The Italien tax authorities had issued an assessment against Fashion box s.p.a., adjusting revenues for FY 2004 with the sum of EUR 988,888.27, related to transfer pricing transactions between the taxpayer and foreign subsidiaries of Fashion Box Group s.p.a. located in various European countries. In particular, the tax authorities pointed out that sales to the European subsidiaries accounted for 95 % of total sales and that the discounts applied to subsidiaries were 31 % while those offered to Italian shops were between 2 and 2,5 %. The products were sold in Italy for slightly lower prices than those applied to European subsidiaries. Therefore, the subsidiaries could enjoy a much higher profits. An Italian shop had a theoretical mark-up of 138% while the foreign distributor had a mark-up of 233 %. Hence, profits had been transferred to the foreign entities of the group. The Regional Tax Tribunal rejected the assessment. In its judgement the Tribunal stated that it was necessary to compare the prices of the products ‘at the same marketing stage’. In the present case, prices charged ‘at retail’ on the domestic market, had been compared with the ‘wholesale’ prices charged to foreign subsidiaries. The tax authorities appealed against this judgment. Judgement of the Supreme Court The Court dismissed the appeal of the tax authorities and ruled in favor of Fashion Box s.p.a. Excerpt “On this point, the Regional Commission provided adequate and appropriate reasons for its decision, pointing out that the higher discounts applied to European subsidiaries (31 %), compared to those applied to Italian companies (2,5 %), were justified by the different stage of marketing of the products. In fact, it is clearly stated in the grounds that the tax recovery made by the Office is based solely on the greater amount of the discount in favour of the European subsidiaries, but no account is taken of the fact that, while sales to the European subsidiaries are wholesale, those to Italian customers are ‘retail’, so that the comparison relates to products which are not at the same stage of marketing, with the consequent impracticability of the ‘price comparison’ method. Nor can that reasoning be regarded as insufficient, merely because it did not take account of the ‘counter-evidence’ offered by the Revenue Agency, which, noting the different marketing stage of the products, in the case of a comparison of prices between sales to European subsidiaries (wholesale) and sales to Italian companies (retail), also compared the prices charged to the independent Danish customer, to whom discounts of 25 % were applied. Indeed, quite apart from the fact that the level of discount in that situation is very close to that applied to the foreign subsidiaries (25 % and 31 % respectively) and that the Danish customer De Lorenzo had not signed up to the obligation to increase the level of sales every year and was a ‘multi-brand’ retailer, with a larger volume of sales – so that even in that case there were absolutely significant differences – it should be noted that the trial judge does not have to take into consideration all the evidence in the file, when he provides an adequate and analytical statement of reasons for his conviction, based on a solid basis of argument” Click here for English translation Click here for other translation ...