PJSC Uralkali, produced and sold fertilizers (“potassium chloride”) through a related Swiss trader. Uralkali had informed the authorities about the controlled transaction and submitted the required TP documentation. To substantiate the pricing of the transaction they had applied the transactional net margin method (TNMM) with the Swiss trader as the tested party.
The Russian tax authorities disapproved of the choice of method and the way the method had been applied. They conducted an analysis, using the CUP method, and determined the the prices used in the controlled transaction deviated from price quotations of an independent pricing agency (Argus). Hence a tax assessment was issued.
PJSC Uralkali disapproved of the assessment and brought the case to court.
The court of first instance supported Uralkali’s position, and argued that the tax authority should have applied the same TP method as the Taxpayer. Failure of the tax authority to apply the same TP method or to provide sufficient evidence to justify use of another method was considered sufficient to invalidate the tax assessment.
The Court of Appeal overruled the decision of the lower court. They concluded that the TNMM method had been applied in violation of paragraph 1 of Article 105.12 of the Russian Tax Code, and that the method had been applied for the purpose of obtaining an unjustified tax benefits. They found that the CUP method was more appropriate for the case, taking into account the actual circumstances and conditions of the controlled transaction. They ruled in favor of the tax authorities and returned the case for new consideration in the court of first instance.