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Landmark case of  Transfer Pricing

5 FEBRUARY 2021 Landmark Decision on Transfer Pricing: Section 140A Income Tax Act 1967 and Income Tax (Transfer Pricing) Rules 2012 S v Ketua Pengarah Hasil Dalam Negeri In a landmark decision yesterday,

the Special Commissioners of Income Tax (SCIT) discharged an income tax assessment raised by the Inland Revenue Board (IRB) pursuant to transfer pricing (TP) adjustments made under s 140A of the Income Tax Act 1967 (ITA) and the Income Tax (Transfer Pricing) Rules 2012 (TP Rules).

 The courts have previously examined the IRB’s general power to disregard transactions, including TP transactions, under s 140 of the ITA. However, this is the first decision addressing s 140A of the ITA and the TP Rules, which were promulgated to specifically deal with TP.

 The decision will provide welcome guidance on key principles in TP adjustments and the IRB’s powers under s 140A of the ITA and the TP Rules. The taxpayer was successfully represented by Dato’ Nitin Nadkarni, Jason Tan Jia Xin and Chris Toh Pei Roo from Lee Hishammuddin Allen & Gledhill’s Tax, SST & Customs Practice.

Brief background The taxpayer is a Malaysian manufacturing company which is part of a large multinational group. It sells its finished products primarily to related parties outside Malaysia.

The taxpayer prepared and submitted its TP documentation based on the Comparable Uncontrolled Pricing (CUP) method. The IRB rejected the CUP method and directed the taxpayer to prepare a benchmarking analysis using the Transactional Net Margin Method (TNMM). Despite maintaining its position that CUP was the most suitable method for assessing whether there had been any TP, the taxpayer complied with the IRB’s direction. After an exchange of correspondence, a final list of six comparable companies — three proposed by the taxpayer and three by the IRB — was agreed as acceptable for the purposes of the benchmarking analysis.

 The taxpayer’s results fell within the interquartile range of the comparable companies for all four years under audit, and above the median in three out of the four years. Nevertheless, the IRB proceeded to make TP adjustments on the taxpayer and issued an assessment for additional taxes.

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The IRB relied on s 140A of the ITA and Rule 13 of the TP Rules to adjust the taxpayer’s results to the median for the one year (out of the four years in question) in which its profits fell below the median profitability of the comparable companies. The IRB rejected the taxpayer’s contention that TP principles, as encapsulated in the Organisation for Economic Co-operation and Development TP Guidelines (OECD Guidelines),