The Court Cancels the Rp112 Billion Correction: The Directorate General of Taxes Inconsistency in Rejecting the Comparable Companies is Deemed Unfounded

The dispute between PTSUM and the DGT once again underscores the importance of consistency in selecting comparable companies in transfer pricing analysis. PTSUM is a company engaged in the broiler farming industry, producing live birds through partnership schemes with contract growers (plasma farmers) as well as its own company-owned and managed farms.

In the course of its business operations, all related-party transactions undertaken by PTSUM are conducted with affiliates domiciled in Indonesia. PTSUM purchases livestock production inputs (“Sapronak”) from its related parties, consisting of day-old chicks (DOC), animal feed, veterinary medicines (such as disinfectants and vaccines), as well as farming equipment.

The dispute arose when the DGT rejected four out of the eight comparables used by PTSUM in its transfer pricing analysis. The affiliated transactions were tested under the Transactional Net Margin Method (TNMM), with the Mark-up on Total Cost (MTC) applied as the profit level indicator. The four comparables ignored by the DGT were AKF Co. Ltd, NS Co. Ltd, VPT Company, and KCF Co. Ltd. According to the DGT, these companies were not comparable to PTSUM, as they operated in different lines of business namely, the production of animal feed and poultry eggs.

This rejection had a significant impact on the outcome of the arm’s length analysis. Based on the financial data of the final set of comparables used by PTSUM for fiscal years 2016–2018 (multi-year data), the Mark-up on Total Cost (MTC) was determined at the first quartile (Q1) of 1.91%, the median (Q2) of 3.28%, and the third quartile (Q3) of 4.91%. However, after the DGT excluded the four comparables, only four remained—DV Corporation, DFT Co. Ltd., VJS Company, and JPF Sdn. Bhd. As a result, the interquartile range shifted significantly, with Q1 increasing to 4.33%, the median (Q2) rising to 5.46%, and Q3 reaching 6.78%.

The widening of the interquartile range had a direct impact on the calculation of the arm’s length profit. PTSUM’s MTC ratio for fiscal year 2019 was recorded at 2.67%, while the median (Q2) under the DGT’s analysis stood at 5.46%, resulting in a difference of 2.78%. This variance became the basis for the DGT to make a positive adjustment to PTSUM’s operating profit amounting to IDR 112,373,654,000. PTSUM argued that such adjustment did not reflect an objective application of the arm’s length principle, as the DGT only retained comparables with relatively higher profit margins.

Upon reviewing all evidence and arguments presented by both parties, Tax Court Panel of Judges conducted an in-depth examination. The Tax Court Panel of Judges found inconsistencies in the DGT’s criteria for accepting or rejecting comparables. First, the DGT rejected three companies NS Co. Ltd, VPT Company, and KCF Co. Ltd on the grounds that they operated in the animal feed industry and were therefore not comparable to PTSUM’s business activities. However, the DGT simultaneously accepted other companies with similar business profiles, such as DV Corporation and DFT Co. Ltd., both of which engage in poultry farming, chicken meat production, and animal feed manufacturing. This inconsistency indicates that the DGT’s approach in selecting comparables was not applied in a consistent and objective manner.

Second, the DGT rejected AF Co. Ltd. on the grounds that the company was engaged in poultry egg production and therefore deemed not comparable. On the other hand, the DGT accepted VJS Company and DV Corporation as final comparables, despite both companies having significantly more diversified business activities. For instance, DV Corporation is not only engaged in poultry farming but also in cattle and swine farming, food processing, and owns its own trademarked products. Similarly, VJS Company operates in the poultry sector while also focusing on the processing and trading of fresh meat products, including beef and pork.

This further reinforces the assessment that the DGT did not apply the comparability criteria consistently, but rather selectively based on the profit levels of the comparables. Evidently, the DGT rejected AKF Co. Ltd., NS Co. Ltd., VPT Company, and KCF Co. Ltd., each of which had relatively low weighted average mark-ups on total cost for the 2016–2018 period 0.39%, 1.47%, 2.06%, and 2.36%, respectively. Conversely, the DGT retained only the four companies with higher profitability — DV Corporation, DFT Co. Ltd., VJS Company, and JPF Sdn. Bhd. whose weighted average MTCs were 7.48%, 6.54%, 4.20%, and 4.37%, respectively. Such a selective approach clearly indicates the presence of cherry-picking practices in the selection of comparables.

Considering all facts and evidence submitted, The Tax Court Panel of Judges concluded that the DGT’s rejection of four comparables could not be justified. The Panel fully granted PTSUM’s appeal and annulled the Positive Fiscal Adjustment amounting to IDR 112,373,654,000.

In this case, the Panel placed significant emphasis on the consistency of comparability criteria in transfer pricing analysis. The decision underscores that the selection of comparables must not be conducted selectively (cherry picking) by relying solely on certain favorable factors while disregarding other relevant information. Instead, comparables should be determined based on economically justifiable and relevant business characteristics.

For the DGT, this ruling serves as a reminder that any adjustment to related-party transactions must be supported by a transparent and consistent analytical methodology. Rejection of comparables without objective reasoning may ultimately weaken the tax authority’s position before the Tax Court.

For taxpayers, PTSUM’s victory highlights the importance of maintaining a comprehensive, credible, and empirically supported Transfer Pricing Documentation (TP Doc). Such documentation is a key instrument to objectively demonstrate that the applied method and selected comparables comply with the Arm’s Length Principle (ALP) in practice.