“Stone” A SRL had bought stones/minerals from related parties and paid for certain services.
Following an audit the tax authorities had issued an assessment, where the price paid for stones had been adjusted based on cost plus method and deductions for costs of services had been denied due to lack of benefit.
The court of first instance upheld the assessment in regards of the profit adjustment related to purchase of stones, but set aside the assessment in regards of denied deductions for services.
This decision was appealed to the Supreme Court by both “Stone” A SRL and the tax authorities.
Judgement of Supreme Court
The Supreme Court found the appeal unfounded and upheld the decision of the court of first instance.
“The appellant claimed that the court of first instance misapplied the OECD Guidelines (Organisation for Economic Co-operation and Development transfer pricing guidelines) in adjusting/deducing the expenses by the amount of RON 24 703 representing the value of the stone purchased in 2010 from E. S.R.L..
That criticism is also unfounded.
It appears from the contents of the RIF that the tax authority proceeded, in accordance with Article 11 para. (2) (a) of Law No 571/2003, to adjust the expenses with the cost of the raw materials in question using the net margin method, after having verified the transfer price file in the form and with the explanations submitted by the applicant.
The applicant considers that account should have been taken of the price of the stone purchased, which would have been of a higher quality than that supplied by other trading partners, to which transport costs were added.
However, the party fails to recognise that such an argument had to be accompanied by appropriate evidence of the facts relied on, which in fact was not the case either in the administrative procedure or before the first instance.
Even the technical expert appointed stated that he did not have access to the documents of E.S.R.L. in order to be able to carry out a comparative verification of the price charged in relation to the appellant applicant compared with the relationship with other business partners, limiting himself to assuming only that the transport of raw materials was also taken into account, although the High Court finds that such a circumstance is not apparent from Contract No x/2009 concluded between the companies.”
“According to Article 11(11)(a) of Regulation No 17 (2)(b) of Law No 571/2003, in the context of a transaction between related Romanian persons, the tax authorities may adjust the amount of the income or expenses of any person, as necessary, to reflect the market price of the goods or services provided, based on the cost plus method, whereby the market price is established on the basis of the costs of the good or service provided by the transaction, increased by the appropriate profit margin.
In the present case, however, the cost-plus method used and described by the appellant was not correctly applied, as the production costs were not separately identified by category of customer – affiliated and non-affiliated, so that the first instance lawfully and properly upheld the findings in the contested tax documents to the effect that the appellant did not provide a full justification of the transfer price, even after the submission of additional documents, following the request of the inspection bodies.
Thus, it was precisely Article 11 of the Tax Code, Article 3(3)(a) and (b) of the Tax Code, which was given effect to. (1) Annex 3 of the MFP Order no. 222/2008 (“identification of three examples of transactions similar to those to be assessed”) and point 29 of the Methodological Norms for the application of Art. 11 of the Tax Code (“the net margin method involves calculating the net profit margin obtained by a person from one or more transactions with related persons and estimating this margin on the basis of the level obtained by the same person in transactions with independent persons […]”), relied on by the appellant, by selecting a sample of 3 comparable companies (taken into account under D. P.T.), operating in the same field as the appellant, taking into account the same indicators for the selected affiliated and non-affiliated persons and identifying examples of transactions similar to those to be estimated.”ROM-Decizia-nr.-3217-2020