Council of State ruling on the dispute

N° 65009

Mentioned in the tables of the Recueil Lebon

Mr Rougevin-Baville, President

Mr Fabre, rapporteur

Mrs Liébert-Champagne, Government Commissioner

reading on wednesday 25 october 1989

FRENCH REPUBLIC

IN THE NAME OF THE FRENCH PEOPLE

Having regard to the appeal by the MINISTER FOR THE ECONOMY, FINANCE AND BUDGET, registered on 3 January 1985 at the Secretariat for Litigation of the Council of State, and seeking

1°) primarily, that the Council of State :

 - annul the judgment of 5 September 1984 by which the administrative court of Grenoble granted to the public limited company 'Caterpillar France', whose registered office is ..., the discharge of the additional corporation tax, the exceptional contribution payable by legal persons liable to corporation tax, and the withholding tax to which that company had been subject in respect of, respectively, each of the years 1972, 1974, 1975 and 1976, of the year 1976, and of each of the years 1969 to 1976, as well as of the penalties added to those taxes ;

- reinstate the company "Caterpillar France" to the rolls for corporation tax and the exceptional contribution payable by legal persons liable to corporation tax due for the years 1972, 1974, 1975 and 1976 in respect of all the duties and penalties which had been maintained at its expense by the regional tax director, and remit to the company the duties and penalties which had been assigned to it, in respect of withholding tax, for each of the years 1969 to 1976;

2°) in the alternative, that the Conseil d'Etat :

- reform the said judgment insofar as the administrative court granted the company "Caterpillar France" discharge from the additional corporation tax and the exceptional contribution payable by legal persons liable to corporation tax to which that company had been subject in respect of each of the years 1972, 1974, 1975 and 1976, and of the year 1976 respectively

- reinstate the company 'Caterpillar France' to the rolls of corporation tax and the exceptional contribution payable by legal entities liable to corporation tax due for the years 1972, 1974, 1975 and 1976 in respect of all the duties and penalties which had been maintained at its expense by the regional director of taxes;

Having regard to the other documents in the file;

Having regard to the general tax code;

Having regard to the code of administrative courts and administrative courts of appeal;

Having regard to order no. 45-1708 of 31 July 1945, decree no. 53-934 of 30 September 1953 and law no. 87-1127 of 31 December 1987;

Having heard :

- the report of Mr Fabre, State Councillor,

- the observations of SCP Lyon-Caen, Fabiani, Liard, lawyer for the company "Caterpillar France" (CFSA)

- the conclusions of Mrs Liébert-Champagne, Government Commissioner;

On the plea that the administrative court ruled beyond the conclusions before it :

Considering that the requests and claims of the public limited company "Caterpillar France" presented or submitted to the administrative court tended, with regard to the reminders of corporation tax and of exceptional contribution for legal persons liable to corporation tax to which this company was subjected, respectively, in respect of each of the years 1972, 1974, 1975 and 1976, and in respect of the year 1976, and insofar as the partial reliefs pronounced ex officio during the proceedings had not rendered the conclusions irrelevant, for the discharge of only a fraction of these taxes and the related penalties; that, as a result, the court, in deciding, in Article 1 of the operative part of the contested judgment, that the company should be discharged from all the duties and penalties that had not given rise to an automatic relief, ruled beyond the conclusions that remained before it; that, consequently, the MINISTER OF THE ECONOMY, FINANCE AND BUDGET is entitled to request the annulment of the said judgment insofar as the first judges granted the company "Caterpillar France" the discharge of sums exceeding FRF 2,867,865 in simple duties and FRF 215,089 in late payment interest with regard to the corporation tax established for the year 1972, F 1,525,890 in simple duties and F 381,472 in late payment interest in respect of the corporation tax established for the year 1974, 712,474 F of simple duties with regard to the corporation tax established for 1975, 757,555 F of simple duties with regard to the corporation tax established for 1976, and 28,498 F of simple duties and 2,850 F of increase for insufficient payment with regard to the exceptional contribution payable by legal entities liable to corporation tax established for 1976;

On the validity of the taxes:

Considering that it is clear from the investigation that the company "Caterpillar France", almost all of whose share capital is, through the intermediary of the Swiss company "Caterpillar Overseas", held by the American company "Caterpillar Tractor", concluded with the latter, on 30 March 1961, a "licence agreement for the use of the equipment", a "patent licence agreement", amended on 28 February 1964, under which it is authorised to manufacture and market under the trademarks belonging to the parent company any equipment covered by patents held by it, with the benefit of its technical assistance; that in return, the contract provides for the payment to the Caterpillar Tractor Company of a royalty fixed at 5% of the turnover made by the Caterpillar France company, less, however, the cost price of the parts purchased by the latter from other companies of the group; that the administration considered that the basis of the royalty thus included a margin made on the resale of parts manufactured by other companies of the group, and owing nothing to the technological contribution of the parent company to the French company;

Considering, firstly, that when the administration intends to apply the provisions of Article 57 of the General Tax Code prescribing the incorporation into the results of companies which are dependent on companies located outside France, of profits indirectly transferred to the latter, the administration must establish, in particular, the existence of an advantage of such a nature as to make it presume the reality of such a transfer; that, when a disagreement between the taxpayer and the administration on this question of fact is submitted to the assessment of the departmental commission for direct taxes and turnover taxes, pursuant to the provisions of Article 1649 quinquies A of the General Tax Code, included in Article L. 59 of the book of tax procedures, and that the administration follows the opinion of the commission, as is the case in the present case, it is up to the taxpayer to establish, before the tax judge, the factual elements which he invokes in support of a contrary assessment;

Considering that, according to the administration, the rate of the royalty paid by the company "Caterpillar France" is admissible only when it applies to the selling price of equipment entirely manufactured by the company, but not when it affects the gross margin made on equipment that the company has only assembled, since the assembly operations make less use of the technology and know-how acquired by the American company than the machining operations themselves; that, however, the details provided and the documents produced in this respect by the company do not make it possible to make such a distinction between the operations that successively contribute to the production of the finished products; that the uniform rate of the fee cannot, in the circumstances of the case, be regarded as excessive; that, consequently, the Minister is not justified in maintaining that the Administrative Court was wrong to hold that, as regards the tax years 1969 to 1972, the company 'Caterpillar France' provided proof that, contrary to what the departmental commission considered, the amount of the royalty paid by it to the company 'Caterpillar Tractor' was justified in the light of the rights granted and the services rendered, that, as regards the tax years 1973 to 1976, the administration did not establish that the royalty could have constituted a means of transferring profits, and that, for all these years, the disputed increases could not find a legal basis in the provisions of Article 57 of the General Tax Code;

Considering, secondly, that the Minister concludes, in the alternative, to the reinstatement of the duties and penalties which did not give rise to an automatic relief, by maintaining that the increase in the taxable profits of the company "Caterpillar France" would find another legal basis, in that the royalties paid by this company would have had as a counterpart the acquisition of an intangible fixed asset, and could not, consequently, pursuant to the provisions of Article 38 of the General Tax Code, constitute a deductible charge for the determination of its profits;

But whereas the purpose of the "patent use licence contract" concluded between the company "Caterpillar France" and the company "Caterpillar Tractor" is, without limitation or guarantee of duration, to allow the exploitation by the former, with the technical assistance of the latter, of the inventions and processes contributing to the manufacture of the equipment successively marketed by the group; that the French company cannot dispose of them to third parties; that thus, the royalty provided for in the contract has as its counterpart, not the acquisition by the French company of an intangible and transferable fixed asset, but the benefit of a current technological and commercial contribution; that the sums paid in respect of the royalty have, consequently, the character of a deductible expense for the financial year in respect of which they are due ;

Considering that it follows from all the above that the MINISTER OF ECONOMY, FINANCE AND BUDGET is not entitled to maintain that it is wrongly that, within the limits of the conclusions before it, the administrative court granted the requests and claims of the company "Caterpillar France" tending, on the one hand, to the reduction of the corporate income tax and exceptional contribution contributions payable by legal entities liable for corporate income tax, and on the other hand, to the discharge of the withholding tax contributions to which it was subject in respect of the above-mentioned years;

Article 1: The judgment of the Grenoble administrative court of 5 September 1984 is annulled insofar as it grants the S.A. "Caterpillar France" a tax credit of Article 1: The judgment of the Grenoble Administrative Court of 5 September 1984 is annulled insofar as it grants S.A. "Caterpillar France" discharge of sums exceeding FRF 2,867,865 in simple duties and FRF 215,089 in late payment interest with regard to the corporation tax established for the year 1972, FRF 1,525,890 in simple duties and FRF 381,472 in late payment interest with regard to the corporation tax established for the year 1974, FRF 712,474 in simple duties in respect of corporation tax for 1975, FRF 757,555 in simple duties in respect of corporation tax for 1976, and FRF 28,498 in simple duties and FRF 2,850 in surcharges for insufficient payment in respect of the exceptional contribution payable by legal entities liable to corporation tax for 1976.

Article 2: The S.A. "Caterpillar France" is reinstated in the above-mentioned tax rolls for the fraction exceeding the sums indicated of the duties and penalties which had been maintained at its charge by the regional director of taxes.

Article 3: The remainder of the conclusions of the appeal of the MINISTER OF THE ECONOMY, FINANCE AND BUDGET is rejected.

Article 4: This decision shall be notified to the Minister Delegate to the Minister of State, Minister of the Economy, Finance and the Budget, in charge of the budget and to the public limited company "Caterpillar France".