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 ...