Australia: Middletons wins a landmark transfer pricing case for SNF Australia
Last Updated: 7 June 2011

Middletons has successfully acted for SNF (Australia) Pty Ltd (SNF) in a landmark transfer pricing case with the Full Federal Court last week unanimously dismissing the Commissioner of Taxation's appeal against the earlier decision of Middleton J.

Middletons tax partner, Philip Diviny said, "This is a commonsense outcome to a very protracted case. It provides welcome relief to non residents investing into Australia that the transfer pricing provisions will be interpreted commercially by Australian courts."

"The Full Federal Court has recognised that the transfer pricing provisions are, first and foremost, part of the Australian domestic law and need to be interpreted as such." said Philip.


SNF carries on the business of manufacturing and selling industrial chemicals known as polyacrylamides which are principally used in the cleansing of water in an industrial setting. As part of its business, the taxpayer purchased chemicals from related foreign companies and on-sold these to third party customers. Notices of assessment were issued to the taxpayer in each of the income years 1998–2000 and 2002–2004, increasing the taxable income of the taxpayer on the basis that it had paid more than an arm's length price in respect of acquisitions of the products from non-resident related party suppliers.

The taxpayer said that as a matter of fact it had purchased the products, in most cases, for an amount equal to or less than the amount paid by arm's length customers of its related party manufacturers. Whilst accepting that it had operated at a loss for many years, the taxpayer contended that those losses could be explained by other than the cost of product purchases. Those factors included unreasonably low levels of sales per salesperson, competition in the Australian market, excessive stock levels and poor management.

At first instance, the Trial Judge accepted that the evidence presented showed the taxpayer had generally paid the related party suppliers less for the same or similar products than comparable independent third party purchases. He concluded that the prices paid by the taxpayer were not in excess of an arm's length consideration and allowed the taxpayer's appeal in each year. In coming to this conclusion, the Trial Judge also found that the losses were caused by the factors such as those outlined above and had not arisen from the transfer of profits to the suppliers.

Grounds of Appeal

The Commissioner appealed the Federal Court decision on 3 bases:

  1. the Trial Judge made an error in finding that based on the evidence, the transactions upon which the taxpayer relied were comparable;
  2. the Trial Judge incorrectly accepted evidence that the French supplier had made losses on its sales to the taxpayer; and
  3. the Trial Judge made an error of law as the concept of arm's length consideration required an examination of transactions between independent parties dealing at arm's length and those words require the purchasers to share each and every quality of the taxpayer bearing on price save for the fact they are not under the control of SNF France.

Findings of the Full Court

At trial, the evidence presented consisted of three different sets of comparables. Whilst acknowledging that there were some deficiencies in the Trial Judge's approach to all three sets of comparables, on the material provided, it was clear that the taxpayer paid less for the same or similar products (in comparable markets) than arm's length purchasers did and to this end the Trial Judge's conclusions were correct. At first instance, the Commissioner argued that the taxpayer should apply the Transaction Net Margin Method (TNMM) in determining if an arm's length price had been achieved, because it argued there was a lack of comparable transactions. The Full Federal Court accepted that the evidence presented had shown the existence of an extensive range of comparables and as such the Commissioner’s submission that the Trial Judge should have adopted the TNMM in determining an arm’s length price was incorrect.

The Commissioner also argued that the Trial Judge had erred in accepting the evidence of SNF France's owner, Mr Pich, that the French supplier had made losses on its sales to SNF. The Full Federal Court found there was nothing which cast any doubt on Mr Pich's credibility or honesty.

In dismissing the appeal as to the determination of an arm’s length price, the Full Federal Court referred to OECD Transfer Pricing Guidelines saying that to be comparable means that none of the differences between the situations being contemplated could materially affect the situation or that reasonably accurate adjustments could be made to eliminate such differences. The Court rejected the notion that an arm’s length price required all factors other than ownership to be identical.

The Full Federal Court accepted that there is not simply one arm's length consideration and that goods will change hands at prices which are different from the market value for legitimate reasons, such as a need to secure long term or large volume arrangements or for example, with securities, to acquire control. In the present case, the taxpayer proved that the prices paid by it were less than the prices paid by independent comparable purchasers and as such those prices were at arm's length.

Philip said "This decision confirms the decision of the single judge that sales can be comparable despite not being identical. The CUP methodology can be applied to a broader range of transactions than the ATO would have taxpayers believe."

"The case is significant for taxpayers as it provides guidance as to what constitutes an arm's length price and the factors that may be taken into account in determining whether such an arm's length price exists. The decision is also significant as it confirms the finding of the Federal Court that losses, including long term losses, may be evidenced by commercial reasons and not purely as a result of inflated prices." said Philip.

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