Burkert Contromatic Italiana s.p.a. is engaged in sale and services of fluid control systems. The italian company is a subsidiary of the German Bürkert Group.
Following a tax audit, the Italian tax authorities issued a notice of assessment for FY 2007 on the grounds that the cost resulting from the transactions with its parent company (incorporated under Swiss law) were higher than the arms length price of these transactions.
The company challenged the tax assessment, arguing that the analysis carried out by the Office had been superficial, both because it had examined accounting documents relating to tax years other than the one under examination (2007), and because the Office, in confirming that the Transactional Net Margin Method (TNMM) was the most reliable method, in order to verify whether the margin obtained by the company corresponded to the arm’s length value, had carried out a comparability analysis (aimed at identifying the net remuneration margin obtained by independent third parties in similar transactions), identifying only three comparables..
The tax authorities replied that the analysis carried out using the Transactional Net Margin income method, had revealed an average Return On Sales (R.O.S.) equal to 13.35 %, with the consequent ascertainment of the company’s higher profitability and the recovery for taxation of intra-group costs exceeding the normal value.
The Provincial Tax Commission decided in favor of Burkert Contromatic Italiana s.p.a., noting that the choice of companies made by the tax authorities was completely different from that made by the company. In particular, they pointed out that the benchmark analysis carried out by the taxpayer, and attached to the appeal, had the objective of identifying independent companies operating in the national territory engaged in activities comparable to that of the taxpayer itself, i.e. commercial companies that purchased products from third-party suppliers and resold them on the national market to third-party customers; this comparison had indicated an average profitability of 4.85% compared to that ascertained by the Office of 10.26%. It also excluded that the Office had provided clear and irrefutable evidence of the methodology applied in the assessment.
An appeal was lodged by the tax authorities, which complained of failure to state reasons or insufficient reasons on decisive facts and infringement of Article 110, paragraph 7, since the grounds of the judgment did not show the reasons in law justifying the acceptance of the appeal.
The Regional Tax Commission rejected the appeal of the tax authorities. It held that there was no “omitted and/or grossly inadequate motivation on decisive and controversial facts” on the part of the judges at first instance and even less a violation of the provisions of Article 110, paragraph 7, of the TUIR.
The tax authorities then filed an appeal with the Supreme Court. In the appeal the tax authorities stated that it is a clear case of motivation by reference, since the regional tax court confines itself to using vague and general formulas, stating that the judgment of the provincial tax court is “clear” and “well-founded”, without giving any reason to understand why the objections raised by the tax authorities to the judgment at first instance were unfounded and why the reasoning provided by the judge at first instance was shared.
Judgement of the Supreme Court
The Supreme Court decided in favor of the tax authorities. It set aside the judgment under appeal and referred the case back to the court of first instance, with a different composition.
“Referring to the judgment appealed against, the C.T.R. [Commissione tributaria regionale] limited itself to stating that the first judges, ruling on the benchmark analysis, “for the purpose of identifying the companies comparable to the appellant and the relevant interquartile range of market value”, carried out by the Office on the basis of a comparison with three companies, had concluded that the Administration had not offered irrefutable evidence of the methodology applied in the assessment. It did not, however, adequately explain either the reasons why it intended to adhere to the decision of the Provincial Tax Commission and, therefore, the reasons why the method used by the Office could not be considered reliable, or why the method used by the taxpayer company should be preferred, and it failed to examine the specific observations made by the Tax Office, which had clearly and exhaustively set out the methodology actually applied and the results of the audit. In so doing, it failed to explain whether the assessment made by the tax authorities deviated from the criteria that must guide the analysis of intra-group transactions aimed at ascertaining whether the taxpayer company complied with the arm’s length price by comparing it with similar transactions carried out by independent third party companies.
The taxpayer’s defence is therefore not adequately argued and the overall reading of the judgment, which also includes the factual premise and the arguments put forward by the parties at the various stages of the proceedings, does not bear witness to an independent assessment by the appeal court because it does not allow for an understanding of the assessment made with regard to the transfer pricing analysis carried out by the Office.”