Judgment summary
This judgment concerns a corrective additional assessment of Corporate Income Tax (IRC) for 2008 issued against A..., S.A. following a tax inspection. The Tax and Customs Authority (AT) disregarded a declared capital loss arising from the sale of an industrial wash plant to B..., S.A. for a nominal price, relying primarily on the indispensability requirement in article 23 of the CIRC and, alternatively, on the transfer pricing regime in article 58 of the CIRC on the basis of special relationships between A... and B... on 31/12/2008, the date of sale.
The Administrative and Tax Court of Beja dismissed the taxpayer's challenge. The Central Administrative Court of the South (TCA Sul) held the indispensability ground unlawful but upheld the correction on transfer pricing grounds, finding that special relationships existed when the terms of the sale were negotiated, even though they no longer existed when the contract was formally concluded.
The Supreme Administrative Court admitted an exceptional review appeal and ultimately upheld the appeal, revoking the TCA Sul judgment and annulling the additional assessment insofar as it related to the wash plant correction (2.2.1, 3).
Background
A... is engaged in mining activity and was subject to an external partial tax inspection for the 2008 financial year (A, C). The inspection led to a report dated 14/12/2010 which corrected, among other items, capital losses of 16,931,946.26 euros declared on the sale of an industrial wash plant to B..., S.A. (D).
The wash plant had originally been purchased by A... from B... in 2005 for 36,112,950 euros, with B... holding a contractual option to repurchase it at the same price, later referenced against a 2007 independent valuation of 16,931,947.09 euros (CC, DD, and inspection report).
In late 2008, amid the sale of the C... Group's stake in B... to D... SGPS, SA (part of the E... Group), the sale of the wash plant by A... to B... for one Euro was made a precondition of that share sale. The share purchase agreement was signed on 23/12/2008, and the wash plant sale was completed on 31/12/2008 (QQ, RR, SS).
The AT assessed additional IRC of Eur. 5,217,594.44, which A... paid on 23/03/2011, before lodging an administrative claim and subsequently a judicial challenge (I, L, M, N).
Core dispute
The dispute centred on whether the transfer pricing regime under article 58 of the CIRC (now article 63) could be applied to the sale of the wash plant, given that B... had ceased to belong to the same corporate group as A... by the date the sale was concluded (31/12/2008), although the parties may have been related when the terms of the deal were negotiated.
A related issue, not ultimately decided, was whether it was lawful for the AT to use, as a comparable market price under the Comparable Market Price method, the value of an independent valuation (16,931,947.09 euros) that had been used as a reference within a prior transaction between the same, then-related, entities.
The appeal also raised whether the TCA Sul was entitled to uphold the assessment on the basis of special relationships existing at the negotiation stage, when this was not the ground actually invoked by the AT in its contextual reasoning for the assessment.
Court findings
The Supreme Administrative Court held that the legality of a tax assessment must be judged solely by reference to the grounds contained in the contextual reasoning of the act itself, and that a court cannot substitute or supplement that reasoning with grounds not invoked by the AT. The AT had based its correction on the existence of special relationships as at 31/12/2008, the date of the sale, not at the negotiation stage. The TCA Sul therefore erred by upholding the assessment on a different basis, namely special relationships existing only at negotiation.
The court further held that, even if this substitution of grounds had been permissible, the relevant moment for verifying the existence of special relationships for transfer pricing purposes is when the deal is concluded, not when it is negotiated. This follows from the wording of article 58(1) of the CIRC, which refers to transactions "carried out", and from the tempus regit actum principle, and is consistent with the underlying purpose of the transfer pricing regime, which is to prevent intra-group transfers of profits or losses at non-market prices.
The court rejected the Public Prosecutor's argument that the effects of the share purchase agreement between F..., LTD and D... SGPS were only produced on 31/12/2008 by virtue of a suspensive condition; instead, applying articles 270 and 276 of the Civil Code, the effects of that contract, once the condition was fulfilled, related back to the date of signing, 23/12/2008. B... had therefore already left the C... Group before the wash plant sale was concluded on 31/12/2008, meaning no special relationship existed between A... and B... at that time.
The court noted, without deciding the point conclusively for this case, that if the AT considered the price unjustified or the arrangement abusive, it might have used the general anti-abuse clause under article 38(2) of the LGT instead of the transfer pricing regime (2.2.2.4). Because the appeal succeeded on the first ground, the second issue, concerning the propriety of using the 2007 valuation as a comparable market price, was not examined (2.2.3).
Outcome
The Supreme Administrative Court upheld the appeal, revoked the judgment of the Central Administrative Court of the South, and upheld the legal challenge in the contested part relating to the correction on the sale of the wash plant. Costs were awarded against the Defendant (AT), with the remainder of the court fee waived under article 6(7) of the CPR, on the basis that the amount payable, given the value of the case, could otherwise infringe the constitutional principles of access to the law, effective judicial protection, proportionality and necessity.
Tp method highlighted
The AT applied the Comparable Market Price method under the transfer pricing regime, treating the value of an independent valuation of the wash plant carried out in 2007 (16,931,947.09 euros), which had been accepted by A... and B... within an Amendment to the Equipment Utilisation Contract, as the comparable market price against which the actual sale price of 0.83 euros (excluding VAT) was measured.
The Appellant argued that this comparison was invalid because the reference value derived from a transaction between entities that were, at that time, related, and therefore could not serve as a market comparable, and further that no genuine comparable transaction existed given the unique nature of the equipment. The Supreme Administrative Court did not decide this second issue, as the appeal was resolved on the ground concerning the timing of special relationships.
Major issues / areas of contention
- Whether the transfer pricing regime under article 58 of the CIRC can apply where special relationships existed when a deal was negotiated but no longer existed when the transaction was concluded.
- Whether a court may uphold a tax assessment on grounds not contained in the contextual reasoning actually given by the tax authority when it issued the assessment.
- The correct moment for verifying the existence of special relationships as a precondition for applying the transfer pricing regime.
- Whether a valuation used as a reference within a prior transaction between related entities can serve as a comparable market price under the Comparable Market Price method (raised but not decided).
- Whether the court fee remainder should be waived under article 6(7) of the CPR given the value and nature of the case.