De Grisogono Italia s.r.l. is an Italian company that sells luxury watches and jewellery through its boutiques in Rome and Porto Cervo. It purchases jewellery and watches from its Swiss parent company, De Grisogono SA, for resale on the Italian market. For the years 2014–2016, the company documented its transfer pricing using the TNMM with a net cost plus indicator, treating itself as a limited risk distributor.
Following a tax audit, the Revenue Agency issued additional tax and VAT assessments for 2014–2016. On transfer pricing, it accepted the use of TNMM but rejected the taxpayer’s profit level indicator and comparables. Using the AIDA database, it built its own set of external comparables and tested De Grisogono Italia’s results with EBIT margins, concluding that the company’s persistent losses showed that the prices paid to the Swiss parent were far from the arm’s length price. The assessments also challenged amortisation of goodwill and the VAT treatment of certain sales as exports.
De Grisogono Italia challenged the assessments. It argued that the Revenue Agency’s TNMM study was unreliable because the selection of comparables and the comparability analysis did not take proper account of contractual terms, economic circumstances, market conditions and business strategies, as required by the OECD Transfer Pricing Guidelines. On VAT, it maintained that the disputed sales were exports to non EU customers under Article 8, not tax free sales to travellers.
The Provincial Tax Commission upheld the appeal in full. It annulled the transfer pricing adjustment, finding the Office’s benchmarking defective, and cancelled the VAT adjustment on the basis that the sales were exports arranged by the supplier for non EU customers and did not fall under the special regime for travellers. The Revenue Agency appealed to the Regional Tax Commission, which rejected the appeal. The Regional Commission referred to Supreme Court case law on TNMM and comparability and confirmed that the Office had not carried out an adequate comparability analysis for the selected companies.
The Revenue Agency then filed an appeal with the Court of Cassation.
Judgment:
The Court of Cassation rejected the appeal and confirmed the judgment of the Regional Tax Commission.
The Court restated its case law on Article 110(7) TUIR and TNMM, stressing that a proper application of TNMM requires careful selection of comparables and analysis of all relevant comparability factors, including contractual terms, economic circumstances, market conditions and business strategies. It held that the Regional Commission had correctly applied these principles in finding the Revenue Agency’s benchmarking unreliable and that this evaluation of the evidence could not be revisited at the cassation stage.
On VAT, the Court declared the Revenue Agency’s ground inadmissible because it would require a new assessment of the facts already made by the lower court. The decision of the Regional Commission therefore remained in force, with full annulment of the transfer pricing and VAT adjustments.
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