the most appropriate method among those provided for in Article 11(1)(b) of the Code. (2) of the Tax Code. The result of the analysis is reflected in a range of values/range of values with relatively equal relevance.
If the prices used in the relationship between the affiliates fall within this range, the provisions of the Tax Code relating to the adjustment do not apply. Adjustment occurs when the prices used by the affiliates do not fall within the range of comparison and that adjustment, as provided for in the rule challenged by the applicant, takes place at the median value of the range of comparison.
The appellant-claimant submits that any value of the comparison range, that is to say not only the median value but also the lower quartile as well as the upper quartile of the comparison range, corresponds to the market value, so that the norming of the adjustment to the median value is unlawful.
The High Court finds that the claims of the appellant-appellant are unfounded since the median value of the comparison range best corresponds to the requirement to reflect market value. The appellant criticises, in fact, the failure of the secondary legislature to adopt the rule of adjustment to any value of the comparison range which would be more favourable to the affiliated person concerned by the transfer pricing verification. That does not, however, constitute, in relation to the higher-ranking legislative framework, a criticism of the unlawfulness of the lower-ranking rules under challenge.
Transfer pricing is not an exact science, as the OECD Guidelines also point out. There is flexibility in terms of the methods used for comparison, and in terms of assessing the results by reference to a range of values rather than a fixed point.
However, when verified prices fall outside the range of comparison, the manner of adjustment to reflect market value is within the discretion of the secondary legislator.
And the solution chosen by the secondary judge – adjusting to the median value of the comparison range – is the one that best meets the imperative of reflecting market value and the imperative of uniform and equal application of the tax law.
The exercise of this role by the national tax administration is also recognised by the OECD Guidelines, paragraphs 3.61 and 3.62.
Moreover, the very recommendations in the OECD Guidelines referred to above are to the effect that the point within the range at which the adjustment takes place should be the median value if there are some comparability flaws which cannot be identified and/or quantified.
The applicant’s references to paragraph 2.7 of the OECD Guidelines were correctly dismissed by the court. Those provisions contain recommendations applicable at the stage of carrying out the comparability analysis, which ends with the establishment of the comparability range. Paragraph 2.7 refers to profit-based methods of comparison and not to the adjustment operation.
As such, not only at the level of the legality analysis, but not even at the level of argument, the reference to point 2.7 of the Guidelines is irrelevant and does not support the appellant-claimant’s contention that the choice of the median adjustment solution could lead to overtaxation.”
“Referring to paragraphs 3.57 and 3.62 of the OECD Guidelines, the appellant submits that the central tendency of the market is not a point, but a range, namely the range of comparison, from the lower quartile to the upper quartile, and that the Guidelines leave the possibility of adjustment to any of the values of the range, whereas the contested national rules circumvent that possibility by requiring the tax authority to adjust to the median value.
Without reiterating the points made above, which are also relevant to the analysis of the legality of Article 9(1)(b) of Regulation (EC) No 1782/2003, the Court of Justice has held that the taxable person is entitled to apply the lower limit of the taxable amount. (2) of Order No 442/2016 and Art. 5 para. (15) of the Methodological Rules, the High Court finds that paragraph 3.57 of the OECD Guidelines contains a recommendation concerning the establishment of the range of values when certain comparability flaws that cannot be identified/quantified remain, in the sense of establishing this range according to the central tendency, in order to ensure the reliability of the analysis. Again, the recommendation shown does not refer to the adjustment itself. Relevant in this respect are the recommendations in paragraphs 3.61 and 3.62, according to which the tax administration determines the point within the comparator range at which the adjustment takes place. Also at the level of recommendations, the Guidelines indicate that, in the case of relatively equal and high reliability results, any of the points in the range may be used for the adjustment, and that if some comparability deficiencies remain, it is preferable to use the central tendency to determine this point, reflected by the median value.
As such, the contested sub-legal rules do not suffer from any legality flaw by choosing the solution of adjusting to the median value, but on the contrary respond most appropriately and in all cases to the condition imposed by the Tax Code of adjusting to the level of the central market trend.
The decision of judicial practice relied on by the appellant-appellant is not a source of law and does not constitute an argument supporting a solution contrary to that envisaged on the basis of the arguments set out above.
For all those reasons, on the basis of Article 496 of the Civil Procedure Code, finding the grounds of appeal under Article 488(2) of the Civil Procedure Code to be unfounded, the appellant claims that the Court should (1) pc. 8 of the same Code, the High Court will reject the appeal filed by the appellant-claimant A. S.R.L. against the civil judgment no. 18 of 3 February 2019 of the Court of Appeal Timișoara, Administrative and Fiscal Litigation Section.”