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Pricing Adjustments Made To Median Pricing

Recently, the High Court dismissed the Director General of Inland Revenue’s (DGIR) appeal in a transfer pricing appeal.

The key issue in question was whether the DGIR had any basis in law or fact to contend that the taxpayer’s 2.25% margin was not at arm’s length.

Brief Facts

The taxpayer was a company incorporated in Malaysia and involved in the marketing and distribution of health, personal care and beauty care products. The taxpayer entered into a Distribution Agreement dated 1.7.2021 (the Agreement) and was appointed by its related party entity (PGIOPL) to oversee the distribution of a range of the PGIOPL’s consumer goods to Malaysian customers. By virtue of the Agreement, the prices of the goods sold to the taxpayer was set by PGIPOL in a manner which guaranteed a margin that adhered to the arm’s length principle. The agreed margin between the taxpayer and PGIOPL was at 2.25%.

In 2009, the DGIR conducted a transfer pricing audit on the taxpayer and requested for the taxpayer’s transfer pricing documentation for the years of assessment (YAs) 2004 to 2008. On 26.1.2010, the taxpayer submitted it’s the requested documentation to the DGIR.

The DGIR issued its audit findings letter to the taxpayer on 28.5.2012 where the DGIR informed the taxpayer that it will be invoking Section 140(6) of the Income Tax Act 1967 (ITA) to adjust the transaction between the taxpayer and PGIOPL. Among others, the DGIR contended that the margin earned by the taxpayer was not at arm’s length.

The DGIR also selected 5 comparables companies with advertising and promotion levels allegedly to be comparable to the taxpayer and adjusted the taxpayer’s results to the median.

In doing so, the DGIR rejected the taxpayer’s benchmarking analysis of local comparable companies in Malaysia, comprising of 22 comparable companies.

Furthermore, the DGIR had also disallowed the taxpayer’s claim to deduct the grant payments made to PGIOPL under Section 33(1) of the ITA on the basis that there was no evidence being led to show how the amount of payment was


Subsequently, on 25.6.2012, the DGIR proceeded to raise assessments imposing additional taxes and penalties amounting to RM44,639,963.20 for YAs 2004 to 2008 on the taxpayer.

Being aggrieved by the assessments, the taxpayer filed an appeal to the SCIT.

The SCIT’s Ruling

The SCIT allowed the taxpayer’s appeal for the following reasons:

  • The DGIR did not produce any transfer pricing report to support their contention. The taxpayer’s transfer pricing report should therefore prevail based on the case of MM Sdn Bhd v Ketua Pegarah Hasil Dalam Negeri [2013] MSTC 10-046.

  • The DGIR’s adjustment to median was wrong and does not conform to paragraphs 3.60, 3.61 and 3.62 of the Organisation for Economic Co-Operation And Development Guidelines 2010 (OECD Guidelines 2010).

  • The taxpayer’s 2.25% margin was at arm’s length.

  • The 5 local comparables chosen by the DGIR unilaterally were not applicable because they were dissimilar in functions, risks and assets.

  • Furthermore, the grant payments made by the taxpayer were wholly and exclusively incurred in the production of the taxpayer’s income pursuant to the Agreement and thus, deductible under Section 33(1) of the ITA.

  • The assessments raised for the YAs 2004 and 2005 were time-barred pursuant to Section 91(1) of the ITA.

Being aggrieved by this ruling, the DGIR filed an appeal at the High Court against the SCIT’s decision.

High Court Ruling

On 20.4.2022, the High Court dismissed the DGIR’s appeal.

The High Court ruled the following:

i. In the absence of the DGIR’s own transfer pricing analysis, the taxpayer’s TP documentation prevails. There was also no FAR analysis that was undertaken by the DGIR that was submitted to court.

The relevant excerpt from the judgment is reproduced below:

“It must also be emphasised that the Respondent’s TP documentation is the only TP documentation on transfer pricing available to this court as evidence.

This Court finds that the Respondent had performed a proper functions, assets and risks (FAR) analysis where their TP documentation had properly discerned the respective functions, assets and risks…”

ii. Thus, the DGIR’s adjustment to the median was wrong and against the OECD Guidelines 2010. The taxpayer’s 2.25% margin falls within the interquartile range and thus, it was at arm’s length.

iii. As for the issue of penalty, the main issues in contention in the matter arose from a technical disagreement of the DGIR’s transfer pricing policy. As such, the SCIT’s decision to set aside the penalties imposed by the DGIR on the taxpayer should not be disturbed.

iv. Furthermore, the grant payments made by the taxpayer to PGIOPL are part of a price setting mechanism under the Agreement to ensure that profit is always adjusted to reach the agreed 2.25% margin. Thus, the grant payments were made wholly and exclusively in the production of income pursuant to the Agreement and were deductible under Section 33(1) of the ITA.

v. The DGIR’s Assessments for YAs 2004 and 2005 were time-barred under Section 91(1) of the ITA as the DGIR had failed to provide evidence on negligence, wilful default or fraud under Section 91(3) of the ITA to lift the time bar.

vi. Thus, the DGIR had no basis in law or fact to raise the Assessments for YAs 2004 to 2008 against the taxpayer.

The High Court’s ruling emphasises the significance of having transfer pricing documentation, which played a crucial role in this case. In coming to its decision, the High Court took cognizance of the case of MM Sdn Bhd where it was held that the Appellant’s failure to provide such analysis or report and failure to put its case across to the Respondent’s witness by producing its own transfer pricing report was fatal to its case.

Authored by Nur Hanina Azham, an Associate with the firm’s Tax, SST and Customs practice.

30 March 2023


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