Italy vs Promgas s.p.a., May 2022, Supreme Court, Cases No 15668/2022

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Promgas s.p.a. is 50% owned by the Italian company Eni s.p.a. and 50% owned by the Russian company Gazprom Export. It deals with the purchase and sale of natural gas of Russian origin destined for the Italian market. It sells the gas to a single Italian entity not belonging to the group, Edison spa, on the basis of a contract signed on 24 January 2000. In essence, Promgas s.p.a. performes intermediary function between the Russian company, Gazprom Export (exporter of the gas), and the Italian company, Edison s.p.a. (final purchaser of the gas).

Following an audit for FY 2005/06, the tax authorities – based on the Transaction Net Margin Method – held that the operating margin obtained by Promgas s.p.a. (0.23% in 2025 and 0.06% in 2006) were not in line with the results that the company could have achieved at arm’s length. Applying an operating margin of l.39% resulted in a arm’s length profit of €4,227,438.07, for the year 2005, which was €3,426.803.00 higher than the profit declared by the company.

Promgas s.p.a. appealed against the notice of assessment, which was upheld by the Provincial Tax Commission of Milan, with sentence no. 356/44/11, notified on 23/12/2011.

The tax authorities then filed an appeal with the Regional Tax Commission of Lombardy which upheld the the tax authorities main appeal and rejected the company’s cross appeal.

Promgas s.p.a. then filed an appeal with the Supreme Court

Judgement of the Supreme Court

The Supreme Court remanded the cast to the Regional Tax Commission of Lombardy

Excerpts
“….
8.1. The failure to examine the facts put forward by the taxpayer company to oppose the set of comparables identified by the Revenue Agency resulted in a defect in the overall reasoning of the contested judgment, as denounced by the appellant company in its fifth and sixth grounds of complaint.
8.2. As is clear from the criteria indicated in the OECD Guidelines referred to above, in order for the application of the TNMM to be reliable, it is necessary to conduct an analysis of comparability that passes through the two moments of the choice of the tested party and the identification of the comparable companies, an identification that, under free market conditions (arm’s length principle), presupposes a “comparison” (internal or external) between the tested party and comparable companies that satisfies the five factors of comparability indicated by the OECD criteria (characteristics of goods and services functional analysis; contractual terms underlying the intra-group transaction; business strategies; economic conditions).
It is through such a comparison that the factors that may significantly influence the net profit indicators (see paragraph 7.9 below) are identified on the basis of the facts and circumstances of the case.
8.3. Indeed, the reliability of such a method, according to the prevailing practice and interpretation, must pass through the following steps
– selection of the tested party for the analysis;
– determination of the financial results relating to the controlled transactions
– selection of the investigation period;
– identification of comparable companies;
– accounting adjustments to the financial statements of the tested party and differences in accounting practices, provided that such adjustments are appropriate and possible;
– assessment of whether adjustments are appropriate or necessary to take account of differences between the tested party and the identified comparable companies in terms of risks assumed or functions performed;
– selection of a reliable profitability profit level indicator (so-called Profit Leverage/ Indicator, or PLI).
8.4. The CTR’s failure to verify the circumstances alleged by the taxpayer, resulted, in essence, in the pretermission of the comparability analysis for the selection of the TNMM applied to the case, and thus, of the procedure for the identification of comparable transactions and the use of relevant information to ensure the reliability of the analysis and the compliance of the PLI, or PLI, with the principle of free competition, or rather, the reliability of the selected TNMM.
9. The seventh ground of appeal – alleging breach of Article 6(1) of Legislative Decree 18/12/1997, no. The seventh ground of appeal – which alleges infringement of Article 6(1) of Legislative Decree No 472 of 18 December 1997, on the ground that the Regional Tax Commission held that the financial penalties applied by the Tax Office were lawful, erroneously excluding the existence of a ground of non-punishability, without specifically verifying the percentage of discrepancy between the amount declared by the company (0.23%) and the amount assessed by the Administration (1.39%) – is considered to be absorbed by the acceptance of the fifth and sixth grounds of appeal.
10. In conclusion, the appeal must be upheld limited to the fifth and sixth grounds of appeal, with absorption of the seventh and dismissal of the remainder. The judgement must be set aside in relation to the upheld grounds, with a reference back to the CTR, in a different composition, for a new examination of the merits of the dispute from the point of view of the standards of comparability relating to the method chosen and the penalty profile also in the light of the more favourable ius superveniens.”

 
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Italy Sez 5 Num 15668 Anno 2022

TP-Guidelines

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