Gruppo Illy and its subsidiary Domori received a tax assessment in which the tax authorities had adjusted the pricing of goods sold by Domori to Agriland under application of the Italian arm’s length provision. During the relevant period, Domori had incurred losses.
According to the tax authorities, two Agriland directors were also Illy Group directors, and on this basis, the tax authorities held that the transactions were controlled under the definition found in Article 110 of the TUIR (the Italian arm’s length provision).
Illy and Domori contested the assessment by filing an appeal, as Agriland was neither part of the group nor otherwise controlled by them.
The Provincial Tax Commission cancelled the assessment, a decision which was later upheld by the Regional Court.
An appeal was then filed with the Supreme Court.
Judgment
The Supreme Court upheld the Regional Court’s decision and set aside the assessment.
Excerpt in English
“In other words, the ruling does not so much resolve the issue on the basis of the symptoms indicated by the office as revealing the absence of influence in the case in question in the light of the principle abstractly identified by the court (control relevant within the meaning of Article 2359 of the Civil Code), but denies at its very root the relevance of such symptoms, which would in fact be relevant for determining mere stable economic influence.
In particular, the Court of Appeal: 1) considers that the fact that two directors (Bardini and Degrassi) are common to both companies is not accompanied by the existence of concrete management initiatives that would have led to Agriland’s economic subordination; 2) notes that the latter is not exclusively or predominantly engaged in the distribution of Domori products; 3) in view of the alleged failure to activate the contractual remedies (termination) provided for the breach of the minimum supply and the communication of sales data, notes that the office does not contest the defence of the counterparty, according to which all this was due to Domori’s insufficient production, with significant set-up costs that would justify its negative results; 4) notes that the office did not even contest the data provided by the other side, according to which Agriland has been in the distribution business for thirty years, with a large network of suppliers and customers, distributes high-quality Italian and foreign products, and has extensive logistics facilities and staff, as specified in the judgment.
It is true that at the end of this examination, the Court of Appeal observes that “the existence of shareholding or contractual ties would therefore appear to be unproven”, but immediately adds significantly “or even just a stable economic influence, obviously different and additional to mere membership of the same group, relevant for the application of Article 110(7) of the TUIR”.
On the basis of this reconstruction, the part of the ground of appeal put forward by the State Attorney’s Office – based on the non-retroactive nature of the amendment to Article 110 cited above and, therefore, on the applicability to the present case of the concept of “control” specific to the original text of the aforementioned provision – is unfounded in that, in fact, the appeal judges fully complied with the obligation to ascertain the existence of a stable economic influence.
Nor can the judgment be criticised, as suggested in the ground of appeal, for having erroneously subsumed the case by requiring the office to prove not only the mere “potentiality” of economic influence, but also its “concreteness”.
This is because the CGT complied with the specific criterion for verifying the existence or otherwise of the influence in question, in the terms set out above, and because it also conducted its investigation with reference to the overall activity of the company deemed to be influenced, not limiting itself to observations regarding the absence of “concrete” evidence of management initiatives indicating Agriland’s subordination through the two directors in common.
All this, moreover, in view of the undoubted burden of proof incumbent on the Administration to demonstrate the existence of actual stable economic influence of one company over another.
For the rest, the observations of the Treasury’s defence are all aimed at a review of the findings of fact made by the appeal judge, which certainly cannot be the subject of the present judgment of legitimacy.”
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