Convergys Italy Srl had provided call centre services to a related Dutch company for which it received a 5% mark-up on costs.
Following an audit, the tax authorities found that the benchmark study on which the 5% was based included loss-making companies. After removing the loss-making companies, the median mark-up of the benchmark study was 7.42%. A tax assessment was issued adding the additional income to the taxable income.
Convergys Italy Srl appealed, but the Provincial Tax Commission and the Regional Tax Commission later ruled in favour of the tax authorities.
An appeal was then lodged with the Supreme Court.
Judgment of the Court
The Supreme Court ruled in favour of Convergys Italy Srl, stating that loss-making companies should only be excluded from the benchmark study if the losses are due to exceptional – not comparable – circumstances.
Excerpt in English
“…The company then proceeded to determine the mark-up applied to call-center services through the preparation of two transfer pricing studies, namely the Foundation Report, prepared at group level prior to the notice of the tax audit, and the National Transfer Pricing Documentation, prepared pursuant to Art. 26 of Decree-Law No. 78 of 31 May 2010, converted by Law No. 122 of 30 July 2010, as well as the Provision of the Director of the Revenue Agency of 29 September 2010; the latter documentation includes the benchmark analysis made by the company using the AIDA database, which collects data only from domestic companies.
On the basis of these results, it can be inferred that the 5% value applied by the taxpayer company is positioned within the arm’s length range, being in the upper part of that range.
Instead, the Office applied a higher normal value (7.42%), using different criteria, and in particular eliminating from the price analysis, for each tax year concerned, a number of companies with no accounting data or with negative operating results in at least two out of three tax years. The contested judgment found this methodology to be correct, and it must nevertheless be observed that such further criteria do not appear to be consistent with the OECD Guidelines and do not find any justification for the purpose of selecting (as envisaged by the aforementioned Guidelines) a sample of companies comparable to Stream Italy, since it is not possible to exclude in advance certain potentially comparable companies merely because they have recorded reduced and/or negative results in some years. In fact, it is normal that in a market of free competition there are also loss-making companies, or in any case companies lacking certain accounting data. In fact, the OECD guidelines themselves, in paragraph 1.59 et seq. admit that one of the factors determining comparability are company strategies, and therefore provide for the inclusion in the benchmark analysis of those companies that, in order to penetrate a given market or to increase their share in the same market, set a price for their products that is lower than the price charged on the market for comparable products, or temporarily incur higher costs and therefore make lower profits than other taxpayers operating in the same market.
The OECD Guidelines do not provide for the elimination tout court of loss-making companies or companies with low or no book values, if these results are achieved in order to obtain better results in future years; according to para. 3.43, certain companies may be excluded when they are in ‘special situations’, such as start-ups, bankrupt companies, etc., if it is clear that these special situations do not represent appropriate comparisons. It was precisely this analysis that was completely omitted by the C.T.R., which apodictically considered the Office’s criterion to be valid, without making any assessment of the situation of the companies excluded from the comparison.
Moreover, the appellant had pointed out that the Office, in the process of forming the sample of companies for the benchmark analysis, had included companies that for size and/or activity carried out could not have been comparable with Stream Italy s.r.l., and on this point the C.T.R. did not make any factual analysis.
With specific reference, then, to the costs relating to the management services “Executive”, “Facilities” and “IT”, provided by the parent company Stream Europe, it should be noted that the costs incurred by a company for the purchase of services, on the basis of a contract entered into with other entities belonging to the same group, satisfy the conditions set forth in Article. 109 of Presidential Decree No. 917/1986 (inherence, objective determinability, certainty and effectiveness), which allow their deduction, if the group company documents the contracts in which the services received are provided for and regulated.
In the present case, the appellant produced, at first instance, a contract for intra-group services, detailing the types of services that Stream Europe provided to Stream Italy s.r.l. and illustrating the manner in which those services were remunerated.
Consequently, the C.T.R. should have analysed this contract in order to verify whether or not the conditions for the deduction of such costs were actually met.”
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