The Tax Court Panel of Judges Annuls IDR 4.6 Billion Adjustment:
TNMM Ruled the Most Appropriate Method for Toll Manufacturers

PT WRST is a toll manufacturer in the textile industry producing garments such as shirts, trousers, and T-shirts based on orders from its affiliate, SKP Pte., Ltd. All raw materials are supplied by the affiliate, while PT WRST is responsible solely for the production process and charges a cost-plus mark-up on its operating costs. Given this profile, PT WRST does not bear inventory risk, market risk, or credit risk. At the beginning of each fiscal year, the company sets a mark-up of 3%–5% based on internal cost standards, which it considers consistent with industry practice for limited-risk manufacturing entities.

The dispute arose when the Directorate General of Taxes (DJP) imposed a Positive Adjustment to Revenue of IDR 4,671,277,888. DJP argued that PT WRST and its affiliate operated with high levels of integration, rendering the transactional net margin method (TNMM) applied by PT WRST inappropriate. DJP replaced TNMM with the Profit Split Method (PSM), resulting in a higher profit allocation to PT WRST.

PT WRST rejected the adjustment, asserting that its transfer pricing documentation was prepared in accordance with PMK-213/2016 and that it had applied TNMM using a full cost mark-up (FCMU) as the profit level indicator. The benchmarking study showed an arm’s length range of 0.27%–3.14%, with a median of 1.50%, while the company’s actual margin was 2.51%. Since its margin fell within the arm’s length range, PT WRST argued that no further adjustment was required. PT WRST also referred to the OECD Transfer Pricing Guidelines, which state that any point within the arm’s length range satisfies the Arm’s Length Principle.

DJP’s selection of comparables was also challenged. Most of the comparables used—companies in pharmaceutical, nutrition, medical device, and baby product distribution sectors—were deemed irrelevant to the characteristics of the textile manufacturing industry. Further, DJP used inconsistent cost bases between the parties in applying PSM: total costs (COGS + OPEX) for PT WRST, but OPEX only for the affiliate. This inconsistency inflated PT WRST’s relative contribution and created a biased profit split outcome.

The Tax Court Panel of Judges assessed that the core dispute concerned the selection of transfer pricing method and the quality of the comparables. Based on the evidence and arguments presented:

1. TNMM is the Most Appropriate Method for Toll Manufacturers

The Panel emphasized that given PT WRST’s profile as a toll manufacturer with limited functions, assets, and risks, TNMM is the most reliable and widely accepted method for such business models. The Panel referred to OECD Guidelines paragraphs 3.55, 3.60, and 3.62, confirming that no adjustment is required when the tested party’s margin falls within the interquartile range. Since PT WRST’s 2.51% margin was within the benchmarked range, the transaction was considered to comply with the Arm’s Length Principle.

2. DJP’s Comparables Were Fundamentally Misaligned

The Panel disagreed with the four comparables used by DJP, PT TRS Tbk, PT EMT Tbk, PT MPI Tbk, and AGEP Co., Ltd. as their business activities (distribution of baby products, pharmaceuticals, nutrition, medical equipment, and coal) did not reflect the functional profile of a textile toll manufacturer. These companies differed significantly in terms of functions performed, assets employed, risks assumed, and value chain characteristics.

3. PSM Application Was Methodologically Flawed

The Tax Court Panel of Judges found that DJP’s application of PSM relied on inconsistent cost bases, resulting in a distorted profit allocation. Both parties should have been evaluated using the same cost base to fairly reflect their respective economic contributions. This inconsistency was a major factor in concluding that DJP’s PSM approach was unsuitable and unsustainable.

Given the irrelevant comparables and methodological inconsistencies, the Tax Court Panel of Judges concluded that the IDR 4.67 billion revenue adjustment lacked sufficient basis and therefore must be annulled. This decision offers several important takeaways for taxpayers. First, an accurate functional analysis (FAR) remains the cornerstone of selecting an appropriate transfer pricing method. Second, benchmarking must be relevant to the taxpayer’s industry to produce outcomes that align with the Arm’s Length Principle. Third, the reliability of any transfer pricing analysis depends heavily on the quality and comparability of the selected companies. Lastly, comprehensive transfer pricing documentation prepared in accordance with PMK-213/2016 continues to serve as an effective defense instrument. Overall, this case reinforces that in Indonesia’s transfer pricing landscape, the chosen method must reflect the true economic profile of the taxpayer, and tax adjustments cannot be justified when the taxpayer’s profitability clearly falls within a defensible arm’s length range.

A comprehensive analysis and the Tax Court Decision on This Dispute Are Available Here