The increasing transparency has resulted in more data being provided to the tax authorities, with deeper insights gained by those authorities.
The global demand for transparency and adherence to the fair share principle has also resulted in many transfer pricing matters reaching the courts. These cases have resulted in both national and European case law. The case law creates a precedent and provides guidance to taxpayers in the relevant jurisdictions.
For example, in the Danish case involving Pharma Distributor A/S (Case No. SKM2020.105.OLR, 11-03-2020), the Eastern High Court of Denmark ruled, unlike the National Tax Tribunal, that the company’s goodwill amortization costs could not be added back to the profit margin of the company before comparing it with the independent company EBIT benchmarks. While this was permissible in principle, the taxpayer had not proven that the benchmark companies operated with similar goodwill and that they had not capitalized/amortized the costs.
In another case involving Federal Mogul Anand Bearing India Ltd. (Case No. TS-580-ITAT-2020(MUM)-TP, 09-07-2020), the Mumbai Income Tax Appellate Tribunal ruled in in favor of the taxpayer. In this case, the court established important guidance in relation to benchmark studies. The taxpayer was a manufacturer of automotive components. The tax administration imputed a higher operating profit for the company based on a comparable company, which the tax administration had identified.
The court rejected this comparable company for the following reasons:
The proposed benchmark company was much larger than the tested party, so it could therefore be assumed that it would benefit to a greater extent from the economy of scale. The court also referenced another case relating to DHL Express (India) Pvt. Ltd..
It could be assumed that the benchmark company had more valuable intangible assets, because it had been established for a significantly longer period of time and had become a market leader having more established and extensive relationships with its customers. The Court referenced cases involving Maersk Global Service Centre India Pvt. Ltd. and Lubrizol Advanced Materials India Pvt. Ltd..
The tax authorities did not give insights in the selection procedure of the proposed benchmark company. With no transparency, cherry-picking of comparable companies by the tax administration could not be ruled out. In this regard, the court referenced cases involving Bayer Material Science Pvt. Ltd., Mentor Graphics (Noida) Ltd., Toshiba India Pvt. Ltd., and Allscripts India Pvt. Ltd.
The court also ruled that working capital adjustments made to the financial results of the comparable companies was permissible. It is also important to note the additional local requirements in relation to the benchmark studies that are performed. Thus, the case law provides guidance that should be respected when performing benchmark studies. Learn more about the benchmarking technology here.
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