Italy vs Edison, April 2016

 

Civil Judgment Sect. 5 No. 7493 Year 2016 President: CICALA MARIO

Rapporteur: VIRGILIO BIAGIO Date of publication: 15/04/2016

 

JUDGMENT - on appeal r.g.n. 12882/08 brought by:

AGENZIA DELLE ENTRATE, in the person of its Director pro tempore, with an address for service in Rome, Via dei Portoghesi 12, at the Avvocatura Generale dello Stato, representing and defending it;

- applicant -

against

EDISON s.p.a., in the person of its legal representative pro tempore, with an address for service in Rome at Via della Scrofa 57, at the offices of Giancarlo Zoppini, Giuseppe Russo Corvace and Giuseppe Pizzonia, lawyers, who represent and defend it pursuant to the power of attorney provided in the documents;

- counterclaimant -

against the judgment of the Regional Tax Commission of Lombardy No 38/11/07, filed on 22 March 2007.

and on appeal r.g.no. 4011/09 brought by:

EDISON s.p.a., in the person of its legal representative pro fempore, with an address for service in Rome at Via della Scrofa 57, at the offices of Giancarlo Zoppini, Giuseppe Russo Corvace and Giuseppe Pizzonia, who represent and defend it by proxy;

- appellant -

against

AGENZIA DELLE ENTRATE, in the person of its Director pro tempore, with an address for service in Rome, via dei Portoghesi no. 12, at the Avvocatura Generale dello Stato, who represents and defends it;

- counterclaimant -

against the judgment of the Regional Tax Commission of Lombardy no. 107/17/07, filed on 17 December 2007.

Hearing the report of the cases made in the public hearing of 25 November 2015 by the Rapporteur Cons. Biagio Virgilio;

Hearing of Fabrizio Urbani Neri, Avvocato dello Stato, on behalf of the Agenzia delle Entrate and Cristiano Caumont Caimi, Avvocato dello Stato, on behalf of Edison S.p.A.; hearing of the Public Prosecutor, in the person of Luigi Cuomo, Substitute Public Prosecutor General, who concluded that appeal no. 12882/08 should be allowed and appeal no. 4011/09 rejected.

In fact

1.1. The Agenzia delle Entrate appealed to the Court of Cassation (bearing the number 12882 of 2008), on the basis of four grounds, against the judgment of the Regional Tax Commission of Lombardy of 22 March 2007, which rejected the appeal of the Office and confirmed the unlawfulness of two notices of assessment issued to EDISON s.p.a. for IRPEG and ILOR for 1995 and 1996 respectively. In particular, the assessment for 1995 concerned the recovery for taxation purposes of interest income deriving from a payment (in excess of Lire 500,000,000,000) made by Edison s.p.a. to its foreign subsidiary Selm Holding International S.A., based in Luxembourg, which the Office considered to be an interest-bearing loan falling within the scope of Article 76, paragraph 5, of the Consolidated Income Tax Law (old numbering), concerning transfer pricing, despite the fact that the company had qualified it as a non-interest-bearing payment on account of a future capital increase. The assessment for 1996 concerned, first of all, the failure to account for interest income deriving from both the same transaction referred to in the previous notice and similar payments (amounting to £600,000,000) made by Edison to the foreign subsidiary Tanti lnvestimentos Intemacionais S.A., with registered office in Madeira, which the Office considered to be interest-bearing loans and not payments on account of a future increase in capital; in addition, the notice contained other observations, by which it was contested that the accrual principle laid down in Article 75 of the TUIR had been infringed.

1.2. The appellate court, with regard to the question of the fruitfulness or otherwise of the remittances in question, held that they, as accounted for by the parent company, "are in any case unproductive of interest and it is under this formal aspect that the possibility of presuming the accrual of interest income cannot be considered existing"; it added that, also pursuant to art. He added that, also pursuant to Article 42 of the Consolidated Income Tax Law, interest on borrowed capital is presumed to be received at the due date and in the amounts agreed in writing, unless there is proof to the contrary, and no formal document shows any request for such proof to the contrary; in conclusion, he affirmed that what has been declared and ascertained in the documents constitutes valid proof of the actual unproductive nature of the remittances. As to the other claims for 1996, based on the violation of the accrual principle, the CTR noted that this "fulfilment.... ratione temporis appears to have been carried out by the appellant, as is also noted in the contested ruling"; and that "in any case, in relation to the revenues for which it is claimed that they were accounted for in the tax year following the year of competence, this is an accounting requirement, albeit limited to residual turnover, which occurred, as can be deduced, from year to year and such as not to determine irregularities, at least substantial, of a taxing nature and negative effects, therefore, on tax collections as a whole, even multi-yearly".

1.3. Edison s.p.a. has resisted with a counter-appeal.

1.4. The Revenue Agency filed a memorandum.

1.5. Counsel for Edison S.p.A. submitted written observations pursuant to Article 379, last paragraph, of the Code of Civil Procedure.

2.1. Edison s.p.a. appealed to the Court of Cassation (n. 4011 of 2009), putting forward two grounds, against the decision of the Lombardy Regional Tax Commission of 17 December 2007 whereby, rejecting the company's appeal, it confirmed the inadmissibility of the appeals it had lodged with the Milan Provincial Tax Commission against two notices of refusal of the facilitated settlement of the dispute concerning the above-mentioned assessments, requested by the taxpayer pursuant to Article 16 of Law no. 289 of 27 December 2002.

The appeal judge confirmed that the appeals had been brought before a judge with no functional jurisdiction, since the dispute was already pending, following the Office's appeal, before the Regional Tax Commission of Lombardy, adding that the erroneous indication of the appeal judge contained in the refusal decision was not relevant in the opposite sense, an error that could only legitimise the submission of a new appeal to the competent judge with a possible request for re-examination within the time limits.

2.2. The Revenue Agency has resisted with a counter-appeal.

Consideration in law

1. As a preliminary step, for reasons of connection pursuant to article 274 of the code of civil procedure, appeal no. 12882 of 2008 should be joined with appeal no. 4011 of 2009.

2.1. For reasons of logical and legal priority, appeal No 4011/09 should be examined first.

By its first ground of appeal, Edison SpA complains that the judgment under appeal is null and void for infringement of Article 5(3) of Legislative Decree No 546 of 1992, in so far as the CTR and, before it, the Milan Provincial Tax Commission, in declaring that it lacked jurisdiction, did not indicate the tax court considered to have jurisdiction, as required by that provision, for the purposes of resuming the proceedings before it. The second plea alleges infringement of Article 7(2)(c) and Article 10 of Law No 212 of 2000, observing that the bringing of the action before the CTP should be regarded as admissible, since it was the result of an excusable error due to the - in turn - incorrect information contained in the contested refusal decision.

2.2. The grounds are unfounded. It is sufficient to note in this regard that: a) the special provision of Article 16(8) of Law no. 289 of 2002 is applicable in this case. (a) the special provision in Article 16(8) of Law No 289 of 2002, according to which an appeal against a refusal to settle a dispute must be brought "before the court before which the dispute is pending", is applicable in the present case; (b) the Court of First Instance (CTP) before which the appeal was brought declared that it lacked functional jurisdiction on the basis that, at the time the appeal was lodged, the dispute was already pending before the Regional Tax Commission (which was therefore the competent court) following the appeal lodged by the Office; (c) the erroneous (or even omitted) indication in the contested measure of 'the court (. (c) the erroneous (or even omitted) indication in the appealable act "of the court (...) to which it is possible to appeal" (indication prescribed by the above-mentioned Article 7, paragraph 2, letter c, of the Statute of Taxpayers' Rights and, in general and in similar terms, by Article 3, paragraph 4, of Law no. 241 of 1990) does not result in the nullity of the act, which is not provided for by the law, nor in the admissibility of the appeal before a court lacking jurisdiction, but rather in the procedural recognition of the excusability of the error committed by the appellant and, therefore, the extension of the time limit in the case of late submission of the appeal before the competent court (among others, on art. 7 cited above, Court of Cassation n. 10822 of 30 June 2010, and Court of Cassation n. 675 of 30 June 2010, on art. 7 cited above), Cass. nos. 10822 of 2010, 19675 of 2011, 10520 of 2015; in general, Cass. sez. un., nos. 362 of 2000, 9947 of 2009). 2.3. In conclusion, the appeal must be dismissed. There are justified reasons for setting off the costs of the present appeal.

3. We can therefore examine appeal no. 12882 of 2008.

3.1. Edison S.p.A. first of all objects to the fact that it is inadmissible pursuant to Article 369(2)(4) of the Code of Civil Procedure. The objection is unfounded since, in the case of appeals against judgments of the tax commissions, the unavailability of the parties' files (which, under Article 25(2) of Legislative Decree No 546 of 31 December 1992, remain part of the case-file) is such that it is not possible for the parties to appeal. (which, under art. 25, second paragraph, of legislative decree no. 546 of 31 December 1992, remain part of the official file and are returned only at the end of the trial) means that the appellant is not required, under the aforementioned provision, to produce his own file and, on its behalf, an authenticated copy of the deeds and documents contained therein on which the appeal is based, since the file is already part of the official file whose transmission he has requested under the third paragraph of art. 369. 369 (unless the said party has irregularly obtained the return of the party's file from the secretariat of the tax commission); nor is it required, for the same reason, to produce a copy of the deeds and documents on which the appeal is based and which may be contained in the other party's file (Cass, sez. un., no. 22726 dcl 2011).

3.2. In its first ground of appeal, the Agenzia delle Entrate complains of a breach of Article 76(5) of Presidential Decree No 917 of 1986 (TUIR, old numbering).

It submits, in that regard, the following question of law: <whether, pursuant to Article 76(5) of Presidential Decree No 917 of 22 December 1986 (under the numbering prior to Legislative Decree No 344 of 12 December 2003), in the case of financing granted by a company, the taxpayer is entitled to a tax credit for the purposes of Article 76(5) of Presidential Decree No 917 of 22 December 1986. 344), in the case of loans granted by an enterprise established in the territory of the State to companies, controlled by it, not resident in the territory of the State, the components of income deriving from the transaction, for the enterprise that has made the loan, must be valued - whatever the conditions agreed upon by the parties - assuming as consideration the normal value of the service provided and if, consequently, in the presence of payments of money between the aforesaid persons, the court of merit, which finds that such remittances are in any event unproductive of interest", may not nevertheless consider the question of the classification of the transactions in which the payments are based (that is to say, whether they are sums given as a loan or on account of future capital increases) to be absorbed?

3.3. It should be noted that: (a) the objection of inadmissibility of the plea on the ground that it is accompanied by a multiple question is unfounded since, irrespective of any other consideration regarding the admissibility of multiple or cumulative questions, in the present case the question is not multiple at all, since it poses a single legal question, which is linked to the grounds of the judgment under appeal; (b) the objection of external jurisdiction raised by the appellant is inadmissible and in any event unfounded: the judgment relied on (CTP Milan no. 280/27/01 of 29/10/2001 of 29/10/2001 of 29/10/2001 of 29/10/2001 of 29/10/2001 of 29/10/2001) is inadmissible and in any event unfounded. (CTP Milan no. 280/27/01 of 29/10/2001), in fact, became res judicata before, or in any case during, the appeal proceedings, and therefore its - alleged - expansive effect had to be challenged there (otherwise, the judgment was subject to the remedy of revocation) (Cass, sez. un., No. 21493 of 2010); moreover, the judgement is based on the tax relationship, as configured by the claim made by the administration in the tax assessment notice and by the grounds of appeal put forward by the taxpayer, and the dispute decided by the aforementioned judgement of the Provincial Tax Commission of Milan, although relating, in part, to the same case (in relation to the year 1993), concerned a tax claim based on completely different legal grounds (violation of art. 75 TUIR for the non-deductibility of interest expense paid by Edison s.p.a. to the banking system).

3.4. The plea is well founded.

The Agenzia delle Entrate points out that the appellate court could not avoid resolving the decisive preliminary issue concerning the classification of the payments made by Edison SpA to its foreign subsidiaries, namely whether they constituted financing, according to the Office's view, or payments on account of future capital increases, according to the taxpayer's view.

According to the appellant, the aforementioned court erred in equating the two alternative hypotheses put forward by the parties, on the basis of the consideration that the sums involved were "in any event non-interest bearing", since, if the transactions were to be qualified as loans, the rules laid down in Article 76, paragraph 5, of the TUIR (old numbering, now Article 110, paragraph 7), on the so-called transfer pricing, would be applicable, notwithstanding the agreed free nature of the loans themselves.

The aforementioned provision provides, as far as it is relevant here, that "The components of income deriving from transactions with companies not resident in the territory of the State, which directly or indirectly control the company, are controlled by it or are controlled by the same company that controls the company, are valued on the basis of the normal value of the goods sold, the services provided and the goods and services received, determined in accordance with paragraph 2, if it results in an increase in income"; paragraph 2 refers to art. Paragraph 2 refers to Article 9 of the Income Tax Code (which has retained that numbering also following the amendments made by Legislative Decree No 344 of 2003), which, in paragraph 3, provides that "Normal value, except as provided in paragraph 4 for the goods referred to therein, means the average price or consideration for goods and services of the same or similar kind, in conditions of free competition and at the same stage of marketing, at the time and place where the goods or services were acquired or provided, or, failing that, at the nearest time and place. In determining the open market value, reference shall be made, as far as possible, to the price lists or tariffs of the person who supplied the goods or services and, failing that, to the price lists and tariffs of the chambers of commerce and to professional rates, taking into account customary discounts. In the case of goods and services subject to price regulation, reference shall be made to the measures in force".

3.5. It must be premised that the legislation in question does not constitute an anti-avoidance regulation in the strict sense of the term, but is aimed at repressing the economic phenomenon of transfer pricing (shifting of taxable income following transactions between companies belonging to the same group and subject to different national laws) considered in itself, so that the proof to be provided by the tax authorities does not relate to the higher national taxation or the actual tax advantage obtained by the taxpayer, but only to the existence of transactions between related companies at a price apparently lower than the normal one. 2697 of the Italian Civil Code, and on the subject of tax deductions, the taxpayer has the burden of proving that such transactions have taken place for market values to be considered normal in the light of what is specifically provided for by the cited art. 9, paragraph 3, of the Consolidated Act on Income Taxes (da ult, Cass. no. 18392 of 2015).

That said, according to a recent orientation of this Court, the conclusion of a non-interest bearing loan granted by the parent company in favour of its subsidiaries, which can be traced back to the scheme of the gratuitous loan, is not limited by the fact that the parent company, resident in the State, and the companies residing in other countries belong to the same corporate group, thus creating a cross-border intra-group transaction, since the gratuitousness of the transaction, which excludes the stipulation of interest payments due by the borrower, does not contrast with the provision of Article 76, paragraph 5, cited above. This is because the application of the grandmother is subject by law to the twofold condition that the intra-group transaction generates income components (positive or negative) for the taxpaying company and that the application of the criterion of normal value generates an increase in taxable income; and these conditions are not met in the granting of a non-interest-bearing loan, since the same performance - having as its object the payment of interest - which constitutes the necessary term of comparison with respect to normal value, is extraneous to such transaction (Cass. No. 27087 of 2014; see also Cass. No. 15005 of 2015).

The principle cannot be accepted.

The rationale of the legislation in question is to be found in the principle of free competition set out in Article 9 of the OECD Model Convention, which provides for the possibility of taxing profits deriving from intra-group transactions which have been governed by conditions different from those which would have been agreed upon between independent enterprises in comparable transactions carried out in the free market.

It follows that the valuation "at arm's length" is irrespective of the original ability of the transaction to generate income and, therefore, of any negotiated obligation of the parties relating to the payment of the consideration (see OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, paragraph 1.2).

In fact, it is a matter of examining the economic substance of the transaction that has taken place and comparing it with similar transactions carried out, in comparable circumstances, in free market conditions between independent parties and assessing its conformity with these (cf, on the criteria for determining normal value, Court of Cassation no. 9709 of 2015): therefore, the qualification of the non-fruitfulness of the financing, possibly made by the parties (on whom the relevant burden of proof is incumbent, given the normally onerous nature of the loan agreement, pursuant to article 1815 of the Italian Civil Code), proves to be irrelevant, as it is in itself incapable of excluding the application of the criterion of valuation based on normal value.

It should be added that it would be clearly unreasonable, and a source of conduct easily aimed at evading the legislation in question, to consider that the administration can exercise this power of adjustment in the case of transactions with a consideration lower than the normal value and even derisory, while it is precluded from doing so in the case of free contracts.

3.6. The second ground of appeal is not relevant.

3.7. The third plea alleges infringement of Article 75 of the TUIR (old numbering, now Article 109) in relation to the secondary entries in the notice of assessment for 1996. The question is asked whether the principle of accrual, set out in that provision, 'requires the taxpayer to allocate costs and revenue in the financial year in which they become certain and objectively deductible and whether breach of that principle allows the tax authorities to adjust the tax return in accordance with it, without it being relevant that the costs and revenue were then allocated to a subsequent financial year'. The plea is inadmissible on the ground that the question is unsuitable for the purposes of Article 366a of the Code of Civil Procedure, since it makes no reference to the specific case and to the error of law ascribed to the judgment under appeal.

3.8. Lastly, the fourth ground of appeal alleges the nullity of the judgment on the ground of apparent grounds, pursuant to Article 36(1)(4) of Legislative Decree No 546 of 1992, in so far as the referring court, again with reference to the recoveries referred to in the previous ground of appeal and their correct temporal allocation, stated that such compliance 'appears to have been carried out by the appellant, as is also apparent from the judgment under appeal'.

The plea is inadmissible on the ground that the statement complained of has no independent decisive value, the court at issue having immediately explained why, 'in any event', there was no breach of the rule relied on.

4. In conclusion, with regard to appeal r.g. no. 12882/2008, the first plea should be upheld, the second absorbed, and the third and fourth declared inadmissible; the judgment under appeal should be set aside in relation to the upheld plea and the case referred to another section of the Regional Tax Commission of Lombardy, which will comply with the principle of law set out in paragraph 3.5, as well as ruling on the costs of the present proceedings.

P.Q.M.

The Court shall join appeal No 4011 of 2009 to appeal No 12882 of 2008. Dismisses appeal No 4011 of 2009 and orders costs to be paid. upholds the first plea in law in appeal No 12882/2008, declares the second plea in law to be inadmissible and declares the third and fourth pleas inadmissible

Set aside the judgment under appeal in relation to the upheld plea and refer the case, including the costs, to another division of the Regional Tax Commission of Lombardy.

Delivered in Rome on 25 November 2015.