“TNMM S.r.l.” belongs to an international group that was audited for the 2017–21 tax years in relation to intra-group services received from foreign affiliates.
The Italian tax authorities made transfer pricing adjustments under Article 110(7) of the Italian Income Tax Code. They applied the transactional net margin method, benchmarking the company’s profitability against a selected set of comparable European companies. Based on this analysis, the authorities determined the arm’s length profitability to be at the third quartile and issued an assessment of additional taxable income.
The taxpayer appealed, arguing that the benchmarking analysis was fundamentally flawed. They maintained that the selected companies operated in different economic and organisational contexts, including different markets and business models. Some of the selected companies also owned their own vehicle fleets, whereas the taxpayer did not own a fleet and outsourced most operational activities. While the taxpayer did not dispute the use of the TNMM method, they challenged the comparability of the selected companies and the decision to place the profitability in the third quartile rather than the first.
The tax authorities defended their position, stressing the correctness of the chosen method, and noted that during the pre-litigation settlement phase, they had offered to revise the benchmarking by limiting it to six Italian companies that were allegedly more comparable. The taxpayer did not accept that proposal.
Decision
The Tax Court upheld the taxpayer’s appeal in full and annulled the assessments.
The court held that the tax authorities must prove that the transfer prices determined by the taxpayer deviate from arm’s length pricing, and that they had failed to do so.
The court also found that the selection of comparables was illegitimate, as the chosen companies, although European, operated under economic and organisational conditions that differed too greatly from those of the taxpayer. The court emphasised that an incorrect choice of comparables undermines the entire transfer pricing analysis and necessarily affects the determination of the arm’s length range and quartile position. The authorities’ later proposal of an alternative set of comparables during the settlement phase did not remedy the defects of the original assessments.
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