Tax Court Validity of CUP and Multi-Year Data Amid Pandemic:
The DJP correction is valued at USD 532,624 and has been declared null

The Arm’s Length Principle once again took center stage in a transfer pricing dispute between PTMCPI and the Directorate General of Taxes (DJP). A correction amounting to USD 532,624 on the Cost of Goods Sold (COGS) in the 2021 Corporate Income Tax Overpayment Assessment Letter (SKPLB) was initially made on the grounds that PTMCPI had not properly applied the arm’s length principle. However, through a comprehensive and OECD-aligned Transfer Pricing Documentation (TP Doc.) prepared in accordance with PMK 213/PMK.03/2016, PTMCPI successfully overturned the adjustment at the Tax Court level.

PTMCPI is a chemical manufacturing company producing polyurethane materials, resins, and other derivative products for industrial applications. In the course of its business, MCPI engaged in several intra-group transactions. In its Local File for Fiscal Year 2021, MCPI adopted two transfer pricing methods: the external Comparable Uncontrolled Price (CUP) Method for purchases of Cosmonate T-80 and Cosmonate M-200 K from related parties, and the Transactional Net Margin Method (TNMM) to test the arm’s length nature of other affiliated company transactions, both purchases and sales. This approach was fully supported by segmented financial statements and a written declaration prepared in line with PER-22/PJ/2013 on audit guidelines for related-party transactions.

The dispute stemmed from differing views between MCPI and DJP regarding the appropriateness of the transfer pricing method and data applied in testing the arm’s length nature of the transactions. First, DJP rejected MCPI’s use of the external CUP method for purchases of Cosmonate T-80 and M-200 K, arguing that the comparability analysis was insufficient and that the ICIS (Independent Chemical Information Services) database did not provide payment term details. Based on this, DJP contended that the TNMM should instead be applied to all raw material purchases.

Second, DJP disregarded MCPI’s use of three-year weighted average financial data (2019–2021) for analyzing the profitability of related-party transactions other than Cosmonate, asserting that PMK 213/2016 requires an ex-ante approach limited to data of the fiscal year under review (2021). DJP further claimed that the COVID-19 pandemic did not have a significant impact on MCPI’s industry, rendering the multi-year data approach irrelevant.

In response, MCPI maintained that Cosmonate products are commodities with transparent market prices, making the CUP method the most appropriate approach. Based on ICIS market data for 2021, MCPI demonstrated that its purchase prices were consistently at or below market levels, including (1) January 2021: ICIS USD 2,542/ton vs. purchase USD 2,540/ton (2) April 2021: ICIS USD 1,998/ton vs. purchase USD 1,950/ton (3) October 2021: both USD 2,050/ton (4) December 2021: both USD 2,350/ton

These data confirmed that MCPI’s transactions were within the arm’s length range. Regarding differences in payment terms, MCPI emphasized that such differences represent comparability adjustments, not grounds to reject the CUP method. Furthermore, for other intercompany transactions (non-Cosmonate purchases and related-party sales), MCPI used multi-year weighted averages (2019–2021) to produce a more reliable and representative result. Referring to PER-22/PJ/2013 and SE-50/PJ/2013, MCPI argued that multi-year analyses are essential to mitigate potential distortions from year-on-year economic fluctuations. MCPI’s average operating margin of 6.41% remained well within the arm’s length range of 3.09%–7.27%, after appropriately excluding loss-making comparables in accordance with paragraphs 3.75–3.79 of the OECD Transfer Pricing Guidelines.

After examining all evidence and arguments, the Tax Court Panel of Judges determined that for commodity transactions involving chemical products such as Cosmonate T-80 and M-200 K, the external CUP method was indeed the most appropriate method, provided reliable market data are available. The Panel acknowledged ICIS as a transparent, credible, and globally recognized price source within the chemical industry. Moreover, the Panel emphasized that differences in payment terms should be addressed through comparability adjustments rather than used to reject the CUP method altogether. DJP failed to demonstrate that such differences materially affected comparability. Therefore, MCPI’s application of the CUP method was deemed more rational and aligned with the Arm’s Length Principle than the TNMM approach proposed by DJP.

On the issue of multi-year data, the Tax Court Panel of Judges interpreted that the ex-ante approach under PMK 213/2016 does not prohibit the use of data from multiple years. In periods of economic volatility, such as during the COVID-19 pandemic, multi-year data may produce a more reliable representation of business conditions. the Tax Court Panel of Judges further referred to Decision No. PUT-107502.15/2013/PP/M.XVIIIB Year 2019, which had previously affirmed the validity of multi-year analysis in abnormal economic situations. After reviewing MCPI’s documentation, the Tax Court Panel of Judges found that MCPI had appropriately selected normal and relevant comparables, thereby enhancing the reliability of the analysis.

Ultimately, the Tax Court Panel of Judges concluded that MCPI successfully demonstrated the arm’s length nature of its intercompany transactions through a comprehensive, logical, and well-documented TP Doc. consistent with PMK 213/PMK.03/2016, PER-22/PJ/2013, and the OECD Transfer Pricing Guidelines. Conversely, DJP failed to substantiate the basis of its adjustments. Accordingly, the Court granted MCPI’s appeal in full and nullified the USD 532,624 correction for Fiscal Year 2021.

This ruling highlights the Tax Court’s emphasis on empirical evidence and analytical consistency in transfer pricing examinations. It reaffirms that compliance extends beyond administrative completeness, requiring robust functional, asset, and risk (FAR) analysis, the selection of the most appropriate method, and defensible comparability justifications.

In essence, the decision reinforces that both the external CUP method and multi-year data remain acceptable approaches under Indonesian transfer pricing rules, provided they are supported by credible, reasonable, and well-documented analyses that reflect real economic conditions.

Comprehensive Analysis and the Tax Court Decision on This Dispute Are Available Here.