France v ST Dupont

 

ADMINISTRATIVE COURT OF PARIS

 

N° 1620873, 1705086/1-3

 

FRENCH REPUBLIC

 

SA ST DUPONT

 

Mr Pottier Rapporteur

 

Mr Hanry Public Reporter

 

ON BEHALF OF THE FRENCH PEOPLE

 

The Administrative Court of Paris, (1st Section - 3rd Chamber)

 

Hearing of 6 March 2019

Reading of 20 March 2019

 

Having regard to the following procedure:

 

I.          By an application registered under number 1620873 on 2 December 2016 and briefs registered on 14 September 2017, 29 June 2018 and 20 July 2018, SA ST Dupont, represented by Me Vigneron and Me Le Boulanger (CMS Bureau Francis Lefebvre law firm), asks the Tribunal:

 

1°) to discharge the additional minimum business tax assessment to which it was liable for the financial year ended 31 March 2009 and the additional business value added tax assessments for 2010 and 2011, for a total amount of EUR 38,335, and the withholding tax assessments and corresponding increases to which it was liable for the financial years ended 2009, 2010 and 2011, for a total amount of EUR 824,403;

 

2°) to restore its loss carry forward declared for the financial year ended 31 March 2011 to an amount of EUR 81,721,149 instead of EUR 77,639,879;

 

3°) to charge the State the sum of EUR 10,000 pursuant to Article L. 761-1 of the Administrative Justice Code.

 

It puts forward the following pleas in law:

 

On the sales of finished products to ST Dupont Marketing (STDM):

 

- the administration does not provide the proof, which is incumbent on it under Article 57 of the General Tax Code, that the company granted an advantage to STDM in the context of sales of products;

- the mere fact that losses were reported does not demonstrate a transfer of profits abroad;

- the administration based itself exclusively on the comparable price method on the free market and not, as it wrongly states, on a comparison of gross margins;

- the administration misapplied the comparable open market price method;

- the comparisons made by the department are not relevant, in particular because the functions of the distributors, the geographical areas in which they are located and the volumes of products sold to them are not comparable; the department has not demonstrated that the transactions it has selected are comparable and has itself acknowledged, in the case of the licensing agreement, that South Korea is not a territory comparable to China; moreover, the comparisons made by the department relate to products that differ, in particular for ready-to-wear clothing;

- in the end, the service only retained one comparable transaction, which is insufficient, even though this transaction is not comparable;

- the comparison of the company's margins that the administration claims to have made is contrary to its own doctrine;

- the department fails to show that the company applied the resale price method incorrectly but merely substitutes another method for the one the company used;

- the comparison carried out by the department shows, on the contrary, that the company complied with the arm's length principle, since the comparable transactions retained by the administration include in the price of the products sold services that are invoiced separately for STDM, so that the latter pays, all other things being equal, a higher price to SA ST Dupont than the independent distributor retained by the administration; contrary to what the administration argues, the said services are of the same nature and scope;

- In the alternative, the company presented during the audit the elements justifying its method of determining its transfer prices;

- the public prices of the Asian markets are not useful data for determining the transfer prices of products in Asia, "since these transfer prices are determined by applying a discount to the "European wholesale prices excluding VAT";

- the company was entitled to apply the resale price method;

- the company provided all the information necessary to verify the correct application of the resale price method used by the company during the audit;

- the analysis of internal comparable transactions demonstrates that the principle of competition was respected;

- the analysis of external comparable transactions confirms that this principle has been respected;

- the criticisms made by the administration against these elements of comparison are unfounded, in particular because the possible differences in products are less important for the resale price method, which is based more on the comparability of costs and functions; in the case in point, the functions are indeed comparable, since the subsidiary STDM "acts as a wholesaler and retailer on its market";

 

 

On the licence fee invoiced by the company SA ST Dupont to STDM:

 

- the administration does not provide proof of a profit transfer either;

- The comparison with the contract concluded between SA ST Dupont and SA Interparfums is not relevant, since the products, territories and periods are not comparable;

- the contract between STDM and Bondwood Investment Ltd cannot be considered as a comparable transaction, as the royalty rate is degressive and in any case, these two companies are related;

- the criticisms relating to the analysis of the royalty contracts concluded between SA ST Dupont and third parties are unfounded, since the contract concluded with STDM did not, in fact, involve any transfer of know-how and was therefore comparable with the contracts concluded with the third parties;

- in the end, the elements of comparison used by the administration are limited to two contracts, which is insufficient; moreover, it bases itself on contracts that it had initially dismissed as not being comparable;

- the comparisons made by the department in fact show that the arm's length principle is respected, the fee rate being identical to certain rates provided for by the contracts or at least within the range of rates of comparable contracts retained by the department, in the interquartile range of between 5 and 10%;

- In the alternative, the company presented evidence to support the arm's length nature of the royalty rate charged to STDM;

- the difference in rates between STDM and Bondwood is explained by differences in functions, risks and assets; in this transaction with Bondwood Investment Ltd, ST Dupont SA delegated all its functions to STDM;

- the department misunderstands the nature of the rights granted to STDM, which are limited to making the brand available, to the exclusion, in particular, of any know-how;

- the economic study produced before the departmental interlocutor was based on contracts between third parties including the trademark and know-how;

- the company was justified in applying the comparable price method on the free market;

- the economic analysis based on comparable internal and external transactions shows that the arm's length principle was respected

- the administration's criticisms concerning the external comparable transactions, which did relate to the brand and know-how, are unfounded; in particular, it overestimates the reputation of the ST Dupont brand for ready-to-wear articles;

- the administration does not justify the reference rate it used; On the reduction of deficits :

- the reduction of deficits results from the transfer pricing adjustments, which are unfounded for the reasons mentioned above;

- neither Article L. 169 of the tax procedure book, nor Article 209 of the general tax code, nor any other provision, authorises the administration to reduce the deficit of a statute-barred year when the taxpayer has not deducted it from the taxable profit of a non statute-barred year;

 

In this case, the company did not deduct from the results of the financial year ended in 2009 the amount of the deficits remaining to be carried forward at the end of the previous financial year, so that the department was not entitled to rectify the results of the prescribed financial years ended during the years 2003 to 2008.

 

By statements of defence registered on 4 July 2017, 1 June 2018 and 6 July 2018, the Île-de-France Regional Tax Audit Department argued that the application should be rejected, claiming that the arguments were unfounded.

 

By order of 6 July 2018, the investigation was closed on 23 July 2018.

 

By a request dated 20 February 2019, the administration was asked, pursuant to Article R. 613-1-1 of the administrative justice code, to produce a copy of the documents contained in the CD Rom appended to the reply to the taxpayer's observations of 31 March 2014. These documents were registered at the Court Registry on 22 February 2019 and communicated to SA ST Dupont on 25 February.

 

A brief submitted on behalf of SA ST Dupont was registered on 27 February 2019, after the closure of the investigation, which was reopened only in respect of the documents requested on 20 February 2019 and communicated on 25 February 2019, in accordance with Article R. 613-1-1 of the Code of Administrative Justice.

 

II.        By an order of 14 March 2017, registered at the Court Registry on 23 March 2017, the President of the Administrative Jurisdiction Division of the Council of State assigned to the Court, pursuant to Article R. 342-3 of the Code of Administrative Justice, the judgment on the application submitted on behalf of SA ST Dupont and registered at the Court Registry under number 1705086.

 

By this application registered at the registry of the Montreuil Administrative Court on 2 December 2016, and briefs registered at the registry of the Paris Administrative Court on 18 September 2017, 29 June 2018 and 20 July 2018, SA ST Dupont, represented by Me Vigneron and Me Le Boulanger (CMS Bureau Francis Lefebvre law firm), submits the same claims and the same pleas as the application registered under number 1620873.

 

By statements of defence registered on 4 July 2017, 1 June 2018 and 5 July 2018, the Direction régionale du contrôle fiscal Île-de-France (Regional Tax Audit Office, Ile-de-France) argued that the application should be dismissed as unfounded.

 

By order of 6 July 2018, the investigation was closed on 23 July 2018.

 

By a request dated 20 February 2019, the administration was asked, pursuant to Article R. 613-1-1 of the Administrative Justice Code, to produce a copy of the documents contained in the CD Rom appended to the reply to the taxpayer's observations of 31 March 2014. These documents were registered at the Court Registry on 22 February 2019 and communicated to SA ST Dupont on 25 February.

 

A brief submitted on behalf of SA ST Dupont was registered on 27 February 2019, after the closure of the investigation, which was reopened only in respect of the documents requested on 20 February 2019 and communicated on 25 February 2019, in accordance with Article R. 613-1-1 of the Code of Administrative Justice.

 

Having regard to the other documents in the file;

 

Having regard to:

- the general tax code and the book of tax procedures;

- the code of administrative justice.

 

The parties were regularly notified of the day of the hearing. Were heard during the public hearing:

- the report of Mr. Pottier,

- the conclusions of Mr Hanry, public rapporteur,

- and the observations of Mr Le Boulanger, representing SA ST Dupont. Considering the following:

 

1.         SA ST Dupont, whose business is the manufacture and trading of lighters, writing instruments and accessories, and which licenses the manufacture of various products, and which, on the one hand, is the sole shareholder of several distribution subsidiaries located abroad, in particular of ST Dupont Marketing Ltd (STDM) located in Hong Kong on the other hand, is itself majority owned by D et D International BV, based in Amsterdam and wholly owned by Broad Gain Investments Ltd, based in Hong Kong, was the subject of an accounting audit covering its financial years ending on 31 March 2009, 2010 and 2011. As a result of the audit, the auditor found that the prices charged for the products sold by ST Dupont Ltd to STDM and the amount of the licence fees granted to STDM were below arm's length prices and increased the taxpayer's profit and loss and value added by the amount of the corresponding revenue foregone. These adjustments were partially maintained by the department in its reply to the taxpayer's observations and after the opinion issued by the departmental commission for direct taxes and turnover taxes, which it followed in full.

 

2.         By applications registered under numbers 1620873 and 1705086, SA ST Dupont requests the discharge of the supplements to the minimum business tax assessment and the business value-added tax assessment as well as the withholding tax assessments which were imposed on it, and the restoration of its loss carry-forward which was reduced as a result of these assessments. It is appropriate to join these two applications, which set out identical conclusions, were presented by the same applicant company and were the subject of a joint investigation, in order to rule on them by a single judgment.

 

On the right of the administration to rectify the deficits of the prescribed fiscal years and declared as deficits remaining to be carried forward in the declarations of the non prescribed fiscal years:

 

3.         The last paragraph of I of article 209 of the general tax code, in its wording resulting from the finance law for 2004, provides that "in the event of a deficit incurred during a financial year, this deficit is considered as an expense for the following financial year and deducted from the profit made during the said financial year" and that "If this profit is not sufficient for the deduction to be made in full, the excess of the deficit is carried forward to subsequent financial years. It follows from the provisions of the second paragraph of Article L. 190 of the Book of Tax Procedures, in its wording resulting from the Finance Act for 2003, that "the claims which tend to obtain the repair of errors committed by the administration in the determination of a loss" are subject to the contentious jurisdiction "even when these errors do not lead to the collection of an additional tax", and that "the claims can be presented as from the receipt of the response to the observations of the taxpayer mentioned in Article L. 57".

 

4.         By allowing a company to set off against the taxable profits of a financial year not covered by the statute of limitations the deficits of previous financial years even covered by the statute of limitations, and to carry over these deficits from one financial year to the next as long as this set-off was not possible due to insufficient profitable results, and by giving the taxpayer the option of requesting the tax judge to repair errors committed by the administration in the determination of its deficit results even when these errors do not lead to the recovery of an additional taxation, the above-mentioned provisions necessarily lead to authorising the administration to verify the existence and the amount of these deficits, not only when they have been set off against the taxable profits of non-barred financial years, but also when, in the absence of profitable results, they have been carried forward and declared as such in respect of non-barred financial years, without having to wait, in the latter case, for them to be set off against profits likely to be made in respect of subsequent financial years.

 

5.         It follows from the foregoing that SA ST Dupont is in any event not entitled to argue that the administration could not verify the existence and the amount of the losses carried forward for the financial years ended on 31 March of the years 2003 to 2008 on the grounds that it did not set them off against the results of the financial years verified, for lack of profits, and that it only declared them as losses remaining to be carried forward.

 

On the taxation of indirectly transferred profits:

 

The legal framework :

 

6.         The first paragraph of Article 57 of the General Tax Code, which is applicable to corporation tax under Article 209 of the Code, provides that, for the purposes of calculating the income tax due by companies "which have control over companies located outside France", "profits indirectly transferred to the latter (...) by way of (...) reduction in (...) selling prices (...) are incorporated into the results shown in the accounts".

 

7.         7. Article 57 also specifies the methods by which the tax bases may be determined by the tax authorities in the event of such transfers. Its third paragraph provides that in the absence of a response to the request for information and documents made pursuant to Article L. 13 B of the Book of Tax Procedures, "the tax bases concerned by the request shall be assessed by the administration on the basis of the elements available to it and in accordance with the adversarial procedure defined in Articles L. 57 to L. 61 of the same Book". And its fourth paragraph states that in the absence of precise elements to make the rectifications, "the taxable income is determined by comparison with that of similar businesses normally operated".

 

8.         It follows from the aforementioned provisions of Article 57 of the General Tax Code that, where it finds that the prices charged by an undertaking established in France to a foreign undertaking which it controls are lower than those charged either by that undertaking to other customers not at arm's length with it, or by similar undertakings normally operating with customers not at arm's length, If the difference cannot be explained by the different situation of these customers, the administration must be considered to have established the existence of an advantage which it is entitled to reintegrate into the results of the company established in France, unless the latter can justify that this advantage had at least equivalent counterparts for it.

 

9.         Finally, it follows from Article L. 13 B of the Book of Tax Procedures that the administration may request from an audited company, during the course of an accounting audit, when it has gathered elements leading to the presumption of the existence of an indirect transfer of profits within the meaning of Article 57 of the General Tax Code, all documents and information specifying the nature of its relations with companies that are related to it, the method of determining the prices of the transactions of an industrial, commercial or financial nature that it carries out with these companies, as well as the elements that justify this method. It is then up to the administration, which bears the burden of proof of the existence of an advantage granted by the audited company to the foreign companies with which it is linked, to establish, in the exercise of its control powers and in accordance with the adversarial procedure, that the prices charged between the company and the companies linked to it differ from arm's length prices. If the possible insufficiency or inaccuracy of the elements brought by the taxpayer is without incidence on the burden of proof and on the contradictory character of the procedure of establishment of the tax bases, it results however from the combined provisions of article 57 of the general tax code and of article L. 13 B of the tax procedure book that the failure of the audited company to respond to a formal notice presented in application of Article L. 13 B, or an insufficient response to this formal notice, assimilated to a failure to respond, allows the administration to evaluate the tax bases concerned by the request for information on the basis of the elements available to it.

 

As regards the links between SA ST Dupont and STDM :

 

10.       It is common ground that, for the entire period from 1 April 2006 to 31 March 2011, SA ST Dupont, whose registered office is in Paris, held the entire capital of ST Dupont Marketing Ltd (STDM), which is located in Hong Kong, as noted in the rectification proposal of 20 December 2012. The administration thus provides evidence of a relationship of dependence between the two companies within the meaning of Article 57 of the General Tax Code.

 

With regard to the amount of the licence fee invoiced by SA ST Dupont to STDM:

 

11.       It appears from the investigation that on 7 March 1997 SA ST Dupont concluded a contract with its subsidiary STDM located in Hong Kong granting the latter a licence to use the trademarks, processes and techniques and know-how allowing STDM to manufacture, market and sell (or have manufactured, marketed and sold), in China (excluding Hong Kong), ST Dupont products (ready-to-wear, home furnishings, accessories, with the exception of lighters and writing instruments). In return, STDM undertook to pay a licence fee corresponding to 7% of the turnover achieved. An exclusive sub-licence agreement was signed on 1 April 1999 between STDM and Bondwood Investment Ltd, located at the same address as STDM in Hong Kong. In return, Bondwood Investment Ltd undertook to pay STDM a licence fee corresponding to 30% of the annual wholesale turnover for the first 30 million Renminbi (approximately 3 million euros) and 10% thereafter. The contract runs from 1 April 1999 to 31 March 2006 and allows Bondwood Investment Ltd to assign the sub-licence with the prior agreement of STDM. This sub-licence agreement was tacitly renewed at the end of 31 March 2006 with a continuation of the licence fee paid to STDM for wholesale sales and a reduction of this same fee to 15% of the annual turnover of retail sales over the first 60 million Renminbi (approximately 6 million euros) and to 5% thereafter.

 

12.       In the rectification proposals of 20 December 2012 and 26 August 2013, the administration, after analysing the functions and risks assumed by SA ST Dupont and STDM respectively, and rejecting the comparable open market price method used by the applicant company on the grounds that the latter had not presented any evidence to justify it and that the points of comparison used were not relevant, In the light of STDM's status as a limited-risk distributor, ST Dupont's status as a main contractor and the significant difference in royalties, STDM should have retroceded to ST Dupont SA part of the royalties received from Bondwood Investment Ltd. The department considered, "in the absence of any data on the costs of the licensee's control function assumed by STDM (30% for STDM against 7% for ST Dupont)", that the part wrongly retained should be set at 80% of the amount of the royalty retained by STDM. It considered increasing ST Dupont's results accordingly "to 80% of the royalty paid to STDM by Bondwood Investment Ltd".

 

13.       In the reply to the taxpayer's observations of 31 March 2014, the administration, after criticising the functional analysis supported by the applicant company and maintaining that the points of comparison put forward by the latter were not relevant, argued that the licence agreement concluded on 7 March 1997 between SA ST Dupont and STDM and the exclusive sub-licence agreement concluded on 1 April 1999 between the latter and Bondwood Investment Ltd constituted comparable elements, since "these two agreements concern the same territory, the same products and the same brand". However, 'by way of conciliation', the administration limited the amount of the adjustments by calculating it by applying a royalty rate of 10% of the turnover, 'this rate being the maximum rate provided for by the licence agreements concluded by SA ST Dupont with independent third parties cited by it as comparable'. It then maintained this increase in accordance with the opinion of the departmental commission for direct taxes and turnover taxes on 24 June 2015.

 

14.       However, on the one hand, it is common ground that the capital of Bondwood Investment Ltd is wholly owned by Dickson concept Ltd located in Hong Kong and that the latter is also the ultimate shareholder of SA ST Dupont through Broad Gain Investments Ltd. As a result, SA ST Dupont is entitled to maintain that Bondwood Investment Ltd cannot be considered as having no links with it and that the administration could not therefore base itself on a comparison between the fee invoiced by SA ST Dupont to its subsidiary STDM and the fee invoiced by the latter to Bondwood Investment Ltd in order to establish, pursuant to Article 57 of the General Tax Code, the existence of an advantage that it would be entitled to reintegrate into the results of SA ST Dupont.

 

15.       On the other hand, it is clear from the investigation that the applicant company concluded six other brand concession contracts with independent companies providing for a royalty rate of 5 or 7 or 10 %. If the administration argues, in the alternative, that the rate of 10% which it adopted 'by way of conciliation' was applied by the applicant company to independent companies, whereas the contracts concluded with them did not grant them, unlike the one concluded with the applicant company, a royalty rate of 5%.

 

While such a difference may have a significant impact on the rate of the licence fee, it cannot justify, as such, the administration's retention of only the highest of the fees charged to independent companies, when the purpose of all these fees is also to remunerate the sole licence of the trademark. Moreover, the impact of the granting of manufacturing know-how on the royalty rate has not been quantified in any way (which cannot be the case with the reference to the costs incurred for the financial year ending in 2011 for the design and manufacture of new products and the collection costs of the ready-to-wear business for amounts of EUR 137,227 and EUR 52,884, which the administration mentioned in order to demonstrate that the company retained know-how in this area and without specifying whether these sums related exclusively to the subsidiary STDM). In addition, the administration contests, in several respects, the relevance of the comparison with these other concessions without, however, presenting any objective element of such a nature as to justify that only the concessions remunerated by the 10% fee are likely to be retained as valid points of comparison.

 

16.       It follows from the foregoing that the administration does not provide proof that the arm's length amount of the royalty for the trade mark and know-how granted to STDM should be set at 10% of turnover instead of the 7% rate stipulated in the contract of 7 March 1997. The administration was therefore wrong to regard the amount of the royalty corresponding to the difference between that rate of 10% and the rate of 7% invoiced by the applicant company in accordance with the licence agreement as a profit indirectly transferred to STDM. The applicant company is therefore entitled to request discharge of the additional tax resulting from the reintegration of that amount in its results and reinstatement of its tax loss carry-forward in so far as it was reduced by reason of that increase.

 

With regard to the sale prices of finished products to STDM :

 

A.        A. The administration's criticisms of the transfer pricing method used by the company :

 

17.       The criticisms that the administration addressed to the transfer pricing method set out by the applicant company are based on three observations, namely, the inconsistency of the structurally loss-making results of ST Dupont SA and the structurally profitable results of STDM located in Hong Kong with the analysis of the functions and risks respectively assumed by ST Dupont SA and by this subsidiary, the lack of elements justifying the method for determining the transfer prices of ST Dupont SA to STDM and the lack of relevance of the points of comparison used by the company without adjustment.

 

The analysis of the functions and risks respectively assumed by SA ST Dupont and STDM and their inconsistency with the results reported by these two companies:

 

18.       The auditor noted in the rectification proposals of 20 December 2012 and 26 August 2013, in accordance with the indications given by the company in its letter of 19 September 2012, that SA ST Dupont owns the most important intangible assets: the brand for all product classes and the entire world (except the brand for perfumes), all the other intellectual property rights and the know-how of the Faverges factory, and that it bears the related expenses for the management of the brands and institutional advertising. It holds all the capital of the foreign distribution subsidiaries (except for the subsidiary in Spain) and takes strategic decisions.

 

19.       The administration also notes from the information provided by the company that SA ST Dupont is responsible for manufacturing (the company manufactures lighters, except for those in the "Jet" line, and writing instruments intended to be marketed worldwide under the Dupont brand, in its factory in Faverges, France), trading, and marketing products and goods in France, where SA ST Dupont has two retail shops and sells to a network of independent retailers, and abroad, where the products manufactured and goods bearing the Dupont brand are distributed under distribution contracts, either through independent distributors (wholesale distribution or both wholesale and retail distribution), or through its distribution subsidiaries located mainly in Europe and Asia, or through export agents

 

20.       The administration also notes that SA ST Dupont handles stocks and logistics, in particular for products sold to European subsidiaries, for which it bears all the transport and storage costs (SA ST Dupont delivers directly to the retail customers of the European subsidiaries), unlike products sold to Asian subsidiaries, which bear all the transport and storage costs, except for STDM located in Hong Kong. It also provides services to the subsidiaries and licenses third parties and its subsidiary STDM to manufacture and sell products under the Dupont brand.

 

21.       With regard to the risks borne by ST Dupont SA, the auditor noted that the latter is responsible for the research and development of new products, bears the foreign exchange risk, assumes significant financial costs and the risks associated with them, the risks associated with the market, the industrial risks associated with manufacturing defects as well as the costs generated by the manufacturer's guarantee, with some exceptions.

 

22.       As for the functions and risks assumed by the subsidiaries of SA ST Dupont, the administration considered that the latter assumed few functions and few risks: the European subsidiaries are pure buyer-resellers with only a wholesale activity that must bear the costs of local advertising but not storage costs; the Asian subsidiaries (Hong Kong, China, Japan) are pure buyer-resellers with a wholesale and retail activity that must bear, in addition to the costs of local advertising, the costs of holding stocks, the costs of logistics and the costs of managing ST Dupont's exclusive shops, as well as the risks linked to the distribution function (risks of stocks, non-payment).

 

23.       The administration, like the applicant company, considers that in the light of these elements, which are constant, SA ST Dupont must be regarded as the "principal entrepreneur" of the group, which decides on the taking of economic risks, controls strategic decisions, administers the commercial cycle as a whole and holds the activities and intangible rights with a high value, and which is therefore destined to record the bulk of the results and losses.

 

24.       However, the administration noted that the results of SA ST Dupont were structurally in deficit (from approximately 7 to 32 million euros), while the results of STDM were structurally profitable (for amounts of approximately 1 to 4 million euros, compared to turnover excluding tax amounting to 10 to 15 million euros), and that such a situation, observed for each of the financial years ending on 31 March of the years 2003 to 2009 73 million excluding tax) and the extent of the functions and risks assumed by this company, which, given its nature as a "main contractor", should, according to the administration, have used a method for determining transfer prices that would have allowed it to generate a sufficiently positive net margin in transactions with STDM.

 

The absence of elements justifying the transfer pricing method and the lack of relevance of its implementation by the company:

 

25.       The administration noted that the applicant company cited independent distributors as points of comparison for sales to Asian subsidiaries, but that, on the one hand, the figures communicated for the Russian distributor, the American distributor and those for the Middle East (standard purchase price, wholesale price for the American distributor, retail price for the others, gross margin) only concern the financial year ending 31 March 2011 and a few products, "the best-selling", The company did not provide, despite the service's formal notice, all of these figures for all products and financial years, and that, on the other hand, companies located on the Russian, American or Middle Eastern market cannot a priori, in the absence of any information and analysis and of any correction, constitute elements comparable to transactions with companies located in Asia, due to the significant differences between these markets

 

26.       With regard to the distributor S.J. Duko Co Ltd, located in South Korea, the company did not provide any data in its letter of 19 September 2012, but only indicated that it would benefit from the application of a discount of 28.5%. In its letter of 22 November 2012 and the documents submitted in response to the department's formal notice, the company specified SA ST Dupont's margin for sales to Korea by product family for all financial years. While the administration admits that this element of comparison, located in Asia, is a priori relevant, it notes that the applicant company was not able to produce data on public prices for Asian countries, which are not identical for all countries, which does not allow it to verify the correct application of the resale price method. The administration also notes that the annexes to the letter of 22 November 2012 and the documents presented during the on-site inspection show that, over the financial years from 1 April 2002 to 31 March 2009, the margin rates achieved by SA ST Dupont on sales of goods and finished products to independent distributors located in Asia are higher than the margin rates achieved on sales to the STDM subsidiary located in Hong Kong and that only the latter subsidiary is still profitable.

 

27.       In the light of all these elements, the administration considered that the margins achieved by SA ST Dupont on sales of goods and finished products to STDM were not sufficient to enable it to cover its costs and to ensure an adequate profit on these transactions, given the functions performed and the risks incurred by SA ST Dupont, and that the transfer pricing method relied on by the applicant company was neither justified nor adequately implemented.

 

B.        The alternative method used by the administration :

 

28.       It follows from the investigation, and in particular from the proposals for rectification of 20 December 2012 and 26 August 2013, that after having first relied, pending the results of the computer processing carried out by the applicant company pursuant to II of Article L. 47 A of the Book of Tax Procedures, on a comparison of the margin rates achieved by SA ST Dupont on sales of products to the company STDM located in Hong Kong and on sales of the same products to independent companies located in South Korea, the administration then based itself on a comparison of the prices at which SA ST Dupont sells the same products to the said companies. The administration used as points of comparison the only independent companies that are customers of ST Dupont SA located in Asia with an appreciable volume of transactions, i.e., on the one hand, S.J. Duko Co Ltd, located in South Korea, and on the other hand, a network of tax-free retail shops ("duty free"), also located in South Korea.

 

29.       The results of the request for computer processing that the administration sent to the company on 5 November 2012 and then on 25 March 2013 enabled it to compare the sales prices charged by ST Dupont SA to these companies. The administration carried out a search for products (by product number in the company's databases) that were sold both to STDM and to independent South Korean companies, for each of the financial years processed by the company (financial years ending in 2007, 2008, 2009, 2010 and 2011). As a result, the number of product references sold jointly to the dependent company and the independent companies is approximately half the number of product references sold to the dependent company and one third of the number of product references sold to the independent companies.

 

30.       The service then analysed the average selling price of the products common to the dependent company and the independent companies (average price determined by the amount of turnover resulting from the product divided by the quantity of products sold during each financial year). The administration then noted that the number of product references sold at a lower price to the dependent company, STDM, than to the independent companies was 2 to 13 times higher, depending on the financial year, than the number of product references sold at a higher price to the dependent company (445 versus 33; 408 versus 59; 290 versus 120; 290 versus 40; 303 versus 37). The department then calculated the amount of sales to STDM of common products, differentiating according to whether the sales price level was lower or higher than that charged to independent companies. The administration then found that the amount of sales to STDM of products sold at a lower price to this dependent company than to the independent companies amounted, for the financial years ending in 2007, 2008, 2009, 2010 and 2011, to respectively EUR 4,883,801.97; EUR 5,062,747.34; EUR 4,488,657.65; EUR 3,463,454.07; and EUR 5,661,688.19; for an amount of sales to STDM of products sold at a higher price than to the independent companies of, respectively: EUR 210,296.91, EUR 552,248.46, EUR 1,035,381.20, EUR 436,969.01 and EUR 359,675.15. The department concluded that STDM was purchasing products sold by ST Dupont SA at a lower cost.

 

31.       The service finally carried out an evaluation of the turnover that would have been generated by the sale to the dependent company STDM of the joint products at the price charged to the independent companies. For this purpose, the department calculated the average sales price to South Korea of each joint product and applied this unit amount to the sales volume to STDM. In the rectification proposal of 26 August 2013, the department concluded, after offsetting the few turnover gains from the more expensive products against the turnover losses from the sale of cheaper products, that SA ST Dupont, by selling at a lower price to STDM, was foregoing revenue in the amount of, for the financial years ended 2007, 2008, 2009, 2010 and 2011, respectively: EUR 1,998,996.04; EUR 1,793,601.35; EUR 824,935.66; EUR 897,363.72 and EUR 1,311,478.34 respectively.

 

32.       In the reply to the taxpayer's observations of 31 March 2014, the administration applied a reduction to the revenue thus determined to take account of the observations made by the company and in particular the difference in the conditions of sale and the duties and risks assumed by STDM and the tax-free retail shops located in South Korea. The amount of the allowance applied by the administration is equal to the amount of the margin realised by ST Dupont SA on sales to duty free shops minus the amount of the margin realised by ST Dupont SA on sales to S. J. Duko Co Ltd. The administration therefore set the amount of revenue transferred at: 217,295 euros; 248,415 euros; 15,420 euros; 626,243 euros; 511,024 euros respectively.

 

33.       Finally, in accordance with the opinion issued by the departmental commission on direct taxes and turnover taxes on 24 June 2015, which had considered that account should be taken of the services included in the price of the products sold to S.J. Duko Co Ltd but, according to the commission, invoiced separately and in addition to the price of the products sold to the SDTM, the administration divided the adjustments resulting from the response to the taxpayer's observations by two.

 

C. The applicant company's arguments:

 

With regard to the resale price method used by the company :

 

34.       The resale price method relied on by ST Dupont SA is a method of determining the transfer price which takes as its starting point the price at which a product purchased from an associated company is resold to an independent company. It then deducts from this price (the resale price) an appropriate gross margin (the "resale price margin") representing the amount by which the reseller would cover its selling and other operating expenses and, in the light of the functions performed (taking into account the assets used and the risks incurred), make an appropriate profit. The price obtained after deducting the gross margin can be considered, after adjusting for other costs associated with the purchase of the product, as an arm's length price for the initial transfer between associated enterprises. The resale price margin of the reseller in the controlled transaction can be determined by reference to the margin that the same reseller achieves on products purchased and resold in open market transactions (internal comparable transaction). In addition, the margin on the resale price achieved by an independent company in comparable open market transactions may serve as an indicator (external comparable transaction). In all cases, the reliability of this method requires knowledge of the resale prices since it consists of determining the arm's length selling price by deducting the resale price margin determined by comparison from the actual resale prices.

 

35.       While ST Dupont SA maintains that it made an appropriate and justified application of this resale price method to determine the transfer price of products sold to STDM located in Hong Kong, it follows from the investigation, as regards the gross margin rate used by the company as a comparable element, that as the administration points out in detail the company does not provide sufficient evidence to justify the comparability of the gross margins achieved in the comparable internal or external transactions that it has retained, even though such gross margins may differ significantly, depending on the geographical area, between companies, in particular when they are both wholesale and retail distributors, as STDM is. In particular, with regard to the transactions presented by the company as "internal" comparable transactions, the company has only produced, contrary to what it maintains before the Court, data relating to the results of independent resellers in 2011, and moreover only for a limited number of products, the "best-selling" ones, distributed on the American, Russian and Middle Eastern markets. Furthermore, as the company's letter of 19 September 2012 shows, and as the administration also rightly points out, the company did not in fact set its transfer prices to Asia by referring to a comparable gross margin rate, but by applying, on a case-by-case basis, a "discount" rate which, according to the company, is specific to each subsidiary and each product line and varies according to the functions performed and the characteristics of the local markets, a rate of which the company has, moreover, given only a few examples. It is only the aggregated gross margin rate recorded a posteriori for all the transactions carried out by the subsidiary that the company compares to the range of rates it has retained as comparable elements: the latter therefore do not make it possible to account for the determination of each "discount" rate.

 

36.       As for the base to which the company applied each "discount" rate, the investigation shows that ST Dupont SA did not justify the resale prices charged in Asia, as the administration pointed out, and that it expressly indicated that it applied the "discount" rates not to the resale prices actually charged in Asia, but to the wholesale prices excluding tax charged in Europe. However, on the one hand, these wholesale prices constitute selling prices and not "resale prices", whereas the method it relies on implies deducting the margin rate from the resale price, and on the other hand, the company specified that resale prices were not the same in Asia, which makes the application of a discount rate to the wholesale prices charged in Europe all the less relevant.

 

37.       It follows from the above that the administration has established that SA ST Dupont did not produce the elements needed to justify its method of determining transfer prices and that the applicant company implemented the resale price method in a way that is irrelevant, whether it is a question of the gross margin rate used as a basis for comparison or the base to which this deduction rate was applied.

 

38.       It also follows from the investigation that the department asked the applicant company on 20 July 2012, pursuant to Article L. 13 B of the Book of Tax Procedures, to provide it with its methods for determining transfer prices for each branch of activity and to submit all supporting documents and all information and comparability analyses used by the group to justify the compliance of transfer prices with the arm's length principle. However, despite the formal notice to SA ST Dupont to present all the supporting documents for the method of determining transfer prices and "all elements [...] which, by virtue of the arm's length principle, make it possible to justify that the price or prices used [... . the rate or price used for each category of product", it follows from the above that SA ST Dupont, by failing to produce the resale prices, which are essential to justify the method it relies on, cannot be considered to have sufficiently responded to the formal notice presented to it by the administration pursuant to Article L. 13 B of the tax procedure book. In accordance with the combined provisions of Article 57 of the General Tax Code and Article L. 13 B, this insufficient response must be treated as a failure to respond enabling the administration to assess the tax bases concerned by the request for information on the basis of the information available to it.

 

With regard to the method used by the tax authorities to determine transfer prices :

 

39.       The administration having considered that the markets located on other continents were too different, as the company itself acknowledges, at least for Europe, and that the reputation of the ST Dupont brand gave its products a high degree of specificity, and having noted, throughout the financial years ended 31 March 2007 to 2011, that a significant number of products sold by ST Dupont SA, listed under the same number in its catalogue, were sold in Asia to both its subsidiary STDM and to its subsidiary STM, ST Dupont SA sold a significant number of products under the same number in its catalogue in Asia to both its subsidiary STDM in Hong Kong and to independent companies in South Korea, it was entitled to consider that the method based on the comparison of the price of these sales, the so-called comparable price method on the open market, was the most relevant in the case in point, provided, however, that no difference between these companies was likely to have a significant influence on the selling price set by ST Dupont SA or that any differences could be the subject of an appropriate adjustment. As mentioned above, the independent customers of ST Dupont S.A. in South Korea are S.J. Duko Co Ltd and the duty free shops.

 

40.       As regards the method itself, although the applicant company maintains that the administration intended to apply the comparable price method on the free market, while sometimes wrongly referring to the margin rates achieved by SA ST Dupont, it is clear from the investigation that it was only in the rectification proposal of 20 December 2012 that the administration based the adjustments on a comparison of margin rates, It then based them, as of the rectification proposal of 26 August 2013, on a comparison of sales prices, in accordance with the comparable price method on the open market, which it replaced with the first method. The administration then referred to the margins achieved by SA ST Dupont on sales made with S.J. Duko Co Ltd and on sales made with duty free shops only as a correction, to take into account the specific nature of sales to these retail shops.

 

41.       As regards the comparison with the sales prices to S.J. Duko Co Ltd, the applicant company relies on differences in the functions performed by that company, in the content of the transactions, in their volume, in the characteristics of the products sold and in the distribution markets. However, while it is common ground that that company is a wholesale distributor, whereas the subsidiary STDM established in Hong Kong is a wholesale and retail distributor, such a difference, which may have a significant impact on the resale price and render the method based on the latter irrelevant, is not, in the present case, such as to influence the selling price charged by ST Dupont SA, since STDM performs both functions and itself performs the functions of a wholesaler in relation to the retail shops which are dependent on them.

 

42.       Furthermore, although it is common ground that SA ST Dupont invoices its subsidiary STDM for separate services relating, in particular, to the development of the brand, which are invoiced with a margin of 8 % based on the actual costs, it is clear from the service agreement that, as the administration points out in detail, those services are not commensurate, in terms of their nature and scope, with the services which are included in the sales contract concluded on 1 April 2005 with S. J. Duko Co Ltd and the supporting documents produced by the applicant company. In particular, it is apparent from the latter contract that S.J. Duko Co Ltd must itself devote 6 and then 5.5 and then 5 % of its annual turnover to the communication budget in the first five years, and that SA ST Dupont has undertaken to provide only limited services which are, whatever the departmental committee on direct taxes and turnover taxes may have considered, very limited in scope in relation to the communication services provided for in the service agreement concluded with the subsidiary STDM and which are not equivalent, as far as S. J. Duko Co Ltd is concerned, to the communication services provided for in the agreement. J. Duko Co Ltd, only in the communication expenses that the latter has undertaken to provide itself.

 

 

43.       While it is also common ground that sales of certain products to S.J. Duko Co Ltd are lower in volume than sales of the same products to the subsidiary STDM, it is clear from the tables comparing the sales prices of products common to both companies that there is no significant and unambiguous correlation between the volumes of sales of products sold to either of these companies and their respective prices in this case. Furthermore, the products compared are distributed in the same geographical area and there is no objective evidence to establish that there are significant differences between the two countries of distribution which were used, in this same area, for the comparison of the said products. Finally, the administration compared only products that were also sold to the two companies, listed under the same number in the catalogue of SA ST Dupont, and thus justified that these products are in principle identical or at least similar, including for ready-to-wear products, even though these clothing products, which are also listed identically, would have been made, in one case, in Europe, and in the other, in Asia.

 

44.       As regards the duty-free shops, if the applicant company rightly maintains that the latter have different functions and contexts which have a significant impact on the prices charged directly to them, owing in particular to their status as simple retailers, justifying a significantly higher selling price, and if it results from the investigation that the difference in the selling price is essentially due to the amount of the commission paid by SA ST Dupont to the company that runs this network of retail shops, the administration nevertheless took into account, in its response to the taxpayer's observations, the specific nature of these transactions and applied a reduction to the selling prices charged to these shops to correct this specificity. As stated in point 32, this reduction is equal to the margin made by ST Dupont SA on sales to duty free shops minus the margin made by ST Dupont SA on sales to S. J. Duko Co Ltd. J. Duko Co Ltd.

 

45.       Contrary to what the company maintains, the purpose and effect of this reduction is not to bring the sales prices to duty-free shops to the same level as the sales prices to S. J. Duko Co Ltd and to reduce the margin on sales to S. J. Duko Co Ltd. and to remove this term of comparison altogether. In addition, the applicant company does not dispute the precise relevance of the methods used to determine the reduction that the administration applied in this way. Moreover, the administration submitted to the Court of First Instance, by way of comparison, another method of determining that adjustment, based on the consideration that the function of promoting the network of those retailers is carried out in return for a commission which may be fixed at 27% of the unit price of sales to retailers. By means of new calculations made for the purposes of the investigation before the Court, which it presented in its first defence, the relevance of which is not contested, the administration establishes that the adjustments made on the basis of the differences found between, on the one hand, the selling prices to the subsidiary STDM and, on the other hand, the selling prices to S. J. Duko Co Ltd and retailers, with a deduction of "27% of the unit selling price" for the latter, would result in basic adjustments totalling EUR 2,130,326 instead of the amount of EUR 1,618,397 set out in the reply to the taxpayer's observations (as can be seen from the last line of the second and fourth columns of the table of the various adjustments envisaged, cited in the first defence).

 

46.       Finally, and in any event, the administration could rightly, contrary to what the applicant company also maintains, base itself solely on the comparison between the sales prices to the subsidiary STDM and to the independent company S. J. Duko Co Ltd, since that comparison, which relates to identical products, sold in the same geographical area and to companies that do not have significant functional or contractual differences, is the most appropriate, and since those transactions, recorded throughout the financial years, have a sufficient frequency and volume to constitute comparable transactions, and the administration did not have other more relevant elements. Under these conditions, this comparison alone is sufficiently convincing, which depends less on the quantity of the points of comparison used than on the degree of their comparability. The administration also presented before the Court, in its first statement of defence, new calculations made by excluding transactions with duty-free shops, which resulted in adjustments totalling EUR 1,524,679, without taking into account the 50% allowance mentioned in the opinion of the departmental committee on direct taxes and turnover taxes, an allowance which, in the light of the foregoing, the administration was not required to apply to this new calculation, within the limit of the assessments levied or notified to the applicant company.

 

47.       It follows from all the above that, in the light of the tax law, the administration provides proof of the existence and amount of the profits indirectly transferred by SA ST Dupont to STDM that it reintegrated into the applicant company's results pursuant to Article 57 of the General Tax Code.

 

48.       If, in the light of the interpretation of the tax law by the administration, which states, in the instruction referenced BOI-BIC-BASE-80-10-20120912, published on 12 September 2012, moreover after the financial years in dispute, that "within a group, the main contractor receives the residual remuneration, i.e. the profit (or losses) remaining once all the entities have been fairly remunerated" (§ 100), the applicant company rightly maintains that it must be regarded as the main contractor and that, in this respect, it is not abnormal for it to show in its results deficits that are recorded in the group as a whole; on the other hand, it is not entitled to maintain that, in view of the functions and risks respectively assumed by SA ST Dupont, its subsidiary STDM and all of its other subsidiaries, it is normal for STDM alone to show only profitable results throughout the years. It is therefore in any case not entitled to rely on this interpretation of the tax law.

 

49.       It follows from all the above that SA ST Dupont is only entitled to request the discharge of the additional taxes resulting from the adjustments made in respect of the licence fee invoiced by SA ST Dupont to STDM and the restoration of its loss carry-forward insofar as it was reduced as a result of these adjustments.

 

On the application of Article L. 761-1 of the Code of Administrative Justice :

 

It is appropriate, in the circumstances of the case, to charge the State the sum of EUR 1,500 under Article L. 761-1 of the Code of Administrative Justice.

 

D E C I D E :

 

Article 1: SA ST Dupont is discharged from the additional minimum business tax contribution to which it was liable for the financial year ended 31 March 2009, from the additional business value-added contribution which was charged to it for 2010 and 2011, as well as from the withholding tax contributions and the corresponding increases to which it was liable for the financial years ended in 2009, 2010 and 2011, insofar as these duties and increases result from the adjustments made in respect of the licence fee invoiced by the company SA ST Dupont to the company STDM.

 

Article 2: The deficit carried forward to 31 March 2011 is reinstated insofar as it has been reduced due to the adjustments made in respect of the licence fee invoiced by the company SA ST Dupont to the company STDM.

 

Article 3: The State shall pay the sum of 1,500 euros to SA ST Dupont pursuant to Article L. 761-1 of the Code of Administrative Justice.

 

Article 4: The remainder of the conclusions of SA ST Dupont's request is rejected.

 

Article 5: The present judgment will be notified to SA ST Dupont and to the Ile-de-France Regional Tax Audit Office.