Cargill Bulgaria sold wheat, corn, and other agricultural goods to related Cargill entities in Switzerland and the Netherlands. The Bulgarian tax authority applied TNMM using a return-on-sales profit level indicator, benchmarking against five comparables with an interquartile range of 1.21–1.79%, and assessed additional corporate tax exceeding one million leva. Bulgaria's Supreme Administrative Court ruled in favour of the tax authority and remanded the case for re-examination ... Read more

A French distributor within the SNA group used a gross margin approach supported by 22 external comparables to price purchases from its Swedish parent. The French tax authority challenged the methodology, arguing that large customer discounts were improperly excluded, making the company loss-making against comparable distributors. The Nantes Court of Appeal largely upheld the administration's position, finding that profits had been transferred to the Swedish related entity contrary to the arm's length principle ... Read more

A Czech manufacturer of electronic components disputed a transfer pricing adjustment for 2015, arguing the tax authority misclassified its functional and risk profile and applied an inappropriate profit mark-up on material costs. The Regional Court upheld the assessment of approximately CZK 28 million in additional corporate income tax, confirming the authority's FAR analysis, its characterisation of the company as a risk-bearing manufacturer, and the use of return on total costs as the profit level indicator ... Read more

An Italian luxury watch and jewellery distributor was assessed by the Revenue Agency, which rejected its TNMM net cost plus benchmarking and substituted its own EBIT margin comparables from the AIDA database. The company argued the agency's comparability analysis failed to account for contractual terms, market conditions, and business strategies per OECD guidelines. Italy's Supreme Court ruled in favour of the taxpayer in November 2025 ... Read more

An Italian luxury watch and jewellery retailer purchased goods from its Swiss parent and reported losses, pricing transactions using the CUP method. The Italian Revenue Agency applied the TNMM with return on sales as the profit level indicator, issuing assessments totalling EUR 4.69 million. The company argued TNMM ranked lower in the method hierarchy and that losses stemmed from high rental costs. Italy's Supreme Court decided in favour of the tax authority in November 2025 ... Read more

A Polish company specialising in e-grocery logistics was assessed for additional taxable income after tax authorities applied the transactional net margin method and challenged its intra-group service pricing. The Tax Administration Chamber and Administrative Court annulled the assessment over inappropriate comparables. The Supreme Administrative Court, ruling in August 2025, rejected limitation arguments but remanded the case, finding the lower court had insufficiently examined the transfer pricing methodology and comparability analysis ... Read more

A Panamanian insurance company faced a transfer pricing reassessment after tax authorities rejected its chosen profit level indicator and comparable for excess loss reinsurance premiums ceded to a related party in 2018, issuing additional income and supplementary tax charges. The Administrative Court did not rule on the substantive transfer pricing issues, instead annulling the assessment in 2025 due to serious procedural defects that violated the taxpayer's due process rights ... Read more

A Czech electronics contract manufacturer used ROVAC as its profit level indicator, excluding material costs on the basis that it bore no material risk. The tax authority argued ROTC was more appropriate. The Supreme Administrative Court dismissed the taxpayer's appeal in June 2025, confirming that return on total costs better reflected the company's functions, assets, and risks as a manufacturer holding formal title to raw materials ... Read more

Hitachi Solutions India excluded goodwill amortisation from operating costs in its transfer pricing comparability study, treating it as a non-operating capital item. The Indian tax authority included it, reducing the profit level indicator. The Chennai Income Tax Appellate Tribunal ruled in the taxpayer's favour in 2025, holding that goodwill amortisation arises from a capital transaction and must be excluded from operating expenses to preserve comparability under the transactional net margin method ... Read more

A Czech electronics contract manufacturer used ROVAC as its profit level indicator, excluding material costs from its transfer pricing analysis on the basis that it bore no material risk. The tax authority substituted ROTC, covering total costs. After earlier remittal by the Regional Court for inadequate FAR analysis, the tax authority conducted a revised FAR assessment. The Supreme Administrative Court dismissed the taxpayer's appeal in May 2025, confirming the revised ROTC-based assessment ... Read more

A Colombian emerald producer used the CUP method to justify related-party sales prices, relying on independent appraiser valuations as comparables. The tax authority rejected this approach and applied TNMM using a cost-based profit level indicator, adjusting income to the benchmarking median. The Council of State upheld the assessment in April 2025, confirming that appraiser valuations do not constitute comparable uncontrolled prices under the CUP method ... Read more

A Ukrainian wallpaper manufacturer challenged tax assessments covering FY 2013–2015, where authorities insisted only partial-year data should be used to calculate TNMM profit level indicators for controlled transaction periods. The company argued full-year figures were appropriate given the seasonal nature of wallpaper demand and the limitations of comparables databases. Ukraine's Supreme Administrative Court ruled in favour of the taxpayer in January 2025, confirming that annual financial data was the correct basis for the benchmarking analysis ... Read more

A Czech electronics contract manufacturer used ROVAC as its profit level indicator, arguing it bore no material risk. The tax authority substituted ROTC, including material costs. After a prior remittal requiring a proper FAR analysis, the Regional Court in 2024 upheld the revised tax assessment, accepting that the authority's updated FAR profile sufficiently justified selecting ROTC as the most appropriate profit level indicator ... Read more

A Polish bedding textiles producer sold goods to a related party at a return on total costs of 1.61%, below the arm's length interquartile range of 4.20%–9.22% established by the tax authorities' benchmark study. The authorities adjusted profits to the median of 5.23%. In November 2024, the Polish Administrative Court upheld the transfer pricing adjustment, confirming the TNMM as the most appropriate method and the validity of the benchmark analysis ... Read more

Sabic India, an intra-group marketing services provider, used TNMM with a Berry ratio and cost-based profit level indicators to price controlled transactions. The tax authority rejected the method without reasons and applied an alternative other method. The Income Tax Appellate Tribunal overturned the assessment, and the Delhi High Court upheld that decision in 2024, finding the TPO had failed to justify rejecting TNMM used in prior years ... Read more

A Czech subsidiary of the Japanese Futaba group, operating as an automotive components manufacturer, challenged a transfer pricing assessment covering loss-making years 2016–2017. The tax authority applied TNMM with net cost plus as the profit level indicator, reallocating the functional and risk profile through a value-chain analysis. The Czech Regional Court upheld the assessment in September 2024, confirming the method selection, comparables range, and risk allocation applied by the tax authority ... Read more

A Kenyan tobacco company argued that full-cost-mark-up transfer pricing adjustments explained variances between its CIT and VAT declarations on export sales. The Kenya Revenue Authority challenged the adjustments due to missing documentation. The Tax Appeal Tribunal ruled against the taxpayer in 2024, finding that failure to produce the actual transfer pricing policy or sufficient supporting evidence prevented validation of arm's length compliance ... Read more

Volkswagen Argentina included an extraordinary gain from a related-party loan waiver in its transfer pricing profit calculations for FY 1999–2001, arguing results were arm's length. The Argentine tax authority rejected this adjustment and issued an assessment. After lower courts sided with the taxpayer, Argentina's Supreme Court reversed the decision in August 2024, ruling in favour of the tax authority ... Read more

Scania Argentina applied the Transactional Net Margin Method using Return on Total Costs as its profit-level indicator for intercompany sales, with a comparability adjustment for extraordinary idle capacity. The Argentine tax authority rejected the methodology and substituted ROCE, issuing an additional assessment for FY 2003. The Tax Court and, on further appeal in 2024, the Administrative Court of Appeal both upheld Scania's transfer pricing analysis, finding the tax authority failed to substantiate its objections ... Read more

Yazaki Bulgaria's actual net cost plus margins fell outside the arm's length interquartile range for 2014–2016, but the company applied cost basis adjustments to bring them within range. The tax authorities rejected those adjustments and issued an income assessment. Bulgaria's Supreme Administrative Court overturned the lower court's annulment of the assessment in July 2024, ruling in favour of the tax authorities and upholding the original transfer pricing correction ... Read more

A Peruvian mineral exporter challenged two transfer pricing adjustments issued by SUNAT for FY 2010: one on remuneration for mineral concentrate exports to related parties, and one on the price of a controlling shareholding sale. The Tax Court partially upheld the remuneration adjustment but ruled SUNAT must redo the TNMM analysis in US dollars, reflecting the taxpayer's functional currency. The share price adjustment was annulled entirely ... Read more

A Kenyan subsidiary of a UK tea trading group faced a Kshs 1.4 billion transfer pricing assessment covering 2015–2018, arising from undocumented transactions with a Pakistani related party, Tapal Tea PVT Ltd. The tax authority applied TNMM after identifying common directorship as evidence of control and classified the company's auction licence as a valuable intangible. The Kenya Tax Appeals Tribunal dismissed the appeal in 2024, upholding the assessment in full ... Read more

Sanofi-Aventis de Colombia applied the TNMM with a return on total cost as its profit level indicator for FY2013 related-party transactions. The Colombian tax authority rejected this approach, substituting the CUP method and issuing additional taxable income. Colombia's Council of State upheld the Administrative Court's ruling in favour of the taxpayer, finding that DIAN had applied the CUP method incorrectly by failing to make sufficient adjustments for differences between the compared transactions ... Read more

A Colombian bottling company filed its 2011 transfer pricing return using TNMM with return on total costs as the profit level indicator. Tax authorities challenged the methodology, substituting return on capital employed instead. The Administrative Court ruled for the taxpayer, and in April 2024 the Council of State upheld that decision, confirming that the taxpayer's chosen profit level indicator correctly reflected the arm's length nature of its related-party transactions ... Read more

An Irish subsidiary providing services to its US parent challenged a Revenue assessment arguing that employee share option costs should be included in the TNMM cost base for FY2015–FY2018. The Tax Appeals Commission ruled in favour of the taxpayer in February 2024, overturning the assessment and finding that the comparability analysis did not require stock-based compensation to be included in the cost base ... Read more

Checkpoint Technologies Kenya applied TNMM with a net cost plus margin of 5%, within its benchmarked interquartile range of 4.9% to 7.3%. The Kenya Revenue Authority assessed additional income, arguing the median of 5.5% should apply. The Tax Appeals Tribunal disagreed, ruling in favour of the taxpayer that any point within the arm's length range satisfies the arm's length principle under OECD Transfer Pricing Guidelines paragraph 3.63 ... Read more

Terex Italia, a heavy machinery manufacturer, issued a credit note to its UK related distributor adjusting sales prices, which Italian tax authorities challenged as resulting in below-cost sales. The Provincial and Regional Tax Commissions largely upheld the assessments. Italy's Supreme Court, in January 2024, decided mostly in favour of the taxpayer and remanded the case for reexamination, addressing comparability analysis and the most appropriate transfer pricing method ... Read more

A French manufacturer and distributor of utility meters was assessed for tax years 2012 and 2013 after authorities alleged profits had been shifted to a Hong Kong group distributor via mispriced intercompany transactions. The Administrative Court of Appeal dismissed the tax authority's appeal in January 2024, upholding the lower court's annulment of the assessment and confirming the taxpayer's transfer pricing approach was arm's length ... Read more

A Malaysian subsidiary of Thomson Reuters acted as a local distributor of information and dealing services, applying TNMM with a 2% target operating margin. The tax authority rejected five comparables, added three local ones, and included SG&A costs in the margin calculation. The Special Commissioner of Income Tax upheld the authority's assessment in 2023, dismissing the taxpayer's reliance on pan-Asian comparables and excluding extraordinary costs ... Read more

A Hungarian subsidiary of a global electronic components group faced tax authority challenges over its manufacturing remuneration and excessive interest payments to a Luxembourg group entity under a cash pool arrangement. The Court of Appeal relied on an expert opinion the Supreme Court found seriously questionable. In June 2023, Hungary's Supreme Court set aside the lower court's judgment and remanded the case for new proceedings with proper expert scrutiny ... Read more

A Bulgarian steel producer in the METINVEST group faced additional taxable income assessments following a transfer pricing audit. The Administrative Court annulled the assessment and declared OECD Guidelines inapplicable in Bulgaria. On appeal in 2023, the Supreme Administrative Court upheld the annulment in favour of the taxpayer but corrected the lower court, confirming that OECD Transfer Pricing Guidelines do carry legal weight under Bulgarian law ... Read more

An electronics contract manufacturer used ROVAC as its profit level indicator, arguing its role was limited to assembly without bearing material risk. Czech tax authorities substituted ROTC, including material costs. The Regional Court ruled in 2022 that authorities had not adequately considered the taxpayer's FAR profile to justify the alternative PLI, quashed the assessment, and remitted the case for reconsideration ... Read more

In addition to the profit level indicators provided in § 1.482-5(b)(4), a profit level indicator that may provide a reliable basis for comparing operating profits of the tested party involved in a controlled services transaction and uncontrolled comparables is the ratio of operating profit to total services costs (as defined in paragraph (j) of this section) ... Read more

The reliability of the allocation of costs, income, and assets between the relevant business activity and other activities of the tested party or an uncontrolled comparable will affect the reliability of the determination of operating profit and profit level indicators. If it is not possible to allocate costs, income, and assets directly based on factual relationships, a reasonable allocation formula may be used. To the extent direct allocations are not made, the reliability of the results derived from the application of this method is reduced relative to the results of a method that requires fewer allocations of costs, income, and assets. Similarly, the reliability of the results derived from the application of this method is affected by the extent to which it is possible to apply the profit level indicator to the tested party’s financial data that is related solely to the controlled transactions. For example, if the relevant business activity is the assembly of components purchased from both controlled ... Read more

Other profit level indicators not described in this paragraph (b)(4) may be used if they provide reliable measures of the income that the tested party would have earned had it dealt with controlled taxpayers at arm’s length. However, profit level indicators based solely on internal data may not be used under this paragraph (b)(4) because they are not objective measures of profitability derived from operations of uncontrolled taxpayers engaged in similar business activities under similar circumstances ... Read more

Financial ratios measure relationships between profit and costs or sales revenue. Since functional differences generally have a greater effect on the relationship between profit and costs or sales revenue than the relationship between profit and operating assets, financial ratios are more sensitive to functional differences than the rate of return on capital employed. Therefore, closer functional comparability normally is required under a financial ratio than under the rate of return on capital employed to achieve a similarly reliable measure of an arm’s length result. Financial ratios that may be appropriate include the following – (A) Ratio of operating profit to sales; and (B) Ratio of gross profit to operating expenses. Reliability under this profit level indicator also depends on the extent to which the composition of the tested party’s operating expenses is similar to that of the uncontrolled comparables ... Read more

The rate of return on capital employed is the ratio of operating profit to operating assets. The reliability of this profit level indicator increases as operating assets play a greater role in generating operating profits for both the tested party and the uncontrolled comparable. In addition, reliability under this profit level indicator depends on the extent to which the composition of the tested party’s assets is similar to that of the uncontrolled comparable. Finally, difficulties in properly valuing operating assets will diminish the reliability of this profit level indicator ... Read more

Profit level indicators are ratios that measure relationships between profits and costs incurred or resources employed. A variety of profit level indicators can be calculated in any given case. Whether use of a particular profit level indicator is appropriate depends upon a number of factors, including the nature of the activities of the tested party, the reliability of the available data with respect to uncontrolled comparables, and the extent to which the profit level indicator is likely to produce a reliable measure of the income that the tested party would have earned had it dealt with controlled taxpayers at arm’s length, taking into account all of the facts and circumstances. The profit level indicators should be derived from a sufficient number of years of data to reasonably measure returns that accrue to uncontrolled comparables. Generally, such a period should encompass at least the taxable year under review and the preceding two taxable years. This analysis must be applied in accordance ... Read more

The tested party’s operating profit must first be adjusted to reflect all other allocations under section 482, other than adjustments pursuant to this section ... Read more

For purposes of this section, the tested party will be the participant in the controlled transaction whose operating profit attributable to the controlled transactions can be verified using the most reliable data and requiring the fewest and most reliable adjustments, and for which reliable data regarding uncontrolled comparables can be located. Consequently, in most cases the tested party will be the least complex of the controlled taxpayers and will not own valuable intangible property or unique assets that distinguish it from potential uncontrolled comparables ... Read more

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Under the comparable profits method, the determination of an arm’s length result is based on the amount of operating profit that the tested party would have earned on related party transactions if its profit level indicator were equal to that of an uncontrolled comparable (comparable operating profit). Comparable operating profit is calculated by determining a profit level indicator for an uncontrolled comparable, and applying the profit level indicator to the financial data related to the tested party’s most narrowly identifiable business activity for which data incorporating the controlled transaction is available (relevant business activity). To the extent possible, profit level indicators should be applied solely to the tested party’s financial data that is related to controlled transactions. The tested party’s reported operating profit is compared to the comparable operating profits derived from the profit level indicators of uncontrolled comparables to determine whether the reported operating profit represents an arm’s length result ... Read more

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The comparable profits method evaluates whether the amount charged in a controlled transaction is arm’s length based on objective measures of profitability (profit level indicators) derived from uncontrolled taxpayers that engage in similar business activities under similar circumstances ... Read more

Under Illustration 3, if a controlled transaction is performed as in case 1 while the third party “comparables” are operating as in case 2, and assuming that the difference in the capacity utilisation is not identified due to insufficiently detailed information on the third party “comparables”, then the risk of error when applying a gross margin method could amount to 16 (2% x 800) instead of 50 (5% x 1000) if a net margin method is applied. This illustrates the fact that net profit indicators can be more sensitive than gross mark-ups or gross margins to differences in the capacity utilisation, depending on the facts and circumstances of the case and in particular on the proportion of fixed and variable costs and on whether it is the taxpayer or the “comparable” which is in an over-capacity situation ... Read more

Warning: Undefined array key "file" in /var/www/tpcases.com/public_html/wp-includes/media.php on line 1788 Consequently, enterprises performing different functions may have a wide range of gross profit margins while still earning broadly similar levels of net profits. For instance, business commentators note that the transactional net margin method would be less sensitive to differences in volume, extent and complexity of functions and operating expenses. On the other hand, the transactional net margin method may be more sensitive than the cost plus or resale price methods to differences in capacity utilisation, because differences in the levels of absorption of indirect fixed costs (e.g. fixed manufacturing costs or fixed distribution costs) would affect the net profit but may not affect the gross margin or gross mark-up on costs if not reflected in price differences, as illustrated below. Illustration 3: Effect of a difference in manufacturers’ capacity utilization The example below is for illustration only and is not intended to provide any guidance on the selection of ... Read more

Under Illustration 2, if a controlled transaction is performed as in case 1 while the third party “comparables” are operating as in case 2, and assuming that the difference in the level of risks is not identified due to insufficiently detailed information on the third party “comparables”, then the risk of error when applying a gross margin method could amount to 60 (6% x 1 000) instead of 10 (1% x 1 000) if a net margin method is applied. This illustrates the fact that, depending on the circumstances of the case and in particular of the effect of the differences in the level of risks on the cost structure and on the revenue of the “comparables”, net profit margins can be less sensitive than gross margins to differences in the level of risks (assuming the contractual allocation of risks is arm’s length) ... Read more

Under Illustration 1, if a taxpayer is operating with an associated manufacturer as in case 2 while the third party “comparables” are operating as in case 1, and assuming that the difference in the extent and complexity of the marketing function is not identified because of for instance insufficiently detailed information on the third party “comparables”, then the risk of error when applying a gross margin method could amount to 120 (12% x 1 000), while it would amount to 20 (2% x 1 000) if a net margin method was applied. This illustrates the fact that, depending on the circumstances of the case and in particular of the effect of the functional differences on the cost structure and on the revenue of the “comparables”, net profit margins can be less sensitive than gross margins to differences in the extent and complexity of functions. Illustration 2: Effect of a difference in the level of risk assumed by a distributor The ... Read more

[See Chapter II, Part III, Section B of these Guidelines for general guidance on the application of the transactional net margin method. The assumptions about arm’s length arrangements in the following examples are intended for illustrative purposes only and should not be taken as prescribing adjustments and arm’s length arrangements in actual cases of particular industries. While they seek to demonstrate the principles of the sections of the Guidelines to which they refer, those principles must be applied in each case according to the specific facts and circumstances of that case. Furthermore, the comments below relate to the application of a transactional net margin method in the situations where, given the facts and circumstances of the case and in particular the comparability (including functional) analysis of the transaction and the review of the information available on uncontrolled comparables, such a method is found to be the most appropriate method to be used.] It is recognised that the transactional net margin method ... Read more

As discussed in these Guidelines, there are concerns regarding the use of the transactional net margin method, in particular that it is sometimes applied without adequately taking into account the relevant differences between the controlled and uncontrolled transactions being compared. Many countries are concerned that the safeguards established for the traditional transaction methods may be overlooked in applying the transactional net margin method. Thus, where differences in the characteristics of the transactions being compared have a material effect on the net profit indicators being used, it would not be appropriate to apply the transactional net margin method without making adjustments for such differences. See paragraphs 2.74-2.81 (the comparability standard to be applied to the transactional net margin method) ... Read more