Main text

1 The original decision is reversed.

2. Of the correction of corporate income tax for the fiscal year from December 1, 1999 to November 30, 2000 made by the Administrative Agency for the Disposal of Property to the appellant on April 27, 2004, the portion exceeding the amount of income of 255,742,515 yen, the amount of tax payable of 76,669,100 yen, and the imposition of additional tax for under-reporting (after partial reversal by a revised decision dated June 29, 2004) is reversed.

The part exceeding 255,740,515 yen of income and 7,666,600,000 yen of tax due, and the decision to impose additional tax on under-reporting (which was partially reversed by the revised decision dated 29 June 2004) are reversed.

3. Of the correction of corporate income tax for the fiscal year from December 1, 2000 to November 30, 2001 made by the administrative agency on April 27, 2004 to the appellant, the portion exceeding the amount of income of 537,679,363 yen, the amount of tax to be paid of 161,251,000 yen, and the portion exceeding the amount of tax to be paid of 1,061,000 yen are reversed.

The part exceeding JPY 537,679,363 in income and JPY 161,251,000 in tax payable, and the decision to impose additional tax for under-reporting are reversed.

4. Of the correction of corporate income tax for the fiscal year from December 1, 2001 to November 30, 2002 made by the Administrative Agency for Disposition to the appellant on April 27, 2004, the amount of income of ¥258,637,674

5 The costs of the proceedings shall be borne by the parties concerned.

5 The costs of the suit shall be borne by the appellant in both the first and second trials.

Facts and Reasons

No. 1 Judicial decision sought by the parties

1. The purpose of the appeal is the same as the main text.

2 Reply to the purpose of the appeal

(1) This appeal is dismissed.

(2) The costs of the appeal shall be borne by the appellant. 2 Outline of the case

1 In this case, the Administrative Agency for the Disposal of Property (hereinafter referred to as the "Disposing Administration Agency") dismissed an appeal by the appellant and P1 (hereinafter referred to as "P1 Company") and P2 (hereinafter referred to as "P2 Company"), both of which are foreign related parties (see Article 66-4(1) of the Act on Special Measures Concerning Taxation) of the appellant. (hereinafter referred to as "P1") and P2 (hereinafter referred to as

(hereinafter referred to as "P1") and P2 (hereinafter referred to as "P2", and together with P1, may be referred to simply as "the foreign related parties"), which are foreign related parties of the appellant (see Article 66-4(1) of the Act on Special Measures Concerning Taxation). (hereinafter referred to as "P1") and P2 (hereinafter referred to as "P2") (together with P1, simply referred to as "the foreign related parties in question"), on the grounds that the amount of consideration paid by the appellant to P1 or P2 was less than the arm's length price prescribed in Paragraph 2 of the said Article. As a result, the appellant claimed that the amount of consideration paid by the appellant to P1 and P2 was not less than the arm's length price, and that the amount claimed by the appellant to be the arm's length price was not the arm's length price. The part of the revision that exceeds the amount of income and the amount of tax to be paid in relation to final returns and amended returns, as well as the decision to impose additional tax for under-reporting (however, this decision was partially reversed by a revised decision dated June 29, 2004)

This case is a request for the revocation of the part of the said correction that exceeds the amount of income and the amount of tax payable in respect of final returns and amended returns, and the decision to impose additional tax for under-reporting (after the partial revocation of the said decision by the revised decision dated June 2, 2004).

2 The original proceedings

(1) With respect to whether the amount of the fee in question is less than the arm's length price (Issue (1)), the court held that (i) in order to be able to say that the method is equivalent to the three basic methods in a service provision transaction such as the above-mentioned foreign affiliated transaction, it is necessary that the services involved in the subject transaction are of the same kind as the services involved in the above-mentioned foreign affiliated transaction (arm's length price comparison method) or are of the same kind or similar (resale price standard method) In order to be able to say that the method is equivalent to the three basic methods, it is reasonable to interpret that the services involved in the subject transaction must be the same type as the services involved in the foreign related transaction in question (independent price comparison method), or the same type or similar (resale price basis method and cost basis method), and that the conditions for providing the services involved in the subject transaction are the same as those in the foreign related transaction in question. It is reasonable to conclude that (a) if the government (the appellant) claims and proves that it is not possible to use a method equivalent to the three basic methods despite the fact that the taxation authority has made all reasonable efforts to investigate, it is presumed in fact that it is not possible to use a method equivalent to the three basic methods, and (b) the taxpayer (the appellant) needs to specifically claim and prove that it is possible to use a method equivalent to the three basic methods. In this case, the appellant has alleged and proved (a), but the appellant has not proved (b), and (c) the method of calculating the arm's length price applied by the administrative agency for disposal in this case.

From the point of view of the functions performed and the risks borne by the appellant in the sale of the P3 products, the method of calculating the amount of the normal commission (arm's length price) to be received by the appellant in the foreign related transactions in question) is similar to the functions and risks of a reseller in a resale transaction based on the sales on order method. Therefore, the calculation method in question is a "reasonable method that conforms to the content of the transaction and does not deviate from the concept of the three basic laws (the Resale Price Standard Method)", and therefore, the calculation method in question should be equivalent to a method equivalent to the Resale Price Standard Method. (5) The appellant argues that the transactions subject to comparison cannot be made subject to comparison on the grounds that the criteria for selecting transactions subject to comparison by the administrative agency that imposed the disposition are not reasonable and that the selection is arbitrary, but the reasonableness of the criteria for selecting transactions subject to comparison and whether or not to make them subject to comparison are not directly related. However, there is no direct relationship between the reasonableness of the selection criteria of the comparable transactions and whether or not the comparable transactions are subject to comparison, and it is as stated above that the comparable transactions are comparable, and even if we leave this point aside, we cannot find anything unreasonable in the process of selecting the comparable transactions.

(6) Paragraph 6 of Article 39-12 of the Enforcement Order of the Act on Special Measures Concerning Taxation, which provides for the resale price standard method, stipulates that, where there is a difference between the comparable transaction and the resale transaction pertaining to the foreign affiliated transaction in terms of the functions performed by the seller and other factors, the normal profit rate shall be the rate after making necessary adjustments to the rate arising from such difference. In this case, the calculation method in question is equivalent to the method equivalent to the resale price standard method, and the transactions subject to comparison in this case are found to be comparable, as the amount equivalent to the interest rate included in accounts receivable and accounts payable and the risk of collection of receivables are adjusted appropriately.

It is clear that the amount of the normal commission (the arm's length price) calculated by the administrative agency using this method exceeds the amount of the commission in question.

(2) Whether there are grounds for the illegality of the exercise of the power of questioning and inspection in this disposition (Dispute (2)): Article 66-4(9) of the Act on Special Measures Concerning Taxation is a provision that establishes the power of tax officials to question and inspect comparable corporations, and the procedural requirements for such questioning and inspection are not themselves a requirement for taxation disposition. Therefore, it is reasonable to understand that the taxation disposition cannot be illegal immediately on the grounds that the procedures for the questioning and inspection are illegal, and that only when the procedures for the questioning and inspection violate penal laws and regulations or are seriously illegal, such as being offensive to public order and morals, will there be grounds for the revocation of the disposition. In this case, the facts alleged by the appellant are that the appellant submitted without delay all the books and documents or copies of books and documents that were deemed necessary for calculating the arm's length price that the staff of the administrative agency that made the disposition requested, and that the appellant actively cooperated with the staff of the administrative agency that made the disposition in hearing the details of the business. Therefore, even with the above-mentioned allegations of the appellant, it is not possible to say that there is a serious illegality in the procedures for the questioning and inspection conducted by the administrative agency. It is not possible to adopt the appellant's argument that the dispositions are illegal on the grounds that the officials of the administrative agency exercised the above-mentioned questioning and inspection authority even though they did not meet the requirements prescribed in the said paragraph.

Therefore, the court dismissed both of the appellant's claims.

Therefore, the appellant, who was dissatisfied with this, appealed.

3 The "Provisions of Relevant Laws, etc.," "Assumptions," "Issues," and "Summary of the Parties' Arguments" are as stated in 1 to 4 of "2 Outline of the Case" in "Facts and Reasons" in the original judgment, except that the appellant's supplementary argument at the trial is added in 4 below, and the appellant's admissions, denials, and objections thereto are added in 5 below.

4 Supplementary allegations made by the appellant at the trial

(1) Issue (1) (whether the amount of the fee in question is less than the arm's length price)

(1) Whether the amount of the fee in question is less than the arm's length price (a) The burden of proof is on the State to prove that it is not possible to use a method equivalent to the three basic methods prescribed in Article 66-4(2)(ii) of the Act on Special Measures Concerning Taxation

The original judgment states that if the State has proved that the method equivalent to the three basic methods cannot be used despite the fact that the taxation agency has conducted a reasonable investigation, it is presumed in fact that the method equivalent to the three basic methods cannot be used, and it is reasonable to interpret that the taxpayer needs to prove that the method equivalent to the three basic methods can be used.

However, such a presumption would have the same effect as effectively shifting the burden of proof of the requirement that the three basic methods are inapplicable to the taxpayer, which should be placed on the State, and would be extremely contrary to the rules of logic and experience.

(b) Whether or not the Taxation Office can be said to have "exhausted reasonable investigation

The original decision (1) recognized the investigation process of the P4 Investigator and (2) stated in the Report (B23) that "as a precondition for applying the CPLM (Cost Basis Method) to this analysis, it is extremely difficult to identify external comparable service providers that engage in commission-based sales representation activities such as sales promotion and market development. It can be extremely difficult to identify external comparator service providers that undertake commission-based sales representation activities such as sales promotion and market development. The Tribunal held that the Appellant had proved that it was not possible to use a method equivalent to the three basic methods, despite the fact that the Taxation Office had made all reasonable enquiries.

However, (i) according to the process of the investigation by the P4 investigator as approved by the original decision, the investigation conducted by the Taxation Office was ad hoc, and there were no comparable transactions to which the same method as the three basic methods could be applied.

(1) According to the investigation process of the P4 investigator, which was approved in the original judgment, the investigation conducted by the Taxation Office was ad hoc, and it cannot be said that it is reasonably logical that there is no comparable transaction to which the three basic methods can be applied. (2) It is difficult to find comparable transactions to which the cost basis method can be applied in the transactions of service providers, but the report (B23) clearly states that the transactions of "Japanese independent sales agents operating with limited capital assets" are comparable transactions to which the cost basis method can be applied. It does not mean that there is no comparable transaction to which the cost basis method is applied. In view of these points, it cannot be said that the Taxation Office has carried out a reasonable investigation.

(c) Error in the calculation method adopted by the administrative agency for the disposal of the case

(a) The appellant's foreign related transaction is a service transaction to support the sale of P3 products, and the P3 products are imported by the distributor (wholesaler) directly from the foreign related party in question, resold to the reseller (retailer), and sold by the retailer to the end user, and the appellant does not purchase or sell the products.

Therefore, the calculation method used by the administrative agency for the disposition of the case is that the amount of the arm's length price is the amount obtained by multiplying the appellant's sales to distributors (wholesalers) by the gross profit margin of the comparable transactions, but (i) the appellant does not engage in resale activities, (ii) the appellant's own (2) the amount of normal profit is calculated by multiplying the turnover of the appellant to the distributors (wholesalers) of the foreign related parties in question by the gross profit margin of the comparable transactions, not by the appellant's own turnover; and (3) the amount of "normal profit" itself is considered to be the arm's length price, rather than the amount obtained by deducting the amount of normal profit from the appellant's resale price. This is different from the resale price standard method

(a) The original decision is different from the resale price standard method in that it does not consider the amount of "normal profit" itself to be the arm's length price.

(b) The original decision states that Article 66-4(2)(b) of the Act on Special Measures Concerning Taxation does not apply to transactions other than sales or purchases of inventories.

(a) The original decision held that Article 66-4(2)(b) of the Act on Special Measures Concerning Taxation provides that an arm's length price may be calculated for transactions other than sales or purchases of inventories by a method equivalent to the three basic methods, and that it is reasonable to conclude that this "equivalent method" means a reasonable method that (i) conforms to the content of the transaction and (ii) does not deviate from the concept of the three basic methods. In particular, the court held that the method of calculation in this case is equivalent to the method equivalent to the resale price standard method, and this is unjustified.

In particular, under the respective service contracts between the foreign related parties and the appellant, the commission is stipulated to be "the cost of providing the service plus 1.5 per cent of the turnover of P1 and P2 to the distributors (wholesalers)", and the appellant will always obtain a profit from the service activities and will not bear the risk of suffering a loss. In contrast, in the resale transaction, the appellant will always earn profit and will not bear the risk of loss. In contrast, the reseller in a resale transaction suffers a loss if the realized sales fall below the break-even point and acquires a profit if the realized sales exceed the break-even point, and the appellant and the reseller in a resale transaction are not similar in terms of the risk borne by them. Therefore, the calculation method in this case cannot be said to be a reasonable method that is adapted to the nature of the transactions in this foreign-related transaction.

(c) The original decision pointed out that the resale price method is a calculation method in which the functions performed by the parties to the transaction and the risks borne by the parties to the transaction are considered to be important, and that if there is a similarity in terms of functions and risks with the comparable transaction, the arm's length price can be calculated using a method "equivalent to (or the same as) the resale price method". In this case, the functions performed and risks borne by the appellant in the sale of P3 products are similar to the functions and risks borne by a reseller in a resale transaction based on the sales-on-order method, and therefore, the gross profit margin in a resale transaction based on the sales-on-order method should be used to calculate the arm's length price. Therefore, the calculation method in this case, which attempts to calculate the amount of the normal commission based on the gross profit margin for resale transactions in which the sales order system is used, is appropriate for the nature of the transaction.

The court held that this calculation method, which attempts to calculate the amount of the normal commission based on the gross profit margin for resale transactions that adopt the resale method, is appropriate for the nature of the transaction and is a reasonable method that does not deviate from the concept of the resale price standard method.

However, the above-mentioned judgments are based on the issues of whether or not it is a "comparable method" and

However, the above decision confuses the issue of whether it is a "comparable method" or not with the issue of whether it is a "comparable transaction" or not. There are many different methods of calculating prices using comparable transactions which do not differ in function and risk, and only three of these methods, the arm's length method, the resale price method and the cost basis method, are accepted as the basic methods of calculating arm's length prices. Even if they are transfer pricing methods using comparable transactions with the same functions and risks, not all of them can be regarded as methods to reasonably calculate the arm's length price.

(d) The Appellant argues that: (i) the Appellant provides sales support services for P3 products to distributors and resellers (hereinafter collectively referred to as "wholesalers, etc."); and (ii) the Appellant provides sales support services for P3 products to distributors and resellers (hereinafter collectively referred to as "distributors, etc."). The appellant claims that (1) the appellant provides sales support services for P3 products to distributors and resellers (hereinafter collectively referred to as "wholesalers, etc.") and receives compensation for such services from the foreign related parties; (2) the foreign related parties sell P3 products to distributors (wholesalers); and (3) distributors (wholesalers) pay the appellant for the purchase of P3 products and for the services provided by the appellant. (3) the distributor (wholesaler) pays the appellant the total amount of the purchase price of the P3 products and the price of the services provided by the appellant; and (4) the foreign related party pays the appellant the portion of the price of the services provided out of the amount received from the distributor (wholesaler). Therefore, the appellant argues that there is reasonableness in applying the resale price method to this transaction and calculating the arm's length price, considering that this foreign related transaction is in fact such a purchase and sale transaction.

However, the calculation method in question, as asserted by the Appellant, does not "conform to the content of the transaction and is a reasonable method that does not deviate from the concept of the three basic methods" in the following respects

However, the calculation method claimed by the appellant cannot be said to be "a reasonable method that conforms to the content of the transaction and does not deviate from the concept of the three basic laws" in the following respects

a. What the appellant is doing is an activity which has the effect of stimulating the end user's willingness to buy, and as a result, indirectly increasing the sales of the foreign related party to the distributor (wholesaler), and it does not mean that the appellant is doing the exact same activity as the resale transaction to the distributor (wholesaler) in effect.

b In general, even if it is a resale transaction of the same product, the gross profit margin of a person who imports from a foreign manufacturer and wholesales is not the same as the gross profit margin of a secondary wholesale transaction in which the person purchases from the importer and wholesales, or a retail transaction conducted by a retailer, and therefore, under the resale price standard method, if there is a difference in the transaction stage, it is not a transaction subject to comparison, but the appellant has made the secondary wholesale transaction and retail transaction subject to comparison in this case.

c. The appellant is providing services to the foreign related parties in question and receiving compensation for such services, and is not engaged in transactions in which it provides services to wholesalers, etc. and receives compensation for such services, and the distributors (wholesalers) are only paying for the purchase of P3 products, not paying for the services provided by the appellant.

d. The calculation method in this case is to calculate the amount of normal profit by multiplying the gross profit margin of the comparable transaction, which is the sale of goods and services, by the turnover of the foreign related party to the distributor (wholesaler), and to use the amount of profit as the amount of profit of the sale transaction of services. However, in order to calculate the profit margin of the transaction for the sale of services, it is necessary to deduct the profit margin of the transaction for the sale of goods from the profit margin of the comparable transaction for the sale of goods and services, and this calculation method cannot be said to be a reasonable method.

e. There are many end users who do not receive any explanation of P3 products from the Appellant and purchase P3 products exclusively through the activities of resellers.

Therefore, the part of the increase in the sales of P3 products as a result of the appellant's activities is

The increase in sales of P3 products as a result of the Appellant's activities is only a part of the total sales of P3 products. Nevertheless, it is wrong to multiply the gross profit margin of the comparator corporation by the total sales of the foreign related parties, which are unrelated to the appellant's activities.

f. This calculation method is based on the assumption of a fictitious sales transaction for the same product, and the taxation is based on the assumption that the same profit can be further acquired as that acquired by the person who engages in other sales activities.

This is an unreasonable method of taxing the same profit twice.

(e) Whether the transactions subject to comparison in this case are comparable

The original decision stated that (i) in the case of the resale price method, strict similarity between the comparable transaction and the foreign related transaction is not required, and it is sufficient if the transactions are of the same kind or similar, and (ii) the resale price method is a calculation method in which the functions performed by the parties to the transaction and the risks borne by the parties to the transaction are considered important. (3) Therefore, if there are many similarities between the functions and risks of the comparable transaction and the foreign-related transaction, comparability will be satisfied even if there are differences in the functions and risks of the two transactions.

However, Article 39-12(6) of the Order for Enforcement of the Act on Special Measures Concerning Taxation provides that, where there is a difference between the comparable transaction and a transaction in which the buyer of the inventory involved in the foreign affiliated transaction sells the inventory to a non-affiliated person 'in terms of the functions performed by the seller or otherwise', the percentage difference arising from such difference shall be adjusted as necessary. Thus, the factors to be taken into account for comparability are all the differences affecting the gross profit margin, and not limited to functions and risks. Therefore, the original judgment misinterprets Article 39-12(6) of the Enforcement Ordinance of the Act on Special Measures Concerning Taxation.

In addition, the original judgment considers that comparability is satisfied even if there is a difference between the functions and risks of the two.

In addition, the original judgment did not sufficiently examine the above-mentioned differences because it thought that comparability was satisfied even if there were differences in the functions and risks of the two transactions.

(f) The process of selecting the transactions to be compared in this case

The court held that the reasonableness of the criteria for selecting comparable transactions does not immediately determine whether or not a certain transaction should be selected as a comparable transaction.

However, this overlooks the fact that the comparable transactions are secret comparables and that it is extremely difficult for the appellant to refute the comparability because the appellant does not disclose the details of the transactions on the grounds of confidentiality of state officials. It is generally accepted that the credibility of such evidence is inferior, and it is contrary to the rule of thumb to find that there is comparability of the comparable transactions in question without at least establishing that the comparable transactions in question were selected on the basis of reasonable selection criteria.

(k) Adjustment of the differences

a. The original judgment holds that it is reasonable to interpret that the adjustment of the difference should be made only when it is objectively clear that the difference is expressed in the difference in transaction prices.

However, Article 39-12(6) of the Order for Enforcement of the Act on Special Measures Concerning Taxation stipulates that, with respect to the normal profit rate, "where there is a difference between the comparable transaction and the resale transaction pertaining to the said foreign affiliated transaction in terms of the functions performed by the seller or otherwise, the rate shall be the rate after making necessary adjustments for the difference in rates arising from such difference. There is no textual basis for the limitation in the original judgment as to when an adjustment for differences is necessary. In addition, the basic approach to the adjustment for differences, which is internationally accepted in the OECD Guidelines and elsewhere, is that, in principle, as long as differences exist, there is no comparability without adjustment for differences.

However, in exceptional cases where the differences do not affect the price or the effect on the price is negligible, the comparability is recognized even without the adjustment of differences.

b. The original judgment is contrary to this purpose as well, because (i) the corporation subject to comparison in this case was mainly engaged in sales of software, and the receipt and placement of orders for goods and arrangements for delivery were only incidental to the sales of software, and (ii) in the transactions subject to comparison in this case, the ratio of the transportation cost of goods to the sales amount was 0.09% in FY 2001, 0.09% in FY 2002, and 0.09% in FY 2003. (2) In the transactions subject to comparison in this case, the ratio of the transportation cost of the goods to the sales amount was 0.09% in 2001 and 0.16% in 2002, and since it is difficult to recognize that the ratio of the cost of ordering and arranging delivery of the goods as claimed by the appellant is particularly large compared to the ratio of the above-mentioned transportation cost, it cannot be said that it is objectively clear that the difference in ordering and arranging delivery of the goods is expressed in the difference in transaction prices. However, in the transactions subject to comparison in this case, it is not clear that the difference in the prices is objectively evident.

However, in the transactions subject to comparison in this case, the software sales operations (i) price negotiation with end users, (ii) arrangement for shipping and delivery of goods to end users, (iii) invoicing of sales price to end users, (iv) management of payment of sales price from end users, (v) placing orders to distributors (wholesalers), (vi) management of payment of sales price from end users, and (vii) management of payment of sales price to distributors (wholesalers) are not objectively clear. (6) price negotiations with distributors (wholesalers), (7) management of invoices from distributors (wholesalers), (8) payments to distributors (wholesalers), etc.) are the core business, and services such as product explanations to end users (the same business as that performed by the appellant) are merely incidental. Therefore, it is clear that a differential adjustment is necessary because the gross profit margin attributable to the sales service, which is the core business of the subject transactions, is likely to account for a substantial portion of the gross profit margin of the subject transactions. In addition, in the subject transactions, the gross profit margin is high enough to cover the costs incurred by the comparable companies in performing functions not performed by the appellant.

Therefore, it is also clear that an adjustment for the difference is necessary.

(2) Dispute (2) (Whether there are illegal grounds for the exercise of questioning and inspection powers in these dispositions)

(a) The court held that Article 66-4(9) of the Act on Special Measures Concerning Taxation is a provision that establishes the authority of tax officials to question and inspect comparable corporations, and that the procedural requirements for such questioning and inspection itself is not a requirement for taxation disposition, and therefore, the taxation disposition cannot be illegal immediately on the ground that the procedures for such questioning and inspection are illegal.

However, the reason why the violation of the procedural requirements does not affect the validity of the taxation is that the taxpayer is not disadvantaged by the fact that he cannot contest the illegality of the taxation even if there is a violation of the procedures. Therefore, if the appellant does not satisfy the requirement of taxation by secret comparables ("the corporation did not present or submit the books and documents or their copies without delay"), the transfer pricing taxation using the information of secret comparables obtained as a result of the exercise of the right of questioning and inspection is illegal. (a) The information in the secret comparable obtained as a result of the exercise of the right of inquiry should be interpreted as illegal for transfer pricing taxation.

(a) Transfer pricing taxation using secret comparable information is detrimental to the interests of the taxpayer because the detailed information is not disclosed to the taxpayer, which makes it extremely difficult for the taxpayer to argue. If the price calculated by using secret comparable information is regarded as the arm's length price, the taxpayer, who cannot know the financial position of the comparable company and the figures on which the price is calculated, will not be able to calculate the arm's length price and pay tax legally in future years, and will continue to be exposed to the risk of correction. Therefore, the taxpayer is exposed to the risk of being subject to a correction. Therefore, it is not allowed for the taxpayer to calculate the arm's length price based on the data which was not available at the time of filing the return, and to judge the appropriateness of the return and to take corrective action unless there is "special provision" in the law.

Since the only "special provision" mentioned above is Article 66-4(7) of the Act on Special Measures Concerning Taxation, it is not possible to make a corrective disposition based on Article 66-4(2) by using materials obtained as a result of the investigation under Article 66-4(9) (materials not available to the taxpayer).

Therefore, it is not only a violation of the said clause but also a violation of tax legalism (Article 84 of the Constitution) and due process of law, which aim to guarantee legal stability and predictability in the life of the nation.

It also violates Article 74 of the Corporation Tax Act and Article 16 of the Act on General Rules for National Taxes, which adopt the principle of tax declaration.

(3) There are "justifiable reasons" why additional tax on under-reporting should not be imposed

It is clear that it is impossible for the appellant to obtain the information of the secret comparables, which are not open to the public.

Therefore, there are objective circumstances that cannot be truly attributed to the appellant for not using the arm's length price calculated using the Secret Comparable information as the basis for calculating the tax amount, and even in light of the purpose of the additional tax on under-reporting, it is reasonable to say that adding the additional tax on the appellant's under-reporting would be unjust or harsh.

In this case, there is a "justifiable reason" as stated in Article 65(4) of the Act on General Rules for National Taxes, and the decisions to impose the additional tax on under-reporting should be reversed (judgment of the Supreme Court, First Petty Bench, April 20, 2006).

(Supreme Court, First Petty Bench, Decision of April 20, 2006) ・Minshu Vol. 60, No. 4, p. 1611, Supreme Court, Third Petty Bench, Decision of April 25, 2006

(Supreme Court, First Petty Bench, judgment of April 20, 2006, Minshu Vol. 60, No. 4, p. 1611; Supreme Court, Third Petty Bench, judgment of April 25, 2006, Minshu Vol. 60, No. 4, p. 1728; Supreme Court, Third Petty Bench, judgment of October 24, 2006, Minshu Vol. 60, No. 8, p. 3128)

5. The appellant's admissions, denials and rebuttals to the appellant's supplementary allegations at the trial

(1) a. The appellant's assertion (1) a (burden of proof that the case falls under the case where it is impossible to use a method equivalent to the three basic methods) is denied or disputed.

It is not contrary to the rules of logic and experience to presume that there is no such comparable transaction and that the method equivalent to the three basic methods cannot be applied to the case in question, when the taxation authority cannot find any comparable transaction to which the method equivalent to the three basic methods can be applied in spite of its reasonable investigation.

(b) (1)(a) (whether or not the Taxation Office can be said to have "exhausted reasonable investigation") is denied or disputed.

(a) In the first place, there are only a few corporations, such as the appellant, that operate a business in which they do not themselves become a party to the purchase and sale of goods, but only provide services such as sales promotion in relation to goods sold by other corporations to wholesalers. In addition, even if such transactions exist, the sharing of the roles of purchasing and selling the same goods and sales promotion between different corporations is possible only between related parties in a special relationship such as a parent-subsidiary relationship, and it is highly unlikely that such transactions are conducted between independent corporations. Therefore, it is extremely difficult to select a comparable transaction that satisfies the requirements of Article 66-4(2)(ii)(a) and 66-4(1)(a) to (c) of the Act on Special Measures Concerning Taxation. Under these circumstances, the P4 investigators were unable to find any comparable transactions that could be subject to the application of the same methods as the three basic methods, although, as the original judgment found, they exhausted the investigation methods that could normally be expected in light of their specialized knowledge and experience.

(b) In addition, it is contrary to the facts to assert that the application of the cost basis method is shown to be possible on the basis of this report, because what this report (B23) adopts is not the "cost basis method (equivalent to the cost basis method)" but the "method equivalent to the method equivalent to the cost basis method". In other words, in the case of a corporation engaged in service transactions to which the cost basis method is applicable

In other words, in the case of corporations engaged in service transactions to which the cost basis method is applicable, it is impossible for them to bear "inventory risk" in the first place, but it is stated in this report that "independent sales agents" "bear only a small amount of inventory risk" (page 16, line 21 of the translation of the said certificate), and it is also stated in this report that the eight corporations selected for comparison are all resellers (suppliers) of telecommunications products. In light of the fact that all of the eight companies selected for comparison in the Report are resellers of telecommunications products (purchase sellers), the Report purposely selects purchase and sale transactions as the transactions to be compared, even though the relevant transactions outside Japan are service transactions, and therefore, the method of calculating the arm's length price is not the "cost-based method (or equivalent method)" itself, but the "method equivalent to the cost-based method". Therefore, it is clear that the method of calculating the arm's length price is not the "cost basis method (or equivalent method)" itself, but the "method equivalent to the cost basis method". If this is the case, it should be assumed in this report that there are no comparable transactions to which the method equivalent to the three basic methods is to be applied to the foreign-related transactions in question.

(c) Paragraph (1)(c) of the above (error in the calculation method adopted by the administrative agency for disposition) is denied or disputed.

(a) With regard to (b) above, the original judgment, based on the fact that the resale price standard method is "a calculation method in which the functions performed and the risks borne by the parties to the transaction are given importance," concluded that the functions performed and the risks borne by the appellant in this foreign-related transaction are similar to the functions and risks borne by a reseller in a resale transaction adopting the sales-on-order method. The appellant's criticism of the original judgment is unjustified.

(b) With regard to the same (c), the original judgment clearly distinguishes between the issue of whether or not the Calculation Method in question is equivalent to a method equivalent to the Resale Price Standard Method (p. 46 and below of the original judgment) and the issue of whether or not the comparable transactions selected based on the Calculation Method in question are specifically comparable (p. 51 and below of the original judgment), so the appellant's criticism is unjustified.

(c) With regard to the same (d), the appellant argues that the respondent's argument that "the transactions conducted by the appellant (c) With regard to (d) above, the Appellant argues that the Respondent's statement that "the transactions conducted by the Appellant can be regarded as transactions in which the Appellant purchases P3 products from the foreign related parties in question and sells them to wholesalers together with sales support services (purchase and sale transactions), and that it is reasonable to regard the transactions in question as such purchase and sale transactions in substance and to apply the Resale Price Standards Act. In other words, the appellant argues that the resale price standard method should be applied to the transactions in question. In other words, the appellant is arguing that a method equivalent to the resale price standard method can be applied on the premise that the foreign affiliated transaction in question is not a purchase and sale transaction but a service provision transaction, and that the appellant is not arguing that the foreign affiliated transaction in question should be "regarded as a purchase and sale transaction and the resale price standard method should be applied. Therefore, it is not claiming that the resale price quasi-method should be applied to the foreign related transactions. Therefore, the appellant's arguments on this point are all wrong in their premises and unjustified.

Leaving this point aside, the appellant's objections to each of the allegations are as follows

a. The appellant argues that there is no room to apply the resale price standard method as an "equivalent method" in this case because the appellant is not engaging in activities that are substantially the same as resale transactions to distributors (wholesalers) itself (appellant's argument (1) (c) (d) (a)).

However, the appellant is not asking whether the appellant can be said to be "substantially engaged in the very same activities as resale transactions to distributors (wholesalers)", but whether the functions and risks borne by the appellant in the sale of P3 products are the same as the functions and risks borne by a reseller in a resale transaction adopting the sales-on-order method. Therefore, the appellant's argument above is groundless.

b. The appellant argues that the calculation method is not reasonable because, under the Resale Price Standard Method, if there is a difference in the transaction stage, the transaction is not subject to comparison, and the appellant has made secondary wholesale transactions and retail transactions subject to comparison in this case (same as b).

However, the reason why differences in the stage of transactions, such as retail or wholesale, primary wholesaler or secondary wholesaler, are generally considered as a factor in selecting the comparable transactions to which the resale price standard method applies is that the functions performed and the risks borne by the reseller in such transactions differ greatly due to the different stages of such transactions. In contrast, the calculation method On the other hand, the calculation method in question focuses on the fact that the foreign-related transaction, which is a service provision transaction, is similar in terms of functions and risks to the sales method of purchase and sale, which adopts the sales-on-order method, and attempts to calculate the arm's length price by selecting the sales-on-order transaction as the comparable transaction. If this is the case, there should be no problem in selecting as a comparable transaction a purchase and sale transaction adopting the sales-order method, which is similar to the foreign-related transaction in terms of function and risk, regardless of the transaction stage, and therefore the appellant's argument above is without grounds.

c. The appellant claims that it is engaged in transactions in which it provides services to the foreign related parties in question and receives consideration therefor, and that it is not engaged in transactions in which it provides services to wholesalers, etc. and receives consideration therefor, and that the wholesalers, etc. do not pay for the services (Paragraph c). However, according to the business consignment agreements in question (B9-1 and B9-2), it is clear that the appellant provided services to the wholesalers, etc. in the form of sales promotion and other services as performance of obligations to the foreign related parties under the business consignment agreements in question.

In addition, the foreign related party in question paid the appellant for the provision of the above-mentioned services.

It is also clear that the costs were incorporated in the transaction prices between the foreign related parties and the wholesalers in Japan.

d. The appellant argues that in order to calculate the profit margin of the appellant, who is engaged in a transaction for the sale of services, it is necessary to deduct the profit margin of the transaction for the sale of goods from the profit margin of the comparable transaction for the sale of goods and services, and that this calculation method is not reasonable (d).

However, the appellant was engaged in sales promotion, marketing, advertising, providing training courses and support services for P3 products in Japan, and the content of these services can be said to be similar to the functions performed by a reseller in a resale transaction. Since this is the case, the unique functions of the reseller, which are different from those of the appellant, are purely administrative work such as ordering and arranging for delivery of goods, payment of purchase price, and receipt of sales proceeds, which are separated from the above-mentioned functions such as sales promotion. And since it is difficult to assume that a large amount of profit that would affect the transaction price of goods or the gross profit margin would be generated through such administrative work, it is not recognized that it is necessary to deduct the "profit margin on transactions involving the sale of goods" specific to the comparable corporation as referred to by the appellant from the profit margin on the comparable transactions in this calculation method. In the end, there is no reason for the appellant's argument above.

e. The Appellant has stated that some end users purchase P3 products exclusively through the activities of resellers, etc.

The appellant argues that the calculation method is wrong in that it multiplies the gross profit ratio of the comparator corporation by the total sales of the foreign related party, even though there are many end users who purchase P3 products exclusively through the activities of the reseller, etc. (Article e).

However, the issue in this case is how much money (arm's length price) the appellant should receive from the foreign related party in consideration for the appellant providing the same services as those provided by the reseller in relation to the foreign related party's sales of P3 products in Japan.

Therefore, in calculating the amount, it should be reasonable to multiply the gross profit margin of the reseller, who performs the same function as the appellant, by the total sales of P3 products in Japan of the foreign related party in question, and the appellant's above argument is without reason.

With regard to the appellant's double taxation argument (f), the calculation method in question does not "assume fictitious sales transactions for the same product" and impose tax.

(d) The appellant's argument is unsuccessful because the calculation method does not tax the appellant on the income of the wholesaler (distributor) who is the importer of the P3 product.

(d) The appellant argues that the original decision misinterprets Article 39-12(6) of the Order for Enforcement of the Act on Special Measures Concerning Taxation (appellant's argument (1)(c)(e)) because the factors to be taken into account in comparability are all the differences that affect the gross profit margin and not limited to functions and risks.

However, the resale price standard method mainly focuses on the functions performed by the reseller and the risks borne by the reseller, and unlike the arm's length price comparison method, it does not consider the price of the comparable transaction itself to be the arm's length price, but calculates the arm's length price from the profit margin of similar transactions over a certain period of time. Therefore, it is understood that the strict similarity of inventories is not required and that resale transactions of the same or similar inventories are comparable transactions. Therefore, even in the present case, where a method equivalent to the resale price standard method is applied, strict similarity of the inventories (graphic software) and the services provided (sales promotion, etc.) is not required, but rather, mainly from the perspective of the functions performed and the risks borne by the appellant and the comparables in the present case. It should be sufficient to examine whether there is any similarity between the foreign-related transactions in question and the comparable transactions in question, mainly from the perspective of the functions performed and risks borne by the appellant and the comparable corporation.

In addition, the court found necessary facts regarding the specific contents of the foreign-related transactions and the comparable transactions, and compared the two transactions in a total of 18 items as stated in Exhibit 1 to the original judgment.

The judgment of the court is justified because it found that there is a considerable degree of similarity or similarity between the two transactions.

(e) With respect to the appellant's argument (1)(c)(f), there is no legal basis to interpret that the reasonableness of the selection process of the transactions to be compared (that the selection process is not arbitrary) is an independent tax requirement apart from the requirement of comparability, so the appellant's argument is unjustified.

(f) Regarding point (k)

a. With respect to the provision of Article 39-12(6) of the Enforcement Ordinance of the Act on Special Measures Concerning Taxation, which stipulates the cases where adjustments for differences should be made, the appellant argues that, as long as differences exist, in principle, there is no comparability unless adjustments for differences are made, but exceptionally, if the differences do not affect the price or the effect on the price is negligible, the provision is to the effect that comparability is allowed even without making adjustments for differences (Article 39-12(a)).

However, it is usually impossible for foreign-related transactions and comparable transactions to be completely identical in all transaction terms. If it is not possible to adjust the profit margin for all the differences that may affect the transaction price, the calculation of the arm's length price using the comparable transaction would be extremely difficult. Therefore, in Japan's transfer pricing taxation system, from the legislative stage, it has been interpreted that the adjustment of such differences should be made "only when it is objectively clear that such differences will be reflected in the difference in transaction prices", and the original decision to the same effect is appropriate.

b. Regarding (k)(b)

In this case, it is not considered to be objectively clear that the difference claimed by the appellant is expressed in the difference in transaction prices, and therefore there is no need to adjust for such difference.

To put this in perspective, the appellant was engaged in sales promotion, marketing, advertising, providing training courses and support services for P3 products in Japan, and the content of these services is similar to the functions performed by a reseller in a resale transaction. In this regard, the functions unique to the subject corporation, which the appellant does not perform, are purely administrative work such as ordering and arranging delivery of goods, payment of purchase price and receipt of sales proceeds. The appellant claims that the comparator corporation engages in "price negotiations with end users" (the appellant claims that the comparator corporation engages in "price negotiations with end users", but the appellant's above claim is without grounds because the comparator corporation basically does not engage in price discounting based on transaction volume, transaction amount, etc. (volume discounting) and does not engage in price negotiations with customers). The appellant's argument is without merit. In addition, software wholesalers and retailers deal not only with P3 products but also with a wide range of software from other competing manufacturers, and retailers do not usually sell only specific software to end users. Therefore, if the sales promotion, marketing, advertisement, support and other activities are not carried out as the appellant and the comparator companies are doing, it is considered that significant sales cannot be expected. On the other hand, given the characteristics of the software product, it is difficult to believe that the costs and revenues related to the distribution of the software would have a significant impact on the transaction price, since the software would be transported only in the form of media such as CD-ROMs and documents such as manuals. Therefore, in the resale transaction of software, the source of profit actually earned by the reseller should be the above-mentioned functions such as sales promotion rather than the logistics function itself. Taking into account the fact that the ratio of the transportation cost of the goods to the sales in this comparable transaction was 0.09% in 2001 and 0.16% in 2002

(2) a. The appellant's claimed difference in the transaction prices of the foreign-related transactions and the comparable transactions is not objectively evident, and there is no need to adjust the difference.

(2)a. Regarding the appellant's argument (2)a., the appellant has argued that the "corporation is not required to pay the tax" as provided in Article 66-4, Paragraph 9 of the Act on Special Measures Concerning Taxation.

The appellant argues that transfer pricing taxation using information obtained as a result of the exercise of the right of questioning and inspection is illegal if the requirement stipulated in Article 66-4(9) of the Act on Special Measures Concerning Taxation that "if the corporation fails to present or submit without delay the books and documents or copies thereof prescribed in paragraph 7" is not met.

However, Article 66-4(9) of the Act on Special Measures Concerning Taxation is a provision that establishes the authority of tax officials to question and inspect comparable corporations, and the procedural requirements for such questioning and inspection are not themselves a requirement for taxation disposition. In this case, the appellant's taxation disposition is illegal. In the present case, the appellant failed to present or submit without delay the books and documents, etc., which were deemed necessary for the calculation of the arm's length price, and the requirements for the exercise of the power of enquiry and inspection prescribed in the said paragraph were satisfied. Therefore, there is no reason for the appellant's argument above.

(b) With regard to (a) above, the appellant argues that the taxpayer, who is unable to know the financial position of the comparable company and the figures on which the price is calculated, will be unable to calculate the arm's length price and pay tax legally in future years, and will continue to be exposed to the risk of being subject to correction. Therefore, the transfer pricing taxation using the information of secret comparables violates the tax law principle (Article 84 of the Constitution) which aims to guarantee the legal stability and predictability in the people's life, and violates Articles 13 and 31 of the Constitution which guarantee the proper procedure.

They also argue that it violates the provisions of Article 74 of the Corporation Tax Act and Article 16 of the Act on General Rules for National Taxes.

However, Article 66-4(9) of the Act on Special Measures Concerning Taxation stipulates that, in cases where the requirements prescribed in the said paragraph are met

However, Article 66-4(9) of the Act on Special Measures Concerning Taxation naturally contemplates that the Taxation Office may exercise the power of questioning and inspection over the comparable corporation, obtain non-public information, and make a taxable disposition when the requirements prescribed in the said paragraph are met.

(3) With regard to the appellant's argument (3), the appellant argues that it is impossible to obtain the information on the secret comparables, which are not open to the public, and therefore, there is a "justifiable reason" in accordance with Article 65(4) of the Act on General Rules for National Taxes for not using the arm's length price calculated using the information on the secret comparables as the basis for calculating the tax amount.

However, in this case, the questioning and inspection of the comparables was conducted because the appellant failed to present or submit without delay "books and documents deemed necessary for the calculation of the arm's length price".

In addition, in the two fiscal years immediately preceding the fiscal years in question (the fiscal years ended November 1998 and November 1999), the appellant adopted the purchase and sale method, whereby it purchased all or part of the P3 products from P1 and sold them to wholesalers in Japan. Despite the fact that there was no change in the basic operations of the Appellant's sales department between that time and the fiscal years in question when the commission method (service method) was adopted, the ratio of the Appellant's gross profit margin or commissions received to sales of P3 products was 35% in the fiscal year ended November 30, 1998, 35% in the fiscal year ended November 30, 1999, and 35% in the fiscal year ended November 30, 2001.

It can be inferred that the appellant intended to avoid the tax burden in Japan by changing the transaction form from the purchase and sale method to the commission method, thereby reducing the income of the appellant and transferring the income to the related parties outside Japan.

Under the facts of this case as described above, the appellant argues that the amount of consideration for the foreign related transaction in question is not less than the arm's length price.

Under the facts of this case, it is clear that there was no objective circumstance truly attributable to the appellant that the appellant claimed that the amount of consideration for the foreign related transaction in question was not less than the arm's length price and did not use the appropriate arm's length price as the basis for calculating the tax amount, and in light of the purpose of imposing the additional tax for under-reporting, it cannot be assessed that imposing the additional tax for under-reporting on the appellant would be unjust or harsh.

Therefore, the above argument of the appellant is without reason. No. 3 Judgment of the Court

1 In this case, the certified facts which form the basis of the judgment are as stated in Section 1 of "3. Judgment of the Court" under "Facts and Reasons" in the original judgment, with the following additions and corrections.

(1) On page 27, line 20 of the original judgment, after the word "support", the word "for" is added.

(2) On page 28, lines 1 to 2 of the original judgment (paragraph "(a)") are amended as follows

"(a) An authorised dealer is a person who has been appointed by P1 or an authorised wholesaler as a dealer to sell P3 products to end users.

(3) At the end of line 4 on page 28 of the original judgment, a new line is added as follows

"(c) "Customers" means authorised dealers and authorised wholesalers.

(4) "(c)" in line 5 on page 28 of the original judgment is replaced by "(d)", and "(d)" in line 7 on page 28 of the original judgment by "(e)".

(4) "(c)" in line 5 on page 28 of the original judgment is replaced by "(d)", and "(e)" in line 7 on the same page by "(e)".

(5) The word "agent" in the 12th and 13th lines of the 28th page of the original judgment is changed to "agency" in each case.

(6) In line 28, line 15 of the original judgment, after "of the P3 product", "technology" is added.

(7) On page 29 of the original judgment, from line 3 to line 4, the words "equivalent to the amount of licence sales" should be replaced by "referring to the amount of sales".

(8) On page 29, line 8 of the original judgment, "sales promotion" should be replaced with "promotion", "sales" should be replaced with "performance of services", "sales" should be replaced with "sales", and "sales" should be replaced with "provision of services".

(9) In the original judgment, on page 30, line 2, from "The Claimant" to the end of line 3 on the same page, replace "The Appellant will provide P1 with English translations of all end-user agreements and other indications of property rights contained in non-English materials. The text should be amended as follows

(10) At the end of page 30, line 6, of the original judgment, add: "The appellant shall retain all income received by it in consideration for the provision of the training courses, except in certain cases where P1 claims costs. (10) Add the following

(11) On page 30, lines 8 to 9 of the original judgment, the word "support" is replaced by "assistance".

(12) At the end of line 17 on page 30 of the original judgment, a new line is added as follows

(d) Miscellaneous provisions

The appellant is an independent contractor and nothing in this contract shall be construed as creating a relationship of sales agent or principal and agent. The appellant is not an agent of P1 Ltd.

(13) On page 30, line 18 of the original judgment, the word "d" should be replaced by "e".

(14) In the original judgment, on page 31, line 15, after "support", add "for".

(15) On page 31, lines 18 to 19 of the original judgment (paragraph "(a)") are amended as follows

"(a) An authorised dealer is a person appointed by P2 or an authorised wholesaler as a dealer to sell P3 products to end-users.

(16) At the end of line 21 on page 31 of the original judgment, a new line is added as follows

"(c) Customer means an authorised dealer and an authorised wholesaler.

(17) On page 31, line 22 of the original judgment, "(c)" is replaced by "(d)", and on page 32, line 2 of the original judgment, "(d)" is replaced by "(e)".

(17) "(c)" in line 22 on page 31 of the original judgment is replaced by "(d)", and "(e)" in line 2 on page 32 of the original judgment.

(18) On page 32, line 11 of the original judgment, the words "visit wholesalers and guide customers. (18) On page 32, line 11 of the original judgment, the words "visit wholesalers and direct customers" are replaced by "visit wholesalers and direct customers". and direct customers.

(19) On page 32, lines 13 to 14 of the original judgment, the words "visit wholesalers and guide customers and strategic partners and strategic alliance partners. (19) On page 32, lines 13 to 14, the words "visit wholesalers, direct customers and strategic partners" should be replaced by "visit wholesalers, direct customers and strategic partners". (20) On page 32 of the original judgment.

(20) Lines 15 to 16 on page 32 of the original judgment (paragraph "c") are amended as follows

"c. Follow up orders placed directly with P2 by wholesalers and other customers, with copies sent to the appellant.

(21) On page 33, lines 2 to 3, of the original judgment, the words "corresponding to the amount of sales" are replaced by "referring to the amount of sales".

(22) In the original judgment, on page 33, line 7, "sales promotion" is replaced by "promotion", and in the same page, lines 8 and 11, "sales" is replaced by "provision of services".

(23) On page 34, line 1 of the original judgment, the words from "The Claimant" to the end of line 2 of the same page are replaced by "The Appellant will provide P2 with English translations of all end-user agreements and other indications of property rights contained in non-English materials. The text should be amended as follows

(24) At the end of page 34, line 5, of the original judgment, add: "The appellant shall retain all income received by it as consideration for the provision of the training courses, except in certain cases where P2 claims costs. (24).

(25) On page 34, lines 7 to 8 of the original judgment, the word "support" is replaced by "assistance".

(26) At the end of line 13 on page 34 of the original judgment, a new line is added as follows

(d) Miscellaneous provisions

The appellant is an independent contractor and nothing in this contract shall be construed as creating a relationship of distributor or principal/agent. The appellant is not an agent of P2 Ltd.

(27) On page 34, line 14 of the original judgment, the word "d" is replaced by "e".

2 Issue (1) (whether the amount of the commission in question is less than the arm's length price)

As to

(1) In this case, the decision as to whether or not the arm's length price can be calculated by the method prescribed in Article 66-4(2)(b) of the Act on Special Measures Concerning Taxation (i.e., whether or not the case can be said to be one in which it is not possible to use the same method as the three basic methods prescribed in Article 66-4(2)(a) of the Act on Special Measures Concerning Taxation) is to the same effect as that set out in 2(1) of "3.

(2) We will now consider whether the method of calculating the arm's length price used by the administrative agency for disposition in this case can be regarded as the method prescribed in Article 66-4(2)(b) of the Act on Special Measures Concerning Taxation.

(a) The method of calculating the arm's length price applied by the administrative agency for disposition to the transaction in question is as follows: (i) the sales amount of the P3 product in Japan is multiplied by the gross profit margin of the comparable transaction (after making necessary adjustments for differences), based on the selection as a comparable transaction of a resale transaction of the same or similar software as the P3 product between unaffiliated parties using the sales order system. The amount of the normal commission (arm's length price) to be received by the appellant in this foreign-related transaction is calculated by multiplying the turnover of the P3 product in Japan by the gross profit margin of the comparable transaction (after making the necessary adjustments for differences) (this calculation method is hereinafter referred to as the "Calculation Method"). (This calculation method is hereinafter referred to as the "Calculation Method").

The appellant claims that this calculation method is equivalent to the method equivalent to the resale price standard method prescribed in Article 66-4(2)(ii)(b) of the Act on Special Measures Concerning Taxation, so we will examine this point below.

(a) Article 66-4(2)(ii)(b) of the Act on Special Measures Concerning Taxation provides that an arm's length price may be calculated for transactions other than sales or purchases of inventories by a method equivalent to the Basic 3 Method, and it is reasonable to conclude that the "equivalent method" means a reasonable method that (i) conforms to the content of the transaction and (ii) does not deviate from the concept of the Basic 3 Method, and that the "equivalent method" means a calculation method based on the same concept as the Basic 3 Method for each type of transaction.

Therefore, in the end, it is reasonable to conclude that "a method equivalent to the method under the Basic 3 Taxation Methods" means a reasonable method that is appropriate to the content of the transaction and that does not deviate from the Basic 3 Taxation Methods, depending on the type of transaction, in transactions other than sales or purchases of inventory assets.

The fact that the calculation method in question is equivalent to the method equivalent to the resale price standard method prescribed in Article 66-4(2)(ii)(b) of the Act on Special Measures Concerning Taxation is a fact that constitutes the basis for taxation or a necessary fact for the occurrence of a tax claim, and therefore, the administrative agency that imposed the disposition should bear the responsibility of asserting and proving the above fact.

(c) Then, we will examine whether the calculation method in question can be said to be a reasonable method that fits the content of the transaction and does not deviate from the concept of the three basic laws, according to the type of each transaction.

(a) In this respect, as indicated above, the resale price method is a method whereby the amount of consideration for a foreign-related transaction (the arm's length price) is the amount calculated by deducting the amount of normal profit from the amount at which the buyer of the inventory involved in the foreign-related transaction sold the inventory to a person not having a special relationship with the buyer (the resale price). The reason why this method is regarded as the method for calculating the arm's length price is that the margin realized by the reseller in the resale transaction of the goods (the "amount of normal profit" mentioned above) is considered to be at the same level as long as the functions performed and the risks borne in the transaction are similar (see A38). In other words, because the resale price standard method is a transaction method in which the functions performed by the parties to the transaction and the risks borne by the parties to the transaction are considered to be important (see B7, Article 39-12(6) of the Order for Enforcement of the Act on Special Measures Concerning Taxation, and Basic Notice 6 of the Act on Special Measures Concerning Taxation (Corporation Tax Act)), the resale price standard method is considered to be a transaction method in which the functions performed by the parties to the transaction and the risks borne by the parties to the transaction are considered to be important.

6-4(2)-3(6)(7)), it is considered that the calculation method should be examined from the perspective of the above-mentioned functions and risks when determining whether or not the calculation method in question is a reasonable method that fits the content of the transaction and does not deviate from the concept of the three basic laws.

(b) Therefore, we will examine whether the appellant in the foreign-related transaction in question and the comparable corporation in the comparable transaction in question are similar in terms of the functions they perform and the risks they bear.

a. First, to examine the actual situation of the foreign related transactions in question, based on the above-mentioned premise facts, the evidence (A23, 24, 27, 28-1.2, 29, and P5, a witness at the original trial), and the whole purpose of the argument, it can be said that P3 products are sold to P6 Corporation, P7 Corporation, P8 Corporation, etc., which are distributors (wholesalers) who have no special relationship with the foreign related parties in question.

P6 Corporation, P7 Corporation, P8 Corporation, etc., which are distributors (wholesalers) who have no special relationship with the foreign related parties in question, imported the P3 Products into Japan and sold them to resellers (retailers, including P9 and P9). P6 Corporation, P7 Corporation, P8 Corporation, etc., which are distributors (wholesalers) without special relationship, import the products into Japan and sell them at wholesale to resellers (which include mass merchandisers such as P9 and P10 who sell them at retail to individual end users and corporate resellers such as P11 and P12 who sell them at retail to corporate customers through door-to-door sales activities). Under the terms of the respective service contracts, the Appellant (i) promotes the sales of existing P3 products and introduces new P3 products, and (ii) sells the software at wholesale to mass merchandisers, and (iii) sells the software at retail through door-to-door sales activities to businesses. The Appellant, under the terms of the respective service contracts, (i) visited wholesalers and induced customers, etc. to visit the wholesalers in order to promote the sales of existing P3 products and to introduce and explain new P3 products; and

(ii) bear the costs of marketing the P3 Products, prepare marketing materials and conduct marketing; and (iii) promote and advertise the P3 Products in Japan by the Foreign Related Parties.

(iii) supporting the promotion and advertising of the P3 Products in Japan by parties outside Japan; (iv) providing training courses on the P3 Products to wholesalers, dealers and end users; and (v) providing support services to customers.

Under the terms of the outsourcing agreements, the appellant's remuneration was set at an amount equal to 1.5 per cent of net sales in Japan and all direct, indirect and general administrative costs incurred in providing the appellant's services. It is also admitted that the appellant had to pay the inventory risk.

It is also admitted that the appellant does not bear any inventory risk and does not bear any risk of collection of receivables from customers.

The appellant does not bear inventory risk and does not bear the risk of collecting receivables from customers, as stated above.

b. On the other hand, examining the actual situation of the comparable transactions, according to the evidence (B33, witness P4 of the original trial) and the whole purpose of the argument, the corporation subject to comparison is a wholesaler and retailer of graphic software mainly for professionals, and the products subject to the comparable transactions are graphic software manufactured by overseas manufacturers. The resellers are mainly end users of graphic software, such as computer game production companies, design companies, and educational institutions such as vocational schools, but they also engage in wholesale. (2) As a retailer, the JAL Companies visit teachers at vocational schools and universities to give demonstrations and hold events to advertise the above-mentioned products to potential customers. In addition, as a wholesaler, it conducted sales promotion activities such as visiting potential customers with wholesalers to demonstrate the products, advertising to end users through trade newspapers, direct mail, web advertisements, etc., and providing support services such as receiving and handling questions and complaints from end users. It is also acknowledged that, although the transactions subject to the comparison are purchase and sales transactions, they are sales on order and there is almost no inventory risk, and many of the accounts receivable are from large companies and other customers with high creditworthiness, so the risk of bad debts is small.

c. On the basis of the above, to compare the functions performed by the Appellant in the Cross-border Transactions with the functions performed by the Comparable Corporations in the Comparable Transactions, it is acknowledged that the Cross-border Transactions are based on the performance of obligations to the Cross-border Related Parties under the respective Service Contracts, and that the Cross-border Related Transactions provide services such as sales promotion to wholesalers, etc.

On the other hand, the transaction subject to comparison in this case is mainly a resale transaction in which the corporation subject to comparison purchases the subject product, graphic software, and sells it. It is clear that there is an inadmissible difference in the functions performed by the appellant and the comparator corporation.

Based on the premise that the foreign-related transactions in question are not purchase and sale transactions but service provision transactions, the appellant argues that, since the functions performed and the risks borne by the appellant in the sale of P3 products are similar to the functions and risks borne by a reseller in a resale transaction adopting the sales-on-order method, the calculation method in question is equivalent to the resale price The appellant argues that the method of calculation in this case is equivalent to the method under the Resale Price Standards Act because the functions and risks borne by the reseller are similar to the functions and risks borne by the reseller in resale transactions using the sales on order method, and that the unique functions of the reseller, which are different from those of the appellant, are merely administrative work such as ordering and arranging for the delivery of goods, paying the purchase price, and receiving the sales proceeds, and that through such administrative work, significant profits are generated which affect the transaction price of the goods and the gross profit margin. Therefore, in order to calculate the Appellant's profit margin, it is not necessary to deduct the profit margin of the transaction in which goods are sold from the profit margin of the comparable transaction in which goods and services are sold.

However, even if the content of services such as sales promotion provided by a reseller is similar to the content of services provided by the appellant, it is difficult to say that the above-mentioned factors claimed by the appellant, which are generally related to price setting, are merely administrative work that hardly needs to be taken into account (in this case, the factors that do not need to be taken into account are In this case, there is no concrete evidence to support the fact that there is no need to consider them). In this case, there is no concrete evidence to support the fact that there is no need to consider it.

In addition, as stated above, there is a difference between the functions performed by the appellant and those performed by the comparator corporation.

In addition, as stated above, the appellant does not sell graphic software, so the commission to be received does not include the profit from the sale of graphic software, whereas the gross profit margin of the comparable corporation includes the profit from the sale of graphic software. In other words, the appellant should obtain a profit commensurate with the provision of the above-mentioned services, whereas the comparable corporation should obtain a profit commensurate with the provision of services such as resale transactions and sales promotion (the gross profit margin is the "normal profit margin" used in this calculation method).

(The gross profit margin is the "normal profit margin" (Article 66-4(2)(i)(b) and (2)(b) of the Act on Special Measures Concerning Taxation and Article 39-12(6) of the Order for Enforcement of the Act on Special Measures Concerning Taxation). Even if the content of the provision of services by the subject corporation in this case is similar to the content of the provision of services by the appellant in this foreign affiliated transaction, the subject corporation in this case is also engaged in the resale of products (wholesale and retail).

(wholesale and retail) of the products, and its gross profit includes the profit from the resale of the products. On the other hand, in the case where the wholesaler, who has no special relationship with the foreign related party in question, purchases the P3 products and resells them at a profit, and in parallel the appellant provides services to the foreign related party in question by conducting sales promotion, etc. to the reseller (retailer), the wholesaler also earns resale profit. Therefore, in the amount of profit obtained by multiplying the sales amount of P3 Products in Japan by the gross profit margin of the comparator corporation, as shown in the calculation method in this case, the amount of profit obtained by the wholesaler by purchasing the P3 Products from the foreign related party and reselling them to retailers, etc. is included in the amount of profit obtained by the wholesaler by purchasing the P3 Products from the foreign related party and reselling them to retailers, etc. It is highly probable that the amount of profit obtained by multiplying the turnover in this case by the gross profit ratio of the corporation subject to comparison in this case includes the sales profit obtained by the wholesaler purchasing P3 products from the foreign related party in this case and reselling them to retailers.

Furthermore, in the calculation method in this case, the arm's length price is calculated by multiplying the sales of the P3 Products in Japan by the above-mentioned gross profit margin.

However, according to the evidence (A23, witness P5 of the original trial) and the whole purpose of the argument, the above-mentioned sales include the cases where the P3 products were sold without the appellant's approximate involvement, and the above-mentioned sales include factors different from the resale price referred to in Article 66-4(2)(b) of the Act on Special Measures Concerning Taxation.

d. Comparing the risk borne by the appellant in this foreign related transaction with the risk borne by the comparable corporation in this comparable transaction, the appellant is entitled to receive from the foreign related party in each of these service contracts 1.5 per cent of the net sales in Japan and the direct, indirect and general administrative expenses incurred in providing the appellant's services. On the other hand, the comparable corporation will earn a profit if its sales are above the break-even point, but will suffer a loss if they are below, and the comparable transaction assumes (includes) this risk. There is a fundamental difference between the appellant and the comparables in terms of the risk borne by the appellant and the comparables, and this is the same even if the order-made sales format is adopted. There is no precise evidence to admit that the risk borne by the appellant and the corporation subject to comparison in this case was so slight that it could be disregarded.

(c) Based on the above, it is difficult to say that the functions performed and the risks borne by the appellant in the foreign-related transactions are the same as or similar to the functions performed and the risks borne by the comparator corporation in the comparable transactions, and there is no other evidence sufficient to confirm this. It must be said that the calculation method in this case is not a reasonable method that fits the content of the foreign-related transactions in question according to each type of transaction and does not deviate from the concept of the three basic laws.

(d) Given the above, the method of calculating the arm's length price applied by the administrative agency for the disposal to the transaction in question is based on the Special Taxation Measures Law 66.

The method of calculating the arm's length price that the administrative agency applied to the transaction in question cannot be said to be "a method equivalent to the resale price standard method" as provided for in Article 66-4(2)(b) of the Act on Special Measures Concerning Taxation.

(3) Therefore, in this case, the process of calculating the arm's length price using the calculation method in question is illegal, and in the end, the requirement that "the amount of the consideration to be received by the corporation from the foreign related party is less than the arm's length price" cannot be recognized for the foreign related transaction prescribed in Article 66-4(1) of the Act on Special Measures Concerning Taxation.

3 Based on the foregoing, without deciding the remaining points, each of the appellant's claims in this case is justified and should be accepted, and the original judgment to the contrary should be reversed.

Tokyo High Court, 16th Civil Division

Presiding Judge: Hidetoshi Munemiya

Judge Hideaki Kurotsu

Judge Akihiko Otake