The Special Commissioners of Income Tax in Malaysia delivered a landmark decision on February 2013 in the favour of the taxpayer in the first transfer pricing litigation in Malaysia. The case concerned assessments on a shipping and logistics operator and related to transfer pricing in respect of commission rates, intercompany service charges and the penalties on additional assessments raised.

The question of issue on commission rate was whether the IRB had a legal base as per section 140(1) of the Income Tax Act 1967 (“ITA”) to amend the commission rates as received by the taxpayer. The commission rates received by the taxpayer from its related party have been increased by The IRB by 0.25% for the years of assessment 2002 to 2005.

The issue regarding intercompany service charges was whether the IRB had a legal base as per section 140(1) of the ITA to consider that such services were not provided by its Singapore related party and to ignore the charges for the years of assessment 1998, 1999, 2000 on current year basis, 2001, 2002, 2003, 2004 and 2005.

The penalties issue was whether the IRB had a legal base as per sec. 113(2) of the ITA to impose penalties on additional assessments made for the assessment years 1998 to 2005.

The Special Commissioner’s decision is that:

  1. The adjustments on transfer pricing made by the IRB to be set aside;
  1. The guidelines provided by IRB on transfer Pricing have no force of law, although it was acknowledged that they will be applied retrospectively;
  2. The failure to comply with Section 140(1) and Section 140(5) of the ITA made the assessments as null and void;
  3. The issue on Transfer pricing is not an exact science and the appropriateness of the transfer price is always a matter of judgment; and
  4. The transfer pricing reports of taxpayers and expert evidence offered by the taxpayer were reliable in establishing that the transfer pricing methodology was acceptable.

This case illustrates the importance for a taxpayer to prepare a detailed transfer pricing report that backs up the methodology and computation of the transfer price.