Italy vs Prinoth S.p.A., December 2022, Supreme Administrative Court, Case No 36275/2022

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Prinoth S.p.A. is an Italian manufacturer of snow groomers and tracked vehicles. For a number of years the parent company had been suffering losses while the distribution subsidiaries in the group had substantial profits.

Following an audit the tax authorities concluded that the transfer prices applied between the parent company and the distributors in the group had been incorrect. An assessment was issued where the transfer pricing method applied by the group (cost +) was rejected and replaced with a CUP/RPM approach based on the pricing applied when selling to independent distributors.

An appeal was filed by Prinoth S.p.A. which was rejected by the Court of first instance. The Court considered “the assessment based on the price comparison method to be well-founded, from which it emerged that in the three-year period from 2006 to 2008 the company had sold to its subsidiaries with a constant mark-up of 11.11 per cent, while in direct sales to end customers it had applied a mark-up of 32 per cent and in sales to dealers a mark-up of 25 per cent, 22 per cent and 20 per cent in the various years, and pointed out that these prices were perfectly comparable, since the products were of the same type, under conditions of free competition and at the same marketing stage; pointed out that the resale price criterion also corroborated these results as well as the profit comparison method, finding that Prinoth, in the years from 2007 to 2011, had suffered losses of approximately €4 million while the subsidiaries had made profits of approximately €20 million, which was not consistent with the choices of an independent operator Finally, the Court did not accept Prinoth’s defence that, due to the particular nature of the products and the marketing methods used, the only appropriate method was the cost-plus method, which was accepted by the first judges but not accepted because it led to completely different results, due to the erroneous data used, because in the master files and local files made available by Prinoth, the costs not relating to production were arbitrarily allocated. These considerations led it to conclude that the company had not met its burden of proof.”

Prinoth S.p.A then filed an appeal with the Supreme Administrative Court.

Judgement of the Court

The Supreme Administrative Court found the reasoning of the regional court lacking and remanded the case back to the Court in a different composition.

“5. On the other hand, the second and third pleas, to be dealt with together, are well founded.
In fact, the aforementioned ruling is entirely anapodic, failing to explain in any way the reasons why the numerous and unambiguous factual elements, represented by the taxpayer company and already relied on in the judgments at first instance, have no impact on the concrete possibility of referring to them for the purpose of identifying the normal value in accordance with the criterion of the price comparison method, being instead potentially capable of affecting the actual comparability of the transactions. The company had in fact deduced, in support of the unusability of the price comparison criterion, and on the basis of its own use of the different cost-plus criterion, that in the intra-group transfers Prinoth did not carry out all the marketing, sales and after-sales activities, as well as after-sales assistance, entrusted to the subsidiaries; and, secondly, that of the risks, that in the intra-group transfers the subsidiaries took upon themselves the risks of inventory, fluctuations in the costs of raw materials and interest rates.

Well, the judge cannot, when examining the arguments of the parties or the facts of evidence, limit himself to stating the judgement in which their assessment consists, because this is the only “static” content of the complex motivational statement, but he must also engage, all the more so in a complex case, in the description of the cognitive process through which he passed from his situation of initial ignorance of the facts to the final situation constituted by the judgement, which represents the necessary “dynamic” content of the statement itself (Cass. 20/12/2018, no. 32980; Cass. 29/07/2016, no. 15964; Cass. 23/01/2006, no. 1236).

And such an anapodic and generic statement also results in a violation of the OECD Guidelines that allow the application of the price comparison method only in the presence of effectively comparable transactions, otherwise the necessary adjustments must be made.

And for the purposes of the comparability of transactions, as seen above, the functions performed by the undertakings and the allocation of risks between the contractual parties play a decisive role, together with the identity of the product, which are capable of affecting the price of the transaction.

The second and third pleas must therefore be upheld.”


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Italy vs Prinoth SPA 20221213 2022 n 36275

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