“X Beverages S.A.” had entered into an agreement with the ABCDE Group for the use of concentrate and trademarks for the production and sale of beverages in Spain, but according to the agreement, “X Beverages S.A.” only paid for the concentrate.
Following an audit for the financial years 2005-2007, the tax authorities issued an assessment which considered part of the payment to be royalties on which withholding tax should have been paid.
Court’s Judgement
The Court agreed that part of the payment could be qualified as royalties, but the assessment made by the tax authorities had been based on secret comparables – leaving the taxpayer defenceless – and on this basis the Court annulled the assessment.
Excerpts
“The taxpayer itself seems to recognize that the so-called “Contract of …” contains both a distribution contract and a trademark assignment contract when it says on page 127 of its statement of allegations
“Indeed, this authorization of use is necessary to be able to carry out the activity of packaging and distribution that is the object of the contract, and it would not be possible for X to carry out its obligations under the contract if it did not have this authorization to use the trademark. If X did not have the right to use the trademark, it would not be able to package and label the product as required by its principal (Z), nor would it be able to distribute it under said trademark, in accordance with the terms of the contract.”
And although the “authorization of use” of the trademark recognized by the taxpayer is qualified by the latter as an obligation and not as a right of the same, seeming to want to reach the conclusion that only if it were a right it would generate a royalty, in the opinion of this Court both aspects (obligation and right) are not mutually exclusive but complementary: X acquires the right to use the trademark and the obligation to use the same with respect to the products (the beverages) made by it with the “concentrates” acquired from the ABCD Group. And without the existence of limits and/or conditions. Limits and/or conditions which, on the other hand, are inherent to any assignment of rights contract, which is never absolute. In the present case, such limits would be that X may not use the trademark to identify other products not made with the “concentrates” purchased from the ABCD Group and that it may not identify the products made with such “concentrates” under another trademark. Both things are logical since the trademark owner remains the owner of the trademark (he only assigns its use in a certain temporal and territorial scope) and must protect its prestige by means of the indicated precautions (previously called limits and/or conditions).
Por otro lado, y en contra de lo alegado (pág. 129 of the pleadings), the right to use the trademark is not something merely “instrumental” but something “substantial” to the contracts entered into between the parties in the sense that it is in the interest of the supplier to sell its concentrates and of X to market the products it manufactures with such concentrates under certain trademarks (ABCD or M8), of special diffusion and prestige in the market and whose use implies a volume of sales notably higher than that which it would obtain if it marketed the products under X ‘s own denomination without such diffusion and prestige in the market. The importance of the trademark is such (and more so the ones we are now dealing with) that it would be difficult to understand in the opinion of the Inspectorate a purely “instrumental” transfer of use of the same, and much less free of charge, as the claimant defends. This circumstance is supported by the Inspection in the Valuation Report, which grants to the assignment of the trademark, as an example, percentages of 61.17% of the price of the concentrate in the case of ABCD-1 and 46.18% in the case of ABCD-2.”
“Thus, it is clear that the promotion of the ABCD trademark in Spain (not of the products themselves, which is what is made with the “concentrates” acquired by X) generates expenses for the holder of the trademark[2] ( ABCD Group and, specifically,ABCD C…), the inspection revealed that “it does not seem reasonable to think that the ABCD trademarks in Spain only generate expenses and no income” (….) “From a strictly economic perspective, the actions of the ABCD group, assuming such an amount of expenses to make the brand known to the consumer without this action generating any income for the brand in Spain, lacks all rationality”. This is an additional fact taken into account by the Inspectorate for the purpose of confirming the rationality of the fact that the assignment of use of the trademark is not free of charge but that the ABCD Group obtains income from it.”
“In the case at hand, we cannot properly speak of “lack of evidence” but more properly of “lack of externalized evidence” since, even if such evidence exists (which this Court, in principle, has no doubt about), it cannot be incorporated into the file that is made available to the interested party, Therefore, the latter is defenseless when it comes to being able to oppose the suitability of the comparables used, so that, as stated in the previously transcribed SAN, we are faced with an “inadequate assessment method” in terms of generating defenselessness in the taxpayer.
This Central Court has recently pronounced in the same sense as above in its RG of 05-09-2013 (RG 3780/11).
Having said the above with respect to the “subjective motivation”, it should be noted that the objections raised by the taxpayer with respect to the “technical motivation” refer basically to the fact that the data used by the Inspection to assess are not in any case comparable with those of ABCD because ABCD is unique and neither by its product characteristics, nor by the characteristics of the product …. . In view of this, we can only say that once the issue related to the “subjective motivation” has been resolved in the aforementioned terms, we cannot answer the questions referred to the objections related to the “technical motivation” since, since we do not know which companies are involved, we cannot analyze whether or not they are comparable to ABCD.
Therefore, in the case in question, the valuation on which the assessment is based must be annulled and, consequently, the latter must also be annulled as far as this adjustment is concerned.”
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Spain TEAC 3 October 2013