N. S.P.A. was issued a notice of assessment in regards of transfer pricing. The PLI initially taken into consideration by the tax authorities was the return on sales (ROS). The company observed that, since the uniform application of such a PLI to the amount of all revenues was not possible, it was necessary to take into consideration only the revenues deriving from intra-group transactions. At this point, the tax authorities, instead of simply requesting the income statement for these transactions, proceeded to the assessment on the basis of a completely different PLI, the ROA (return on assets: operating profit to total assets). An appeal was filed by N. S.P.A with the Provincial Tax Commission and in a judgement issued in 2015 the commission concluded that the tax authorities had failed to comply with its duty of fairness and that it had used a different method in the assessment without exploring the possibility of correcting the initial objection, thus completely nullifying the meaning of the anticipated cross-examination. An appeal was then filed by the tax authoritities with the Regional Tax Commission. Judgement of the Regional Tax Commission The Regional Tax Commission (CTR) upheld the decision of the Provincial Tax Commission and the annulment the contested notice of assessment. According to the Court, it is unlawful to replace the margin/profit level indicator used in the cross-examination phase (dispute report) with a different PLI in the assessment phase. Excerpt “…the Revenue Agency justifies the change of method used in the assessment in lieu of the method used in the contestation report with the lack of documentation offered by the company. However, this explanation does not justify the actions of the Revenue Agency. The PLI initially taken into consideration for the challenge to the audited company was the ROS (average operating result per unit of revenue). Having observed that this PLI could not be applied uniformly to the amount of all revenues, as it was necessary to take into consideration only the revenues deriving from intra-group transactions, the Revenue Agency, which had recognised the accuracy of the observation, instead of asking the company for the profit and loss account relative to intra-group transactions, proceeded to the assessment on the basis of a completely different PLI, the ROA (Return on Assets: operating profit on total assets) and, to calculate the total assets of intra-group transactions, selected a sample of 25 products considered most representative. In so doing, the Revenue Agency, on the one hand, failed in its duty of loyalty, completely nullifying the sense of the anticipated cross-examination, since it was carried out entirely using a different method from that used in the assessment, without exploring the possibility of correcting the initial contestation, inviting the taxpayer to produce the documentation specifically required and omitting a new contestation, on which the same company could present its observations. This constitutes a breach of the provisions of Articles 12(7) and 10 of Law 212/2000. The assessment, moreover, is null and void because the method chosen was applied inappropriately. First of all, an unrepresentative sample was used, because it was insufficient to demonstrate the transfer pricing applied by the company. The intra-group sales of the products examined by the Office are of the order of a few percentage points out of the total sales mentioned and, therefore, are not representative; in fact, the sample taken is too small to allow the presumptive reconstruction of the value of all the goods transferred intra-group.” Click here for English translation Click here for other translation ...