Autocentro Pavese S.R.L., a company engaged in the purchase and sale of cars, had rented a showroom to another company with the same shareholding structure and director for a fee of only 5,000 euro per year. Following a tax audit an assessment of additional taxes was issued. The audit had resulted in several findings, one of which concerned the failure to issue invoices in accordance with market prices for renting of showrooms. The Court of Appeal upheld the assessment and an appeal was then lodged by Autocentro Pavese S.R.L. with the Supreme Court. Judgement of the Supreme Court The Supreme Court upheld the judgement and dismissed the appeal of Autocentro Pavese S.R.L. “On the subject of the determination of business income, the deviation from the “normal value” of the transaction price pursuant to Article 9 of Presidential Decree No. 917 of 1986 may in fact be relevant, even for internal intra-group transactions, as a circumstantial element for the purpose of assessing the uneconomicity of the transactions from the standpoint of the lack of inherent nature of the excessive costs, or the possible (partial) concealment of the price in the case of excessively low profits. (Cass. Sec. 5 – , Judgment No. 16948 of 25/06/2019, Rv. 654388 – 02).” Click here for English translation Click here for other translation ...

Fruit old s.a.s was active in wholesale of fruit and vegetables. In 2003 it purchased products at a price higher than the market price from another company owned by the same partners, Fruit new s.r.l., and resold them at a price lower than the purchase price. Both companies were domiciled in Italy. Following these transactions the entire business of Fruit old s.a.s (premises, employees and customers) was transferred to Fruit new s.r.l. The tax authorities issued an assessment where the price of the transactions had been adjusted, since it was in the taxpayer’s interest to transfer income from the Fruit old s.a.s to Fruit new s.r.l. The company argued that the transactions in question only took place over a short period of three months. It also stated that the pricing of the transactions were motivated by an “intra-group strategy”. Lower courts had ruled in favour of the company and set aside the assessment of the tax authorities. Judgement of the Court The Supreme Court upheld the judgement of the lower court and dismissed the appeal of the tax authorities. Since this was a case involving two Italien companies, the rules set forth in Article 110, on international transfer prices could not be applied. Transactions between resident intra-group companies at a price different from the normal value determined pursuant to Article 9 of the Income Tax Act are not in it self indicative of an avoidance conduct. Click here for English translation Click here for other translation ...

In 2013, Philips Uruguay S.A. agreed to sell of its business division related to the marketing of audio and video products to another entity within the group, Woox Innovations Sucursal Uruguay. The related parties had agreed on a price of USD 2,546,409. Philips Uruguay, had not include the transaction in its transfer pricing documentation as – according to the company – the transfer pricing regime in Uruguay was only applicable to transactions involving different jurisdictions (transactions with foreign entities) – unless the domestic transactions were between local entities taxed under different local tax regimes. The tax administration disagreed that purely domestic transactions were not subject for to transfer pricing rules in Uruguay. They also disagreed with the arm’s length nature of the agreed price of USD 2.546.409 and instead estimated an arm’s length value of USD 5,063,294. Consequently, an assessment was issued resulting in an additional tax of USD 630.000. Philips Uruguay disagreed with the assessment and brought the case to court. Judgement of the Court The court agreed that transfer pricing rules in Uruguay are also applicable to purely domestic transactions. However, the tax assessment was annulled by the court, as the price agreed between the parties was considered to have been at arm’s length. Click here for English translation Click here for other translation ...

The key question in this case was whether Glaxo Smithkline Asia (P) LTD and it’s service provider [GSKCH] are related companies within the meaning of Section 40A(2) of the Income Tax Act? If the answer to the question is in the affirmative, then the next question on the merits which arose for determination was whether the allocation of cross-charges by Glaxo Smithkline Asia (P) LTD was the correct test applied by the assessee? In other words, whether the allocation of cross-charges should be allowed or disallowed by the tax authorities? Held by the Supreme Court The Court was of the view that as far as this case was concerned, there was no need to interfere as the entire exercise was revenue neutral. Therefore, the special leave petition filed by the tax authorities was dismissed. Excerpts – “The main issue which needs to be addressed is, whether Transfer Pricing Regulations should be limited to cross-border transactions or whether the Transfer Pricing Regulations be extended to domestic transactions? In the case of domestic transactions, the under-invoicing of sales and over-invoicing of expenses ordinarily will be revenue neutral in nature, except in two circumstances having tax arbitrage – [i] If one of the related Companies is loss making and the other is profit making and profit is shifted to the loss making concern; and [ii] If there are different rates for two related units [on account of different status, area based incentives, nature of activity, etc.] and if profit is diverted towards the unit on the lower side of tax arbitrage. For example, sale of goods or services from non-SEZ area [taxable division] to SEZ unit [non-taxable unit] at a price below the market price so that taxable division will have less profit taxable and non-taxable division will have a higher profit exemption. (…) We are informed that the matter has been examined by CBDT and it is of the view that amendments would be required to the provisions of the Act if such Transfer Pricing Regulations are required to be applied to domestic transactions between related parties under Section 40A(2) of the Act. (…) In order to reduce litigation, we are of the view that certain provisions of the Act, like Section 40A(2) and Section 80IA(10), need to be amended empowering the Assessing Officer to make adjustments to the income declared by the assessee having regard to the fair market value of the transactions between the related parties. The Assessing Officer may thereafter apply any of the generally accepted methods of determination of arm’s length price, including the methods provided under Transfer Pricing Regulations. (…) Normally, this Court does not make recommendations or suggestions. However, as stated above, in order to reduce litigation occurring in complicated matters, we are of the view that the question of amendment, as indicated above, may require consideration expeditiously by the Ministry of Finance.” Click here for translation ...