International case law on transfer pricing in December 2023

Transfer pricing is increasingly becoming the focus of domestic and foreign tax authorities and tax courts, particularly in the light of tax audits. It is therefore worth taking a look at international case law. Decisions reached by foreign courts based on internationally recognized principles of interpretation can help interpret German tax law.

Here, we present an overview of selected cases from December 2023.

France: Court of Appeal Paris of 27 December 2023 in the case SAS CFEB Sisley

Dispute: Gross vs. net profit margins of peer companies in a database study

SAS CFEB Sisley, a French company, serves as the parent of the Sisley Group. The group specialises in the manufacture and distribution of cosmetics and beauty products. It became embroiled in a dispute after SAS CFEB Sisley distributed products through its Asian subsidiary, Sisley Hong-Kong Ltd, in 2012 and 2013. It determined supply prices based on the resale price method in conjunction with a database study.

The French tax authorities made transfer price adjustments for the two years in dispute on the grounds that the gross profit margin applied was not at arm’s length. The tax authorities, based on a database study prepared by SAS CFEB Sisley itself, calculated a net profit margin, but in doing so had neglected to include one of the seven peer companies. As such, the net profit margin actually generated by Sisley Hong-Kong Ltd. in the years in dispute was well above the upper quartile of the adjusted database study.

Court of Appeal rules in favor of the taxpayer

SAS CFEB Sisley took legal action against the transfer price adjustment with the Administrative Court of Montreuil. After the Administrative Court ruled in favor of the plaintiff on 2 December 2021, the French tax authorities decided to appeal the decision.

The court of appeal rejected the appeal on 27 December 2023, finding it to be without merit. The tax authorities had not explained why the transactional net margin method (TNMM) was more suitable than the resale price method in the case in dispute. Instead, the database study would have shown that the profit margins in the industry generally differ significantly and that Sisley Hong-Kong Ltd.’s gross profit margin – even after the tax authorities neglected to include one of the seven peer companies – is within the range of gross profit margins achieved by comparable companies in Asia.

France: Conseil d'État of 29 December 2023 in the case SA Compagnie Gervais Danone

Dispute: Tax recognition of a market development subsidy

SA Compagnie Gervais Danone, a French company, was a minority shareholder in Danone Tikvesli, a Turkish company, which recorded a net loss of almost EUR 40 million at the end of the 2010 financial year. Under Turkish law, this should have led to the discontinuation of its business activities. In order to offset the loss, SA Compagnie Gervais Danone provided a subsidy to Danone Tikvesli in 2011. However, the French tax authorities permitted this subsidy only as a deduction for operational expenses related to its minority stake in the Turkish company. The tax authorities reasoned that the subsidy was not provided in the interests of SA Compagnie Gervais Danone.

SA Compagnie Gervais Danone took legal action against this. In the company’s view, the subsidy was in its own economic interest, as maintaining a presence in the Turkish dairy market was of paramount strategic importance. There is also a license agreement between the two companies that allows Danone Tikvesli to use the brands, patents and know-how of the Danone Group. The plaintiff viewed Danone Tikvesli’s potential for growth, driven by the market development grant and subsequent rise in license fees, as being beneficial to its own economic interests.

Decision of the Conseil d'État in favor of the taxpayer

The initial judgment of 9 May 2019 by the Administrative Court of Montreuil, along with the subsequent appeal on 22 June 2021, were unsuccessful. As a result, SA Compagnie Gervais Danone pursued legal action by filing a lawsuit with the Conseil d’État.

The Conseil d’État, in its ruling on 29 December 2023, determined that the market development subsidy payment is entirely tax-deductible. This decision was made on the basis that SA Compagnie Gervais Danone holds an economic interest in the ongoing operations of its Turkish subsidiary. The Conseil d'État found that the decisions of the lower courts were subject to an error of law in that they assumed that SA Compagnie Gervais Danone had no economic interest in the continuation of the Turkish company’s business. No licence fees were paid by Danone Tikvesli until 2016. Nevertheless, according to the Conseil d'État, the subsidy was in the economic interest of SA Compagnie Gervais Danone, given the prospects for business growth and the future collection of licence fees were not purely theoretical at the time the subsidy was provided.

India: High Court of Dehli of 22 December 2023 in the case Hyatt International-Southwest Asia Ltd.

Dispute: Classification of fees as service fees vs. licence fees

Hyatt International Southwest Asia Ltd. based in the United Arab Emirates had entered into a Strategic Oversight Service Agreement (SOSA) with Asian Hotels Limited, an Indian hotel operator, for the provision of various services of a strategic nature in 2009 to 2018. The plaintiff was also required to provide strategic plans, policies, processes, guidelines and parameters for the operation of a hotel located in India to Asian Hotels Limited that were consistent with Hyatt’s operating standards.

According to the Indian tax authorities, the service fees received by the plaintiff from Asian Hotels Limited under the SOSA were to be reclassified as licence fees. The tax authorities also determined that the plaintiff had a permanent establishment in India. The plaintiff appealed against the findings with the High Court of Delhi.

High Court rules in favor of the taxpayer

The High Court of Delhi, in its ruling of 22 December 2023, said that the fees to be paid constitute consideration for the provision of services owed under the SOSA. The court found that the obligation to provide access to knowledge, processes and information relates exclusively to information, knowledge, skills and experience that serve to promote the service provided by the plaintiff under the SOSA. The mere fact that the extensive services provided by the plaintiff also included access to knowledge, processes and information cannot lead to the reclassification of the service fees as license fees. The High Court also referred to its decision in the Sheraton International Inc. case (ITA No. 216/2020), in which the free use of trade marks was considered to be merely ancillary to the services provided in the fields of advertising, public relations and sales promotion.

However, the High Court determined that Hyatt International Southwest Asia Ltd. had established a permanent establishment in India given that it had control over the premises of the hotel for the purpose of carrying on its business.

Conclusion

The international case law on transfer pricing discussed in this blog entry reveals disputes about the choice of method and use of database studies, the deductibility of market development grants and the qualification of remuneration as service fees (instead of license fees).

Please feel free to contact the authors or your usual FGS contacts if you would like to discuss the international case law on transfer pricing discussed in this blog entry in more detail.