Judgment summary
The case concerns an additional assessment of corporate income tax for the 2016 tax period, arising from a transfer pricing adjustment made under section 23(7) of the Income Tax Act. The tax authority found that the company had not demonstrated that prices in its transactions with Hewlett-Packard Company, conducted under terms set by a related corporate entity, matched prices that would have been agreed between independent parties in comparable conditions (paragraph 2).
The Specialized Tax Office issued a decision on 25 February 2022 assessing additional tax of 21,762,410 Kč and a penalty of 4,352,482 Kč. The appellate tax authority (žalovaný) confirmed this decision on 5 May 2023 (paragraph 1).
The company challenged the appellate decision before the Regional Court in Brno, which dismissed the action as unfounded by judgment of 19 November 2025, No. 29 Af 23/2023-99 (paragraph 3). The company then brought a cassation complaint before the Supreme Administrative Court, which was ultimately dismissed as unfounded.
Background
The dispute centred on the transfer pricing method used to assess the arm's length nature of pricing between the company and Hewlett-Packard Company, conducted under conditions set by a related corporate entity (paragraph 2).
The tax authority applied the Transactional Net Margin Method (TNMM), examining net profit margins in relation to costs. The company did not dispute the use of TNMM as such, but contested the choice of profitability indicator, arguing for return on value added costs (ROVAC) rather than return on total costs (ROTC), which the tax authority had used (paragraph 4).
The Regional Court found that the company was not a typical contract manufacturer, but performed limited functions characteristic of one, including storage, handling, testing and repair of material, use of material in production and assembly, and bearing risks connected with damage to material during production (paragraph 6). It held that the tax authority had appropriately reduced the markup applied, to 24.62%, to reflect the company's specific position, consistent with earlier decisions in similar cases (paragraph 7).
Core dispute
The company's cassation complaint raised four main areas of challenge: first, the choice of profitability indicator (ROTC rather than ROVAC) and the interpretation of the functional and risk analysis under the OECD Transfer Pricing Guidelines; second, the alleged failure of the Regional Court to properly consider the company's argument that it lacked real capacity to bear the risks attributed to it; third, an alleged breach of the principle of legitimate expectations, based on a comparison with the treatment of RR Donnelley Czech s.r.o. in a separate Supreme Administrative Court judgment (No. 7 Afs 31/2024-27); and fourth, alleged unreviewability (nepřezkoumatelnost) of the Regional Court's judgment for insufficient reasoning (paragraphs 12 to 22).
The respondent argued that comparable objections concerning the company had already been addressed and rejected by the Supreme Administrative Court in earlier judgments concerning other tax periods, and that nothing in the present case warranted departing from those conclusions (paragraph 23).
Court findings
The Supreme Administrative Court first addressed the unreviewability argument as a matter it was bound to consider ex officio, and found that the Regional Court's judgment was comprehensible, based on clear reasoning, and had addressed all material submissions; it was not required to respond individually to every argument raised (paragraphs 30 to 42).
On the choice of profitability indicator, the Court held that the selection of a transfer pricing method lies within the discretion of the tax administration, provided the decision is based on objective criteria and is reviewable; the specific arguments underlying the method chosen are subject only to review for completeness and persuasiveness (paragraphs 45 and 46). The Court found the use of ROTC was properly and sufficiently reasoned and was not arbitrary (paragraph 46). It also confirmed that the OECD Transfer Pricing Guidelines and the D-34 guidance are methodological aids rather than binding legal rules (paragraph 47).
On ownership of material, the Court agreed with the Regional Court and the tax authority that the company's ownership of material was not a purely formal legal relationship without economic consequences, but carried functions and risks, albeit to a limited extent (paragraph 48).
Regarding risk-bearing capacity, the Court found no basis to conclude that the tax authority had wrongly assessed the company's risk profile, and noted that it was not necessary to prove the company actually incurred a total loss of material value in the relevant year (paragraphs 50 to 52).
On legitimate expectations, the Court held that this argument had not been raised before the Regional Court and could not be considered on that basis; in any event, a single differing case does not establish an established, uniform and long-term administrative practice capable of founding legitimate expectations (paragraph 53). It further held that the RR Donnelley case was not comparable, since in that case the company acquired ownership of only around 10.5% of the material it used in production, whereas in the present case the material used in production was fully in the company's ownership (paragraph 54).
The Court also found no procedural error in the refusal to hear witnesses I. K. and J. H., noting that the relevant facts were already sufficiently established and that the witness I. K. had not even been proposed before the Regional Court (paragraphs 40 and 41). It further held that it was not necessary for the Regional Court to address every specific discrepancy between the KPMG expert opinion and the tax authority's conclusions, given that the tax authority had already addressed the point and the company had not substantively challenged that treatment (paragraph 39).
Outcome
The Supreme Administrative Court held that the cassation complaint was not well-founded and dismissed it under section 110(1) of the Code of Administrative Justice (paragraph 58).
The Court also refused the company's request to stay the cassation proceedings pending the outcome of separate proceedings before the Regional Court (case No. 30 Af 25/2025), finding that this question was not decisive for the legitimate expectations issue and that the Regional Court's legal view in that separate case would not, in any event, bind the Supreme Administrative Court (paragraph 57).
No costs were awarded to either party, as the company was unsuccessful and the respondent incurred no costs beyond its ordinary official activity (paragraph 59).
Tp method highlighted
The tax authority applied the Transactional Net Margin Method (TNMM), assessing net profit margin against a cost base. It used the return on total costs (ROTC) indicator, rather than the return on value added costs (ROVAC) indicator preferred by the company (paragraph 4).
The tax authority quantified the company's functions and risks relative to comparable companies and, to improve comparability, applied a reduced markup on material costs, setting it at 24.62% (paragraph 7). This approach was said to reflect the company's limited, but non-negligible, functions and risks associated with material it owned, including storage, handling, testing, repair, risk of unpaid receivables, inventory risk and exchange rate risk (paragraphs 6, 9 and 50).
The Regional Court and the Supreme Administrative Court both accepted that such comparability adjustments, including quantification of functions and risks, were consistent with the OECD Transfer Pricing Guidelines (including paragraphs 1.34 to 1.37, 2.94, 3.50 and 3.51) and the D-34 guidance, which permit corrections to improve comparability between the tested party and benchmarked companies (paragraphs 10 and 33).
Major issues / areas of contention
- Whether the tax authority was entitled to choose ROTC over ROVAC as the profitability indicator under the TNMM.
- Whether the functional and risk analysis correctly accounted for the company's ownership of, and functions and risks associated with, the material it used in production.
- Whether the reduced markup on material costs (24.62%) adequately compensated for comparability differences with the benchmarked companies.
- Whether the tax authority's treatment breached the principle of legitimate expectations by comparison with the treatment of RR Donnelley Czech s.r.o. in a separate judgment.
- Whether the Regional Court's judgment was sufficiently reasoned and therefore reviewable.
- Whether the refusal to hear witnesses I. K. and J. H. amounted to a procedural error.
- Whether the KPMG expert opinion required a more detailed rebuttal by the Regional Court.