Case summary
Illichmann Castalloy s.r.o. (“Illichmann”), an aluminium-casting manufacturer in the Slovak Republic, part of the Austrian-headquartered Alicon Group, reported a loss of EUR 562k (approx.) in FY 2012-13. Illichmann used the profit split method (“PSM”) for the valuation of its most significant transaction, but did not include a functional and risk analysis in its (simplified) transfer pricing (“TP”) documentation. As part of the tax audit, the Slovak tax authorities performed a TP-analysis of Illichmann, finding that Illichmann did not perform any functions related to strategic decision-making or marketing activities, and hence had no control over the risks it had been assigned according to Illichmann. The tax authorities thus concluded that Illichmann’s profile was that of a manufacturer with limited risk, and therefore, the PSM was not the most appropriate method for pricing the transaction in question. Instead, the tax authorities used the transactional net margin method (“TNMM”) to determine the taxable profit from Illichmann’s controlled transactions. Their benchmark excluded loss-making comparables and included some related/controlled companies. Increasing Illichmann’s taxable base to the resulting benchmark median, the tax authorities made a TP adjustment, which was appealed against by Illichmann.
The issue before the Administrative Court was whether the use of the TNMM and the TP-adjustment made by the tax authorities was justifiable based on whether Illichmann was in fact a limited-risk manufacturer and should not be allowed to report a loss.
The Administrative Court ruled in favour of Illichmann, concluding that the tax authorities had failed to prove that Illichmann was a limited-function and limited-risk company that could not incur losses. The court also identified methodological defects in the tax authorities’ benchmarking process (relating to the inclusion of controlled entities and the unjustifiable exclusion of loss-making comparables). Accordingly, the court annulled the TP-adjustment in favour of Illichmann’s position (i.e., that the PSM could be applied and Illichmann had a tax loss in FY 2012-13).
