Cadence Design System Srl received a sales commission of 29% under a written agreement dated 1999 with a related party in Ireland. However, in 2003 the commission rate was changed to only 20%. The change was communicated to Cadence Design System Srl by e-mail from the Irish company dated 6/08/2002.
Following an audit, the tax authorities issued an assessment where the taxable income was calculated on the basis of the commission rate originally agreed by the parties.
A complaint was filed by Cadence and in 2010 the regional tax court (CTR) issued a decision where the commission rate was set to 22.38% for FY 2003 based on a transfer pricing study provided in the case.
Not satisfied with the decision an appeal was filed with the Supreme Court.
Judgement of the Supreme Court
The Supreme Court dismissed the appeal and upheld the decision of the regional tax court.
Excerpts
“The ruling in question, in fact, inferred the existence of greater revenues from the clause in the (written) commission agreement between the sister companies, under which the consideration due to the taxpayer by the Irish company was set at 29% of the revenues.
In compliance with the evidentiary mechanism of Article 39(1)(d), the CTR, therefore, by an assessment of merit that cannot be reviewed by the court of legitimacy, ruled out that the factual elements relied on by the appellant to demonstrate the reduction of the commission from the amount originally provided for, were capable of eliminating the probative effectiveness of the relevant contractual clause.”
“The appellant complains that the CTR applied the erroneous regula iuris according to which, in the absence of contrary proof on the part of the taxpayer, the taxpayer’s claim, assisted by a presumption iuris tantum of foundation, should be upheld.
It points out that the appellate court: “should have ascertained whether documentation existed, i.e. positive proof of the office’s claim and, in the absence of any proof of the Treasury’s assumption, should have allowed the taxpayer’s appeal.” (See p. 94 of the appeal).
He submits that, in so doing, the appellate court failed to notice that the percentage provided for in the contract had then been modified by the parties, as attested by the e-mail of 6/08/2002, addressed by the Irish sister company to the Italian taxpayer, which indicated the new commission percentage of 20%.
According to the defence, the CTR, by disregarding this element of knowledge, also infringed Article 11 of the Vienna Convention, which recognises that a contract of sale between intra-group companies, belonging to different States, does not need to be in writing, ad substantiam or ad probationem, and indeed is not subject to any formal requirement.
“The CTR, on the contrary, presumed the existence of greater revenues on the basis of the negotiation clause referred to several times above, and, subsequently (with a judgement on the merits, unquestionable in the court of legitimacy), did not find that the taxpayer had provided evidence of the reduction of the percentage of 29%, denying, inter alia, that the e-mail from the Irish company, addressed to the appellant, communicating the reduction of the commission percentage from 29% to 20%, was capable of: “invalidate the very different conclusion of the written contract” (see page 5 of the contested judgment).”
“In the present case, it is clear that the judgment of appeal is not criticised for a motivational defect concerning a historical fact that is controversial and decisive for the judgement, but rather, in an inadmissible manner, for the relevance that it attributed to certain concrete elements of the case (starting with the written contract that provided for a commission percentage of 29%), to the detriment of others, deemed irrelevant (for example: the e-mail of 6/08/2002), in order to recognise and affirm the validity of the tax assessment.”
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Cass 27-12-2018 no 33406