Tax Case Study: The Fight Over Transfer Pricing’s “Median Point” Rule

For years, transfer pricing audits in Malaysia followed a pattern that unsettled even fully compliant taxpayers: profit margins that sat safely within the accepted benchmark range were still pushed upward by the Inland Revenue Board (IRB) — straight to the median point of that range — triggering hefty additional assessments and penalties.

That practice was tested and dismantled in Ketua Pengarah Hasil Dalam Negeri v Sandakan Edible Oils Sdn Bhd [2023] 1 LNS 616 — now the foundational case for how Section 140A(2) of the Income Tax Act 1967 is interpreted in Malaysia. Here’s what the case established, how the IRB responded, and what it means for your transfer pricing documentation today.

Why Was the “Median Point” Adjustment Disputed?

Section 140A(2) requires that where a taxpayer transacts with an associated person for the acquisition or supply of property or services, that person must determine and apply the arm’s length price.

The dispute centered on what “arm’s length price” actually means in practice:

• The IRB’s position: Under Section 140A and the Income Tax (Transfer Pricing) Rules 2012, the arm’s length price isn’t a broad range — it’s a specific target. If a taxpayer’s margin sat below the median point of the benchmarking analysis, the IRB argued it had the residual power to adjust upward to the median to “protect public revenue.”
• The taxpayer’s position: Supported by the OECD Transfer Pricing Guidelines, taxpayers argued transfer pricing is not an exact science. If a margin falls anywhere within the standard Interquartile Range (IQR) — the 25th to 75th percentile — it satisfies the arm’s length principle, and no adjustment is legally permissible.

The Sandakan Edible Oils Case

Sandakan Edible Oils, a refining company selling products to overseas related parties, went through a transfer pricing audit where the IRB accepted the taxpayer’s own list of comparable companies — and the resulting benchmarking analysis showed the company’s margins fell within the IQR.

Despite that, the IRB still adjusted the margin upward to the median point, raising millions in additional taxes plus a 25% penalty.

From SCIT to High Court: How the Rulings Dismantled the IRB’s Approach

Both the Special Commissioners of Income Tax (SCIT) and, subsequently, the High Court sided with the taxpayer — on three key grounds.

A. The Median Is an “Arbitrary Measure”

The High Court held that using the median point as a default, defensive benchmark against a compliant taxpayer is arbitrary. Profits naturally fluctuate due to real operational factors; expecting a company to hit or exceed a single mid-point every year ignores commercial reality.

B. The Burden of Proof Sits With the IRB

If the IRB wants to adjust a margin that already falls within the range, the burden is on the Revenue — not the taxpayer — to identify and prove specific, material comparability defects. An unsubstantiated allegation isn’t enough; absent solid empirical evidence, the taxpayer’s contemporaneous transfer pricing documentation stands.

C. Alignment With OECD Guidelines

The rulings confirmed that Section 140A(2) must be read in line with paragraph 3.60 of the OECD Guidelines: if results fall within the arm’s length range, no adjustment should be made.

The Legislative Backlash: The 2023 Transfer Pricing Rules

The IRB’s judicial losses under Section 140A triggered a fast legislative response. The Income Tax (Transfer Pricing) Rules 2023 [P.U.(A) 165] effectively rewrote the rules for Year of Assessment (YA) 2023 onward — codifying much of what the courts had just called arbitrary:

• A narrower “safe” range. The standard IQR (25th–75th percentile) is now restricted to the 37.5th–62.5th percentile.
• Statutory median adjustments. The DGIR can now adjust a controlled transaction to the median, or up to the 62.5th percentile, if uncontrolled transactions are deemed to have a “lesser degree of comparability.”
• Automatic median rule. If a taxpayer’s price falls entirely outside the range, the arm’s length price is now automatically taken to be the median point.

Dimension	Post-Court Jurisprudence (Pre-2023)	Under the 2023 TP Rules (YA 2023+)
Acceptable range	Full IQR (25th–75th percentile)	Restricted range (37.5th–62.5th percentile)
Adjustment to median	Prohibited if taxpayer falls within range	Explicitly permitted if IRB identifies “comparability defects”
Defensive strategy	Reliance on OECD guidelines, proving economic fluctuations	Strict local documentation; anticipating compressed margin targets

What This Means for Malaysian Businesses

Three takeaways define the current landscape for corporate tax groups:

1. A “range” was structurally valid, pre-2023. The courts confirmed transfer pricing is an economic science, not a mathematical certainty — margins anywhere within a verified IQR satisfied the arm’s length principle.
2. The IRB can’t act arbitrarily. To justify an adjustment within an established range, the Revenue must identify and empirically prove specific comparability defects — it can’t simply default to the median.
3. The paradigm has shifted, post-2023. The 2023 Rules legalized tighter controls for YA 2023 onward: a narrower 37.5th–62.5th percentile range, and a statutory power to adjust to the median wherever comparability defects are alleged.

The judicial precedent from Sandakan Edible Oils remains a powerful shield for resolving open audit years prior to YA 2023 — it firmly established that the Revenue cannot override economic reality without discharging its legal burden of proof. Going forward, though, compliance strategy needs to account for the tighter 2023 framework.

How to Prevent Transfer Pricing Discrepancies

To defend your transactions and avoid pricing adjustments and the statutory 5% surcharge under Section 140A(3C), shift from passive documentation to defensive, audit-ready compliance:

1. Maintain true contemporaneous documentation. Your Transfer Pricing Documentation (TPD) must be completed before your tax return’s filing due date for that YA — not stitched together after an audit notice. Fabricating or heavily altering a report post-deadline fails the “contemporaneous” test and risks Section 113B penalties of RM20,000–RM100,000 per YA.
2. Tighten your benchmarking targets. With the safe harbor compressed to the 37.5th–62.5th percentile, aim to position your tested party’s margins directly around the median or safely within that narrower corridor — sitting near the old 25th percentile baseline now makes you an automatic adjustment target.
3. Build a “commercial substance” defense file. For every intra-group service or fee (management fees, royalties, inter-company financing), maintain an active benefit-test file with timesheets or project logs, proof of commercial benefit, and a clear FAR (functions, assets, risks) analysis.
4. Implement strict rejection logs for comparables. Document, step by step, why specific companies were excluded from your comparables set. A robust, objective, contemporaneous rejection log makes it much harder for the IRB to dismiss your peer selection and collapse your range.
5. Account for year-on-year economic fluctuations. If margins dip in a tough financial year, don’t leave it unexplained — include a dedicated Economic & Industry Analysis section quantifying the external factors involved, and show that independent competitors saw similar drops.

Conclusion

The Sandakan Edible Oils line of cases marks a pivotal moment in Malaysian transfer pricing enforcement: it confirmed that the IRB cannot arbitrarily push compliant taxpayers to a “median point” without discharging a real burden of proof. But the 2023 Transfer Pricing Rules have since narrowed the safe harbor and given the DGIR clearer statutory footing to make median adjustments going forward.

For corporate groups with related-party transactions, this means transfer pricing documentation can no longer be a once-a-year compliance exercise — it needs to be built proactively, with benchmarking, rejection logs, and commercial substance evidence ready before an audit ever starts.

To deepen your understanding, explore these related Malaysian tax case studies:

• How Bank Guarantee Fees Became Tax-Deductible: The PNK Case