This case relates to sales of crude oil from the Russian company, Dulisma Oil, to an unrelated trading company, Concept Oil Ltd, registered in Hong Kong.
The Russian tax authorities found that the price at which oil was sold deviated from quotations published by the Platts price reporting agency. They found that the prices for particular deliveries had been lower than the arm’s length price and issued a tax assessment and penalties of RUB 177 million.
Dulisma Oil had set the prices using quotations published by Platts, which is a common practice in crude oil trading. The contract price was determined as the mean of average quotations for Dubai crude on publication days agreed upon by the parties, minus a differential determined before the delivery date “on the basis of the situation prevailing on the market”.
Transfer pricing documentation had not been prepared, and the company also failed to explain the method by which the price had been calculated and how the price differential was determined.
In the tax assessment, the tax authorities used the same quotation for comparison in the pricing of the transactions, but adjusted for ESPO M1 differential (added the minimum premium), which was determined at the date closest to the signing of the contract addendum.
The court ruled in favor of the Russian tax authorities.
In the judgement the court pointed to the fact that there was no transfer pricing documentation supporting the pricing of the transaction as an argument in favor of the transfer pricing method used by the Russian tax authorities.
The court did not accept the company’s arguments that the Hong Kong trader was an unrelated party. Counteragents registered in offshore zones are to be treated as related parties according to Russian legislation.