Czech court upholds transfer-pricing adjustment for contract manufacturer

The dispute concerned the tested return

Inventec (Czech), s.r.o. bought materials from its Taiwanese parent, manufactured server cabinets and supplied the finished products to Hewlett-Packard. For the 2015 tax period, the tax authority increased the company's corporate income tax by CZK28,250,530 and imposed the related penalty. The dispute was not about whether the parties were associated: it concerned the functions and risks that had to enter the arm's-length comparison under section 23(7) of Act No. 586/1992 on Income Taxes.^[1]

Materials could not be stripped from the profit base

The company argued that it was a low-risk toll manufacturer and that a return on value-added costs should exclude materials from the profit-level indicator. The court rejected that characterisation. The record showed that the Czech entity ordered, received and checked materials, managed stocks and shortages, bore inventory risk and handled defective inputs. The tax authority could therefore use a return on total costs under the transactional net margin method rather than removing the material base from the tested return.^[1]

A quantified risk adjustment survived review

The tax administration did not simply treat every material cost as economically equivalent to manufacturing activity. It adjusted the benchmarked return to reflect the taxpayer's material-related functions and risks, using 24.62% as the relevant proportion. The court found no fatal defect in that approach and held that the company had not demonstrated a materially different arm's-length outcome. The appeal was dismissed and the parties were told that no further ordinary remedy was available.^[1]

Functional evidence remains decisive

For multinational manufacturing groups, the judgment underlines that a contract label does not determine the transfer-pricing method. Local procurement steps, title to inventory, quality control, shortage management and responsibility for defective materials can support including input costs in the tested base. Groups using toll-manufacturer or limited-risk policies should compare their agreements with operational evidence and document why their chosen profit-level indicator reflects the actual allocation of functions and risks.^[1]