Berry Ratio Dominates! Why Related Party Sales Cannot Be a Benchmark for Arm's Length Profit?

Transfer Pricing Dispute: ROS vs. Berry Ratio in TNMM Method (PT NSDI)

The transfer pricing dispute between PT NSDI and the Directorate General of Taxes (DGT) culminated in a technical debate regarding the selection of the most reliable Profit Level Indicator (PLI) under the Transactional Net Margin Method (TNMM). The tax authority imposed a significant adjustment on the Cost of Goods Sold (COGS) by utilizing Return on Sales (ROS) as the denominator—a move that was subsequently fully overturned by the Tax Court.

The Conflict: Limited Risk Distributor Characteristics

The core of the conflict lies in the taxpayer’s operational characteristics as a limited risk distributor, where nearly all sales (99.9%) are conducted with affiliated parties. The DGT argued that ROS is the most common PLI for testing distribution functions. However, PT NSDI vigorously contested this based on OECD Transfer Pricing Guidelines, asserting that the profitability of a limited risk procurement entity should be measured via the Berry Ratio (Gross Profit to Operating Expenses).

Judicial Review: Achieving an Apple-to-Apple Comparison

The Board of Judges emphasized that to achieve an apple-to-apple comparison, the denominator used in TNMM must be the variable least influenced by affiliated transactions. Since the sales values were controlled by the affiliate group, using them as a denominator would lead to bias. The Judges ruled that operating expenses (derived from independent transactions) are the most accurate value driver to measure the remuneration for the functions performed by a limited risk entity.

Implications: Functional Proof in TP Documentation

The implications of this decision provide an important precedent for multinational companies in Indonesia. PT NSDI’s victory demonstrates that robust Transfer Pricing documentation must functionally prove why one PLI is superior to another. For taxpayers, consistency between the risk profile, functions performed, and the choice of denominator in comparability analysis is the ultimate key to winning tax litigation disputes related to transfer pricing.