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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Press Releases from this Firm
Recent Content from this Firm
By Andrea Beatty, Jim Bulling
By Andrea Beatty, Jim Bulling
By Jenny K. Mee, Murray Deakin, Jemimah Roberts
By Holly K. Towle, Kendra H. Nickel-Nguy
By Belinda Copley
By Jonathan Feder
By Russell Lyons, Andrea Beatty, Becki Tam, Brad Lynch
By Jennifer Mee, Jemimah Roberts
By Sandra Steele, Belinda Montgomery, Marcel Marquardt
By Steven Wulff, Ashley Cameron
Font Size:
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions