When Numbers Are Not Enough: An Analysis of Evidence in a Transfer Pricing Dispute

1. A Dispute That Began with Numbers

In a Transfer Pricing dispute, numbers are often the starting point of the examination. Profit margins, profit level indicators, quartile ranges, and correction values become the basis for assessing whether an affiliated transaction has satisfied the Arm's Length Principle (ALP). However, is a number alone sufficient to prove the existence of unreasonableness?

Tax Court Decision Number PUT-002677.15/2025/PP/M.IIIA of 2026 concerning the dispute of PT YZN for the 2020 Tax Year offers an interesting perspective. In this case, the positive fiscal adjustment correction made by the tax authority amounting to IDR5,323,058,112 based on a Transfer Pricing test ultimately could not be upheld in its entirety. The Panel of Judges did not merely look at the calculation result of Return on Sales (ROS), but also assessed the substance of Other Income, the basis of the correction, and the sufficiency of the evidence used in the audit.

This case illustrates one important point: in a Transfer Pricing dispute, numbers may be the starting point of the analysis, but the proof of the substance of the transaction is what determines the outcome.

2. The IDR5.3 Billion Correction That Started with ROS

The core of the dispute in this case is the positive fiscal adjustment correction of IDR5,323,058,112 arising from the testing of related-party transactions in the trading segment.

Both the taxpayer and the tax authority essentially used the Transactional Net Margin Method (TNMM). For the trading segment, the profit level indicator (PLI) used was Return on Sales (ROS). Meanwhile, for the services segment, Net Cost Plus Markup (NCPM) was used.

The main difference arose when the tax authority calculated the ROS on the taxpayer's trading segment profit and loss without taking into account Other Income amounting to IDR5,428,634,343.

Read Also: When the Accounting Perspective Meets the Tax Perspective in Court Proceedings

3. Basis of the Correction Calculation

With this treatment, the trading segment's ROS according to the tax authority became -12.14%. This figure is far below the ROS range of the comparable companies, namely Q1: 1.37%, Q2: 1.46%, and Q3: 2.10%.

On this basis, the tax authority concluded that the affiliated transaction did not satisfy the ALP and used the median of 1.46% as the arm's-length profit level. The correction was then allocated to the cost of goods sold in the amount of IDR5,323,058,112.

4. When One Line Item Changed the Test Result

According to the taxpayer, the Other Income of IDR5,428,634,343 is not new operating income that substantively increased the company's profit. The amount is the result of an account reclassification made as part of the financial statement adjustment by the auditor.

The taxpayer explained that this amount consisted of:

• IDR2,539,309,313 originating from the contract penalties account;

• IDR2,889,325,030 originating from the bonus, wages & salaries account related to consultant service fees.

In other words, the issue is not merely whether there is a figure of IDR5.428 billion in the Other Income line item. The more important issue is what economic substance lies behind that figure.

This data shows how sensitive the test result is to the treatment of a single line item in the profit and loss statement. With Other Income taken into account, the taxpayer's ROS becomes 1.73%, which falls within the arm's-length range. Conversely, when this item is excluded, the ROS changes to -12.14%. This difference is not merely a difference in figures; it determines the final conclusion as to whether the affiliated transaction is considered to satisfy or fail to satisfy the ALP.

5. The Substance Behind the Accounting Classification

From an accounting perspective, Other Income is presented as a separate line item. However, for the purposes of the Transfer Pricing test, the question that must be answered is whether the income or expense has a direct relationship with the operating activities that are the object of the test.

The taxpayer argued that the Other Income arose from an expense reclassification during the preparation of the audited financial statements. Moreover, according to the taxpayer, if Other Income is excluded from the calculation, then the expense that gave rise to the reclassification should also be taken into account.

On the other hand, the tax authority maintained the approach that the Other Income should not be taken into account in operating profit because it is not substantively directly related to the company's operating activities. The tax authority also stated that there was no information indicating that the comparable companies included Other Income or a similar non-operating item in the calculation of operating profit.

6. From Calculation to Proof

Interestingly, in the end the Panel of Judges did not merely consider the difference in the ROS calculations between the parties. The Panel placed the matter within the context of evidence.

In its considerations, the Panel referred to the tax audit provisions requiring that the auditor's opinions and conclusions be based on strong and relevant evidence, and compared against the taxpayer's actual circumstances or business activities.

The Panel then found as a matter of fact during the hearing that the tax authority's basis for not recognizing Other Income as part of operating profit was based solely on the profit and loss statement, without further examining the substance of that Other Income.

On this basis, the Panel held that the tax authority's conclusion was inconsistent with the audit provisions referred to in Article 29 of the General Provisions and Tax Procedures Law (UU KUP) and could not be considered reliable.

7. TP Documentation as an Instrument of Proof

During the hearing, the taxpayer succeeded in proving its argument that the related-party transactions satisfied the arm's-length standard through its Transfer Pricing documents.

Transfer Pricing Documentation should not be viewed merely as a document for fulfilling an administrative obligation. Ideally, the document should be able to answer questions that may arise when the transaction is tested, including:

1. Why was the TNMM method chosen?

2. Why was ROS used as the PLI?

3. How were the characterization of functions, assets, and risks determined?

4. Why was a particular account included in or excluded from operating profit?

5. How was the segmented financial statement reconciled with the audited financial statement?

6. How was the affiliated transaction compared with independent companies?

7. Is the benchmarking result consistent with the company's business characteristics?

In this case, the taxpayer's ability to explain the relationship between the financial statements, the account reclassification, the ROS calculation, and the Transfer Pricing documents became an important part of the evidence.

Read Also: Transfer Pricing Compliance: When Documentation Becomes an Evidentiary Instrument

8. Not Simply “ROS Outside the Range”

Put simply, the taxpayer's ROS of -12.14% falls outside the comparable range of 1.37%–2.10%. However, the next question is: is -12.14% the correct ROS to use in testing the transaction in question?

This question matters because the PLI is the result of a series of analytical decisions. The choice of PLI, the determination of the components of operating profit, the segmentation of the financial statements, and the selection of comparable companies are all interrelated.

Accordingly, the benchmarking results should not be read in isolation from the process that produced them.

In this case, the difference in treatment of Other Income produced a very significant difference in ROS, namely from 1.73% to -12.14%.

Read Also: TNMM and the Selection of the Profit Level Indicator: The Urgency of GPM in Rescuing ROS

9. When a Correction Is Not Supported by Adequate Evidence

After considering the facts established at the hearing, the Panel stated that the tax authority's action in making the positive fiscal adjustment correction of IDR5,323,058,112 was found not to be supported by adequate evidence.

Conversely, the taxpayer was found able to prove its argument regarding the arm's-length nature of the related-party transaction through its Transfer Pricing documents. Therefore, the correction could not be upheld.

In its verdict, the Tax Court then granted the taxpayer's appeal in its entirety. Accordingly, this case is not only about whether the taxpayer's ROS falls inside or outside the arm's-length range. More broadly, this case shows how the quality of evidence can determine whether a Transfer Pricing correction can be sustained.

10. Conclusion

A Transfer Pricing dispute is essentially an effort to determine whether the conditions of a transaction carried out by related parties reflect conditions that are as reasonable as those of an independent transaction.

To reach such a conclusion, numbers are indeed necessary. Benchmarking is necessary. The PLI is necessary. However, all of these remain merely analytical tools.

The PT YZN case shows that when a correction is built from a figure that is subsequently affected by the treatment of a particular account, the substance of that account becomes a part that cannot be ignored.

In the end, the Panel did not uphold the IDR5.323 billion correction because it found the correction was not supported by adequate evidence, while the taxpayer was able to prove the arm's-length nature of the transaction through its Transfer Pricing documents.