SC (Pty) Ltd (SCL), was part of a supermarket group with a Mauritian subsidiary, SIL, that held trademarks and managed treasury functions for non RSA operations. Under franchise agreements, non RSA subsidiaries paid royalties of 1 percent of gross sales to SIL for use of the group’s intellectual property and know how. SCL received a rutine remuneration for the services performed for SIL.
Following a transfer pricing audit, the South African Revenue Service (SARS) concluded that it was evident from the conduct of both SIL and SCL, their respective employees and boards, and the general correspondence provided to SARS, that SCL had in fact determined the strategies with respect to the group’s expansion into the African market. SCL set the standard with regard to the development of marketing intangibles in non-RSA jurisdictions. SIL was only responsible for entering into the franchise agreements after they had been drafted and vetted by SCL employees. SARS therefore concluded that the real development, enhancement, maintenance, protection and exploitation functions for these intangibles, such as market research, brand development and strategic planning, were carried out in South Africa by SCL and its parent SHL, not by SIL. SARS found that the remuneartion of SCL had not been at arm’s length, relying on the Comparable Uncontrolled Price method which led to large upward adjustments to SCL’s taxable income.
SCL objected to the assessment and subsequently appealed against it. They contended that the arrangements did not give rise to non-arm’s length revenue streams, and that the CUP method adopted by SARS was defective and inapplicable.
The issue that the Tax Court had to decide in this case was whether SARS could submit an expert report in support of their assessment order. This was contested by SCL in their appeal.
Decision
The Tax Court dismissed the appeal of SCL and ruled in favour of SARS.
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