IN an important decision the Full Bench of the Australian Federal Court recently held that that there is not only one arm's length consideration and that goods will change hands at prices which are different from the market value for legitimate reasons, such as a need to secure long term or large volume arrangements or for example, with securities, to acquire control. In the present case, the taxpayer proved that the prices paid by it were less than the prices paid by independent comparable purchasers and as such those prices were at arm's length.

Sales can be comparable despite not being identical. The CUP methodology can be applied to a broader range of transactions. The Court referred to the OECD Transfer Pricing Guidelines saying that to be comparable means that none of the differences between the situations being contemplated could materially affect the situation or that reasonably accurate adjustments could be made to eliminate such differences. The Court rejected the notion that an arm’s length price required all factors other than ownership to be identical.

The Court recognized the fact that losses, including long-term losses, may be evidenced by commercial reasons and not purely as a result of inflated prices.This was a case taken to the Federal Court by the Commissioner against SNF (Australia) Pty Ltd. SNF carried on the business of manufacturing and selling industrial chemicals known as polyacrylamides, which are principally used in the cleansing of water in an industrial setting. As part of its business, SNF purchased chemicals from related foreign companies and sold these to third party customers. Notices of assessment were issued to the taxpayer, increasing the taxable income of the taxpayer on the basis that it had paid more than an arm's length price in respect of acquisitions of the products from non-resident related party suppliers.