OJSC Mostovsky was engaged in the extraction of sand for construction. The sand was sold to related parties who then resold the sand to final customers. The price paid by the final customers was significantly higher than price paid to Mostovsky by the related intermediaries.
Following an audit for 2012-2013, the tax authority held that the setup using intermediate re-sellers was artificial and constructed to obtain an unjustified tax benefit. An assessment was issued based on the “subsequent sale price-method”.
Mostovsky disapproved of the assessment and brought the case to court. In their court filing they proposed use of the CUP method.
The court found that Mostovsky’s transfer prices had not being arm’s length and that an unjustified tax benefit had been obtained, but disagreed with the method chosen by the tax authority.
The “Subsequent Selling Price-method” had not been applied correctly by the tax authority, since:
– the inapplicability of the CUP method had not been properly justified;
– the gross margin had not been calculated for the tested transaction;
– the market interval of gross profitability was determined based on incomparable activities.
On that basis, the court considered that the CUP method should be applied based on comparable internal and external transactions.