Quaker Italia Srl is a non-exclusive distributor of Quaker products in Italy – lubricating oils and greases. It also carries out a minor manufacturing activity.
An assessment was issued by the tax authorities in 2012 regarding the remuneration received for the distribution activities in FY 2007. The Tax authorities considered that the documentation provided by the company was contradictory and incomplete, and therefore recalculated the income using a (partially) different method (TNMM in the modified resale price version, instead of TNMM in the modified cost-plus version). This resulted in additional taxable income in the amount of Euro 1,180,447.00.
A complaint was filed by Quaker with the Provincial Tax Commission. The Provincial Commission confirmed the legitimacy and effectiveness of the tax assessment. An appeal was then filed with the the Regional Tax Commission (CTR) of Lombardy. The Regional Tax Commission rejected the appeal and confirmed the first instance decision.
An appeal was then filed by Quaker with the Supreme Administrative Court. Quaker contested the decision of the Regional Commission due to the absence of sufficient statement of reasons in the judgment. According to Quaker, the Regional Commission merely declared that it agreed with the arguments put forward by the Provincial Commission, without expressing its own assessment of the facts of the case and the grounds of appeal. In the appeal Quaker also claimed that the decision of the Provincial court should be considered null and void because of the irreconcilable conflict between the grounds and the operative part of the appeal.
Judgement of the Supreme Administrative Court
The Court upheld the grounds of appeal put forward by Quaker and remanded the case to the Regional Tax Commission for a new ruling.
“As a preliminary remark, it is worth mentioning that Quaker Italia Sri states that “the transfer pricing policy adopted by the Company, as well as its profitability in the fiscal year 2007, had to be considered at market values” (rie., p. 27), and the premise appears to be acceptable, adding, for the sake of clarity, that the expression “market values” appears to be equivalent, in the case at hand, to “normal value”, or “competition price”, expressions also used by the appellant in its argument. Now, the company decided to adopt the TNMM method of calculation in the modified Cost Plus version, and the tax authorities instead used the same TNMM method, but in the version of the modified resale price method. The stated reason for the Tax Administration’s choice is that the TNMM Cost Plus looks at company productivity, while the TNMM resale price method turns its attention to distribution activity, which Quaker Italia Sri carried out with great preponderance. The appellant opposes, however, that ‘the OECD Guidelines require auditors to follow, as far as possible, the method adopted by the company (rie., p. 32), and furthermore criticises the choice of the Tax Revenue Office to have carried out every assessment in consideration of the distribution activity, totally neglecting the production activity, which was also carried out by the company. It is also worth noting that, in its counter-affidavit, the Tax Administration reiterated the reasons why the calculation method adopted by the company led, in its opinion, to results deemed unreliable, and why it was therefore necessary to adopt a different one (counter-affidavit, p. 14).
6.4. Indeed, in its decision, the CTR illustrates the objections made by the Revenue Agency to the taxpayer during the assessment, and reconstructs in extreme synthesis the course of the proceedings. It then examines with adequate breadth the main appeal brought by the Office in relation to the penalties, and the reasons why it considers it appropriate to uphold the annulment ruling made by the court of first instance. Only in the final part does the CTR then state that it adheres for the remainder to the ruling of the CTP, whose “reasoning was clearly explained both with regard to the adjustment of the costs, the subject of the contested act, and with regard to the non-application of the penalties. The appeals lodged by the parties do not in the least affect the contents and conclusions of the judgment under appeal” (CTR judgment, p. 5).
6.5. The criticisms put forward by the taxpayer appear well-founded. In fact, the judge is not precluded from proposing a reasoning per relationem, but it is nevertheless his duty to illustrate the reasons that lead him to consider correct and acceptable what was decided by another judge. This Court has already had occasion to clarify that “on the subject of tax proceedings, it is null and void, for breach of Articles 36 and 61 of Legislative Decree No. 546 of 1992, as well as of Article 118 disp. att. c.p.c., the judgment of the Regional Tax Commission which is completely devoid of any illustration of the objections raised by the appellant to the decision at first instance and of the considerations which led the commission to disregard them, and which merely gave reasons ‘per relationem’ to the judgment under appeal by mere adherence to it since, in that way, it remains impossible to identify the ‘thema decidendum’ and the reasons underlying the decision, and it cannot be held that agreement with the contested grounds was reached by examining and assessing the groundlessness of the grounds of appeal. (Applying this principle, the Court of Cassation annulled the judgment under appeal that had confirmed the first instance decision by merely referring to the content of that ruling and to the defence writings of one of the parties, in an entirely generic manner and without explaining the logical juridical path followed to reach its conclusions)”, Cass. sez. V, 5.10.2018, no. 24452 (conf. Cass. sez. VI V, 16.12.2013, no. 28113), and it did not fail to specify that “for the purposes of the sufficiency of the reasoning of the judgment, the judge cannot, when examining the facts of evidence, limit himself to stating the judgement in which his assessment consists, because this is the only “static” content of the complex motivational statement, but must also describe 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. sez. VI-V, 29.7.2016, p. 15964 (conf. Cass. sez. V, 20.12.2018, no. 32980).
6.5.1. Moreover, the observations apparently favourable to the company’s conduct highlighted by its defence, it is not clarified by the CTR why they should be considered relevant only to exclude its being subject to penalties, and not also with regard to the legitimacy of the tax assessment itself.”
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Click here for other translationItaly v Quaker 34728 20221125