Italy vs Terex Italia S.r.l., January 2024, Supreme Court, Cases No 2853/2024

Category: Benchmark, Range and Median, Comparability Analysis, Transfer Pricing Methods | Tag: , , , , , , , , , , , ,
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Terex Italia s.r.l. is a manufacturer of heavy machinery and sold these products to a related distributor in the UK. The remuneration of the distributor had been determined based on application of the TNM-method.

Following an audit for FY 2009 and 2010 the tax authorities served Terex a notice of assessment where adjustments was made to the taxable income in respect of a transfer pricing transaction, and in particular contesting the issuance of a credit note, in favour of the English company GENIE UK with the description “sales prices adjustment” recorded in the accounts as a reversal of revenue, in that, according to the Office, as a result of the adjustment made by the note, Terex would have made sales below cost to the English company, carrying out a clearly uneconomic transaction. In the same note, the non-deductibility of costs for transactions with blacklisted countries was contested.

Terex lodged appeals against the assessments, but the Provincial Tax Commission upheld them only “in respect of the purchases from Hong Kong”, implicitly rejecting them in respect of the purchases made in Switzerland and explicitly rejecting them in respect of the disputed credit notes.

An appeal was later rejected by the Regional Tax Commission.

An appeal was then filed by Terex with the Supreme Court. In this appeal Terex stated that “The CTR, for the purposes of identifying the ‘normal value’ of the intra-group transactions relating to the relations with the English company GENIE UK, wrongly disallowed the applicability of the TNMM method (of the ‘net margin’), used by the taxpayer for the years 2009 and 2010 and presupposed the issuance of the contested credit notes and the relative reduction of the declared income, on the other hand, the Office considered that the CUP method (of the ‘price comparison’), used by the tax authorities in the findings relating to the same tax years, was applicable, with the consequent emergence of a higher taxable income, compared to that declared. The same Administration, on the other hand, with reference to the intra-group relations with the same company, located in the tax years 2007 and 2008 and subject to control without censure in the same audit, had not denied the applicability of the TNMM method, used by the taxpayer, which in such cases had led to the issuance of debit notes, with the relative increase in declared income.”

Judgement of the Court

The Supreme Court upheld part of the judgement (black listed costs) and refered part of it (Transfer pricing method and “sales prices adjustment”) back to the Regional Tax Commission for reconsideration.

Excerpts in English

5.1. In particular, with regard to the method applicable for the purpose of determining the “normal value”, it has been clarified, with specific reference to the one referred to as the “TNMM”, that “On the subject of the determination of business income, the regulations set forth in Article 110, paragraph 7, of Presidential Decree no. 917 of 1986, aimed at repressing the economic phenomenon of “transfer pricing”, i.e. the shifting of taxable income following transactions between companies belonging to the same group and subject to different national regulations, requires the determination of weighted transfer prices for similar transactions carried out by companies competing on the market, for which purpose it is possible to use the method developed by the OECD which is based on the determination of the net margin of the transaction (so-called “TNMM”), which is based on the determination of the net margin of the transaction. “TNMM”), provided that the period of investigation is selected, the comparable companies are identified, the appropriate accounting adjustments are made to the financial statements of the tested party, due account is taken of the differences between the tested party and the comparable companies in terms of risks assumed or functions performed, and a reliable indicator of the level of profitability is assumed.” (Cass. 17/05/2022, no. 15668; the principle was shared by, among others, Cass. 12/09/2022, nos. 26695, 26696, 26697 and 26698; Cass. 28/04/2023, no. 11252).”

“The adoption of the TNMM is particularly reliable when the functional analysis shows the existence of a party (tested party or tested party) to the controlled transaction that performs simpler functions and assumes less risk than the other party to the transaction (para. 2.64 et seq. OECD). In analogy to the RPM (Resale Price Method) or CPM (Cost Plus Method), it focuses on the profitability of the tested party in the controlled transaction, whereas it differs from it in that it operates at the level of net margins and not gross margins.”

“Indeed, according to the OECD Guidelines (OECD, Guidelínes,1995), ‘The selection of a transfer pricing method is always aimed at finding the most appropriate method for a particular case. For this purpose, the following should be taken into account in the selection process: the respective advantages and disadvantages of the methods recognised by the OECD; the consistency of the method considered with the nature of the controlled transaction, as determined in particular through functional analysis; the availability of reliable information (especially on independent comparables) necessary for the application of the selected method and/or the other methods; the degree of comparability between controlled transactions and transactions between independent companies, including the reliability of comparability adjustments that are necessary to eliminate significant differences between them. No method can be used in all eventualities and it is not necessary to demonstrate the non-applicability of a given method to the circumstances of the particular case. Ministerial Circular No. 42 of 12 December 1981 also pointed out that the appropriateness of a transfer pricing method is assessed on a case-by-case basis.”

“5.6. The importance that the TNMM has assumed in practice, as the most widely used means of determining transfer prices, has made it the subject of interest of the Eu Joint Transfer Pricing Forum (JTPF) body, set up by the European Commission, which, in 2019, drew up a document (EU JOINT TRANSFER PRICING FORUM, DOC: JTPF/002/2019/EN, SECTION 2), in which it describes its essential characteristics, among which, substantially tracing the OECD Guidelines, it highlights (according to the translation reproduced in the grounds of the cited Cass. 17/05/2022, no. 15668) that “A residual analysis divides the relevant profits of controlled transactions into two types. The first type (initial remuneration) consists of profits attributable to contributions for which there is a comparable (typically less complex contributions for which comparables can be found). This is done by applying one of the traditional transactional methods or the transactional net margin method (TNMM). The second type (the residual) consists of gains (or losses) that relate to unique and valuable contributions, the shared assumption of economically significant risks (or the separate assumption of closely related risks) and/or a high level of business integration and remain after the first type.”

“5.7. Having said this, in the present case the determination of the “normal value” of the intra-group transactions relating to the taxpayer’s relations with the English company GENIE UK in the years covered by the contested tax assessments, and therefore the legitimacy of the adjustments embodied in the credit notes disallowed by the Office, cannot disregard the verification of the appropriateness of the TNMM method (of the “net margin”), used by the taxpayer itself and for this reason contested by the authorities, at least for the tax periods assessed. And such verification cannot disregard the ascertainment, in point of fact, of the recurrence in concrete terms of all the prerequisites of comparability and reliability, to be tested according to the criteria, of national and international matrix, and the jurisprudential principles referred to and illustrated so far. The CTR did not properly apply these principles, explicitly, and erroneously, disregarding the relevance, with respect to the thema decidendum, of the question of the applicable method and its effects, so much so as to censure the taxpayer’s appeal (which re-proposed this question, after having introduced it at first instance, as is apparent from the appeal, the defence and the judgment under appeal) for the ‘centrality’ which it attributed to that argument, which for the appellate courts, with a reversal of the correct logical-legal reasoning, was instead a mere ‘posterius’ to the ratio decidendi.
As a result of such express and erroneous underestimation of the relevance of the method applied, the CTR did not conduct the necessary factual verification of the data that emerged from the audit and those offered by the taxpayer to fulfil its onus probandi, in accordance with the principles and criteria set out above, as to whether or not, and the outcome of any use, of the TNMM method (of the ‘net margin’).”

“5.8. In conclusion, therefore, the first and second grounds of the main appeal must be upheld, in the terms set out in the grounds, with the consequent referral back to the CTR for the necessary assessments, which will be conducted in accordance with the principle, which we intend to reiterate here, whereby “On the subject of determining business income, the rules set out in Article 110, paragraph 7, of Presidential Decree no. 917 of 1986, aimed at assessing the taxable income, must be applied to the taxable income of a company. 917 of 1986, aimed at repressing the economic phenomenon of “transfer pricing”, i.e. the shifting of taxable income following transactions between companies belonging to the same group and subject to different national regulations, requires the determination of the weighted transfer prices for similar transactions carried out by companies competing on the market, for which purpose it is possible to use the method developed by the OECD that is based on the determination of the net margin of the transaction (so-called “TNM”), which is based on the determination of the net margin of the transaction (so-called “transfer pricing”), which is the method used by the OECD to determine the net margin of the transaction (so-called “transfer pricing”). “TNMM’), provided that the period of investigation is selected, the comparable companies are identified, appropriate accounting adjustments are made to the financial statements of the tested party, due account is taken of differences between the tested party and the comparable companies in terms of risks assumed or functions performed, and a reliable indicator of the level of profitability is assumed.”

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Italy vs Terex Italia s.r.l. 31012024 Case No 2853-2024





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  4. TPG2022 Chapter III paragraph 3.5In practice, this process is not a linear one. Steps 5 to 7 in particular might need to be carried out repeatedly until a satisfactory conclusion is reached, i.e. the most appropriate method is selected, especially because the examination of available sources of...
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  8. TPG2022 Chapter II paragraph 2.3Traditional transaction methods are regarded as the most direct means of establishing whether conditions in the commercial and financial relations between associated enterprises are arm’s length. This is because any difference in the price of a controlled transaction from the price in a...
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