The recent decision by the Tax Appeals Court of Kenya in the case of Cipla Kenya Limited vs. Commissioner of Inland Revenue sets an important technical precedent on the interpretation of the interquartile range and the use of the median in applying the Transactional Net Margin Method (TNMM) in Transfer Pricing studies.
Background
The dispute arose from a tax assessment by the Kenyan tax authority for the 2018 fiscal year, when it imposed adjustments on the Transfer Pricing basis on Cipla Kenya Limited, a subsidiary of the multinational pharmaceutical company Cipla Medpro (South Africa). The assessment included adjustments to corporate income tax, interest, and penalties, initially amounting to approximately KES 78.6 million, which was subsequently reduced to KES 31.6 million.
The commissioner’s primary argument was that Cipla’s reported profitability—based on an operating margin of 3.02%—fell below the interquartile range determined in its analysis, which established a median of 4.74%. The commissioner argued that this median should be mandatorily adopted under the OECD Guidelines.
Court Ruling: Technical Interpretation of the Interquartile Range
The Court considered the commissioner’s position regarding the mandatory use of the median to be inadmissible. In its analysis, it relied on paragraph 3.57 of the OECD Guidelines, which states that any point within the interquartile range may comply with the Arm’s Length Principle, unless there are comparability defects.
Furthermore, the Court noted that the commissioner had acknowledged comparability defects in the transactions reviewed. Therefore, relying on the mandatory use of the median—according to paragraph 3.62 of the Guidelines—was inapplicable, as that paragraph only applies when there are no material defects. Consequently, the Court concluded that Cipla’s profitability was within acceptable Arm’s Length limits and overturned the Transfer Pricing adjustment.
Operating Costs and the Arm’s Length Principle
Another relevant point addressed by the Court was the deduction of specific labor and operating costs that the commissioner dismissed for alleged lack of documentation. The Court held that, under the TNMM, these costs are determining factors in the analysis of margins and their artificial exclusion distorts the net income, potentially leading to economic double taxation.
The Court noted that the costs claimed were properly accounted for and audited in the company’s financial statements, and that their elimination would create inconsistencies in the application of the method. Consequently, it also overturned the adjustment related to those costs.
Conclusion
This ruling reinforces the importance of rigorous and contextualized analysis of interquartile ranges and Transfer Pricing methods under the OECD Guidelines. It recognizes the validity of reasonable economic approaches for adequate financial documentation.
This case is a reference for multinational taxpayers and tax authorities regarding the technical interpretation of the use of the median and the documentation of operating costs in Transfer Pricing studies. It highlights the need for effective coordination between local rules and international standards, particularly in jurisdictions consolidating their tax legislation on international taxation.
Source: File No. KETAT/223/2025