Civile Ord. Sez. 5 Num. 11837 Anno 2020 Presidente: CIRILLO ETTORE Relatore: GUIDA RICCARDO Data pubblicazione: 18/06/2020

ORDER

on the appeal registered under no. 19654/2013 R.G. filed by AGENZIA DELLE ENTRATE, in the person of the Director pro tempore, represented by the Avvocatura Generale dello Stato, with legal domicile in Rome, via dei Portoghesi, no. 12, at the Avvocatura Generale dello Stato. - applicant - against S.I.O.T. - SOCIETÀ ITALIANA PER L'OLEODOTTO TRANSALPINO SPA, represented and defended by Corrado Diso, lawyer, with legal domicile in Rome, Via Cosseria, No 5, at the Chambers of Laura Tricerri. - counterappellant - against the judgment of the Commissione tributaria regionale del Friuli Venezia Giulia, section No 11, No 56/11/12, delivered on 18/04/2012, lodged on 30/05/2012. Hear the report carried out in the Board of Directors' meeting of 25 February 2020 by Director Riccardo Guida. It was noted that:

1. the dispute concerns the appeal, with separate appeals, by S.I.O.T. - Società Italiana per l'Oleodotto Transalpino Spa, which operates the transalpine oil pipeline that crosses Italy, Austria and Germany, with the Austrian subsidiary T.O.O. GmbH and with the German subsidiary D.T.O. GmbH, belonging to the same group of companies, of four notices of assessment for IRPEG and IRAP, for 2003, and IRES and IRAP, for the years 2004 to 2006, issued at the conclusion of a tax audit by the Trieste Tax Police that had ascertained higher undeclared revenues, determined in application of the transfer pricing regulations (art. 110, paragraph 7, t.u.i.r.), in force ratione temporis), according to which revenues deriving from transactions with companies not resident in the territory of the State, related to the domestic business, must be quantified according to the "normal value" of the goods sold or services provided, determined on the basis of the criteria set forth in Article 9, t.u.i.r.;

2. in declared application of the methods approved by the OECD in its directives on transfer pricing, aimed at preventing tax avoidance through the artificial shifting of taxable income between group companies having their registered office in different countries, the taxpaying company had used the so-called "transfer pricing". profit split method (profit or profit sharing method) in order to arrive at the determination of the taxable income (of each of them) closer to what would have emerged if the services rendered by one to the other for the overall management of the pipeline had not been rendered between related companies, but between independent companies, in a regime of free competition; in detail, the profit split method consisted in the economic division of the gross profit (before tax) achieved overall by the three companies, through (obviously) the subtraction from overall revenues of the total costs of the three companies; the total gross profit was divided between the related companies on the basis of a percentage allocation (i.e. a share) resulting from the arithmetic average of two significant values, such as the kilometres of pipeline pertaining to each of them (and therefore the tons of crude oil passing through it) and the value of the tangible fixed assets recorded in the financial statements of the subsidiaries; according to the assessors, this criterion, which was theoretically unexceptionable, needed to be corrected in order to determine, for each company, r g. no. 19654/2013 Cons. est. Riecardo Guided a realistic income result, in line with the operating contribution that each company had provided to the management of the pipeline; the instrument for correcting the gross profit allocation coefficient used by the tax authorities consisted of considering (in addition to the kilometres managed and the value of fixed assets) also the cost of plant maintenance borne by each company (that of S.I.O.T. Spa was almost three times higher than that of the other two companies managing the pipeline due to the orography of their respective territories), which entailed, for the Italian company, an increase in the taxable base for each of the years under verification;

3. the Trieste Provincial Tax Commission (judgment no. 107/01/2010), having joined the appeals, upheld them with a decision that, on the appeal of the office, the Friuli-Venezia Giulia Regional Tax Commission, in its cross-examination of the taxpayer, confirmed, with the judgment indicated in the epigraph, based on the following reasons: (a) the tax authorities had adjusted the "normal value" adopted by the taxpayer by referring to two other significant parameters (in addition to those already considered by the company), i.e. that of the electricity used and that of the maintenance costs borne by the individual companies, except then, in practice, to choose and use only one (that of maintenance costs); (b) since this is a case of tax avoidance, the burden of proof is borne by the tax authorities on the Agency, as a substantive plaintiff, not only by virtue of the principle set out in art. 2697 of the Italian Civil Code, but also because of the teaching of the jurisprudence of legitimacy, which echoes the OECD directive of 1995, and states that the taxpayer is not required to prove the correctness of the transfer prices applied, if first of all the A.F. has not prima facie proved the non-respect of the "normal value"; (c) the method of determination of such "normal value" used by the taxpayer was correct, while the corrective parameters identified by the Agency are not supported (p. 1). (c) the method used by the taxpayer was fair, while the corrective parameters identified by the Agency were not supported (p. 7 of the judgment) by "very precise and non-optionable elements [...] that would highlight the progress - unequivocal and reliable over time - of a normal value more consistent and closer to reality than the one adopted", which have been "illogically" neglected by r.g. n. 19654/2013 Cons. est. Riceardo Guida contribuente in order to obtain an unjustified tax benefit; (d) given that the issue raised by the company (with an incidental appeal) at the point of exclusion of the sanctions was absorbed, the exclusion of sanctions was in any case justified because of the objective difficulties in identifying the "normal value" in situations, as in the present case, of complex provision of services;

4. the Agency resorts, with four reasons, for the cassation of this judgment; the company resists with a counter-course;

Considering that:

a. First of all, there is no basis for the company's objection to the inadmissibility of the appeal by the Court of Cassation on the ground that the Agency's acquiescence is manifest to the autonomous head of the judgment concerning the alleged invalidity of the notices on the grounds of lack of reasoning; the company claims that, as the first ground of appeal, the notices are null and void on the grounds of lack of reasoning at the point of existence of elusive intent; it submits that, on the one hand, the Trieste CTP had accepted this critical remark and that, on the other, the Agency had put forward a specific ground of appeal (the first), which, in turn, the Regional Commission had rejected, noting that, as regards transfer pricing, the burden of proving the company's elusive intent lies with the tax authorities; lastly, it seems to maintain (albeit with statements that are not too clear) that the whole of the res litigation is covered by judgment in the absence of a specific appeal by the office against that head of the appeal judgment; this view of the dynamics of the case cannot be shared because, in fact, with the first two grounds of appeal, which are inscribed in the normative parameters of legal error and lack of motivation, the Agency has criticised the whole structure of the appeal decision, thus preventing the judgement from being formed on every controversial aspect of the case;

1. Infringement and misapplication of Article 9(3), Article 110(2) and (5) (now Article 7) of Presidential Decree No 917 of 22 December 1986, in relation to Article 360(3) of the Code of Civil Procedure', the Agency complains of the judgment under appeal in Case No 19654/2013 Cons. est. Riccardo Guida for having wrongly denied that, for the purposes of determining the "normal value" of transactions between related parties, in compliance with the principle of free competition, the criterion chosen by the three companies managing the transalpine pipeline, based on static and asset parameters (the length of the section of pipeline managed; the balance sheet value of the fixed assets), which would require corrections directly related to the analysis of the trend of the individual financial year, such as - precisely - the maintenance costs of the plants, which are much higher for the Italian company than for the foreign ones, due to the different trend of the respective sections of the pipeline (uphill, the Italian section; downhill, the Austrian section; flat, the German one); .

2. with the second plea in law ('2. Failure to state or insufficient reasons on decisive factual points; and in any event failure to examine a decisive fact which is the subject of discussion between the parties and the relevant document in relation to Article 360(5) of the Code of Civil Procedure'). (herein applicable in the text prior to the amendment pursuant to Legislative Decree No 83/2012)], the Agency alleges that the grounds of the judgment under appeal are inadequate; on the one hand, it confined itself to describing the method of apportionment of costs adopted by the three companies, without explaining why that method was capable of reproducing the result which would have been achieved under conditions of free competition; on the other hand, it failed to examine in depth the decisive aspect of each company's contribution to the peacefully unified operation of the pipeline; on the other hand, the Agency accuses the CTR of not having examined a decisive document - p. 1. 21 of the report of finding - which showed that 65.88% of the maintenance costs were borne by the Italian company, 20.70% by the Austrian company and 13.41% by the German company. It points out that if, on the contrary, the difference in maintenance costs had been taken into account, this item, as in a free market system, would have had an impact on the sale prices of the service and operating revenues, as it is inconceivable that highly differentiated operating costs for the same service for different companies would correspond to homogeneous revenues; r.g. no. 19654/2013 Cons. est. Finally, Riccardo Guida, the Agency attributes to the judgment under appeal that it dwelt on the alleged unsuitability of the corrective criterion added by the A.F. to that adopted by the company, without, however, taking a position beforehand on the reasons why the Regional Commission had, instead, considered reliable the method of revenue allocation chosen by the taxpayer;

3. with the third plea ["3. Infringement and misapplication of Article 100 of the Code of Civil Procedure, in relation to Article 360(4) of the Code of Civil Procedure'], the Agency alleges, in the judgment under appeal, that it erred in deciding on the conditional cross-appeal brought by the company, even though it upheld the company's defence on the merits, rejecting the appeal of the Office, which deprived the appellant of the interest in obtaining a ruling on the applicability or otherwise of the penalties;

4. by the fourth ground ['4. Infringement and misapplication of Articles 5 and 6 of Legislative Decree No 472 of 18 September 1997 and Article 8 of Legislative Decree No 546 of 31 December 1992, in relation to Article 360(4) of the Code of Civil Procedure. "In the alternative, the judgment under appeal is criticised for excluding the application of penalties, disregarding the fact that the penalty is applied in the event of an infringement resulting from conscious and voluntary conduct on the part of the taxpayer, and can be excluded only if the agent erred in fact, as a circumstance, in the present case, not even deduced; from another point of view, the applicant denies that, in the present case, there was the exemption represented by the objective difficulty of interpretation of the scope and scope of the rule infringed, also in view of the specialist professional qualifications of the operators concerned and the fact that the need to estimate the 'normal value' depended on the free choice of the companies to form a transnational group to carry out their operations;

5 the first and second pleas, which are subject to joint examination because of their common legal matrix, are well founded;

5. 1. it is useful to compose the regulatory and jurisprudential reference framework and to give account of the criteria outlined by the OECD on transfer pricing between multinational companies; (a) art. 110, paragraph 7, t.u.i.r., in force ratione temporis, regarding transfer pricing, provides that:

"Income components deriving from r.g. no. 19654/2013 Cons. est. Riccardo Guida transactions with companies not resident in the territory of the State, which directly or indirectly control the company, are controlled by it or are controlled by the same company that controls the company, are valued on the basis of the normal value of the goods sold, the services provided and the goods and services received, determined in accordance with paragraph 2, if an increase in income derives from them;" paragraph 2 recalls art. 9, t.u.i.r., which, in paragraph 3, states that "Normal value, except as established in paragraph 4 for the goods considered therein, means the average price or consideration charged for goods and services of the same or similar kind or similar, in conditions of free competition and at the same stage of marketing, in the time and place where the goods or services were acquired or provided, and, failing that, in the nearest time and place. For the determination of the normal value, reference shall be made, as far as possible, to the price lists and tariffs of the person who supplied the goods or services and, failing that, to the price lists and tariffs of the chambers of commerce and professional tariffs, taking account of usage discounts. For goods and services subject to price discipline, reference is made to the measures in force";

(b) according to the prevailing orientation of this Court (Cass.16 /01/2019, n. 898; 25/06/2019, n. 16948), the legislation in question does not integrate anti-avoidance regulations in the proper sense, but is aimed at the repression of the economic phenomenon of "transfer pricing" (transfer of taxable income as a result of transactions between companies belonging to the same group and subject to different national regulations) in itself considered, so that the evidence for the tax authorities does not concern the concrete tax advantage obtained by the taxpayer, but only the existence of transactions, between related companies, at a price apparently lower than the normal price, while it is up to the taxpayer, in accordance with the ordinary rules of proximity of the evidence under Article. 2697 of the Italian Civil Code, and with regard to tax deductions, the burden of proving that such transactions took place at market values to be considered normal in the same way as specifically provided for by art. 9, paragraph 3, t.u.i.r. (Cassation no. 7493 of 15/4/2016; no. 13387 of 30/6/2016; Cassation no. 27018 r.g. no. 19654/2013 Cons. est. Riccardo Guida of 15/11/2017; Court of Cassation no. 18392 of 18/9/2015; Court of Cassation no. 9673 of 19/4/2018).

(c) this same jurisprudence of legitimacy has made it clear that the rationale of the rule lies in the principle of free competition set out in art. 9 of the OECD Model Convention, which provides for the possibility of taxing profits deriving from intra-group transactions that have been regulated by conditions different from those that would have been agreed between independent companies in comparable transactions carried out on the free market; it is, therefore, a matter of verifying the economic substance of the transaction and comparing it with similar transactions carried out, in comparable circumstances, under free market conditions between independent parties and assessing their compliance with these;

(d) the OECD Guidelines on Transfer Pricing for Multinational Enterprises and Tax Administrations of 2010 - which, in the part that concerns us here, follow the Guidelines of 1995 (OECD, Guidelines, 1995), which, in turn, as the doctrine has pointed out, had exceeded Circular 332/IIDD/1980, which seemed to relegate the use of the more sophisticated income methods to auxiliary use, making it possible to use, among other things, the Transactional profit split method (TPSM or PSM) or "profit sharing method" whenever the old comparative methods were difficult and unreliable to apply - among other criteria, they provide for: (§ 2. (108) the (said) transactional profit split method, which aims at eliminating the effects on profits of special conditions agreed or imposed in a controlled transaction by determining the allocation of profits that independent companies would have expected to make by carrying out the transaction(s); this method identifies, first, the profits to be distributed among the associated enterprises resulting from the controlled transactions carried out by them (the 'total profits'); then these profits are distributed among the associated enterprises on the basis of an economically sound basis, which is close to the distribution of profits that would have been envisaged and taken into account in an agreement made in accordance with the principle of free competition;r g. no. 19654/2013 Cons. est. Riccardo Guida (§ 2.109) that the main advantage of the method of sharing the profits of transactions is that it represents a solution for highly integrated transactions for which a unilateral method would not be appropriate; (§ 2.112) that another advantage of the method of sharing the profits of transactions is that it allows a certain flexibility in considering specific circumstances and elements, possibly exceptional, relating to associated enterprises and not existing in the case of independent enterprises, while nevertheless representing an approach in conformity with the principle of free competition in so far as it reflects what independent enterprises would reasonably have done if they had been in identical circumstances; (§ 2. (113) that a further positive aspect of the profit-sharing method of the transactions is that it is less likely that a party to the controlled transaction will be attributed an exceptional and unlikely to make a profit, since the valuation concerns both parties to the controlled transaction. This may be particularly important in the analysis of the parties' contributions to intangible assets used in the controlled transactions. This bilateral approach can also be used to achieve a profit allocation resulting from economies of scale or other group efficiencies that are satisfactory for both the taxpayer and the tax administration; (§ 2.114) one disadvantage of the transaction profit allocation method is the relative difficulty of application. At first sight, the transaction profit sharing method may seem more accessible to both taxpayers and tax administrations as it tends to be less based on information concerning independent enterprises. However, associated enterprises and tax administrations may have the same difficulties in obtaining information on foreign affiliates. In addition, it may be difficult to assess the overall costs and income for all associated enterprises involved in the controlled transactions; this would require uniformity in bookkeeping and documentation and the application of corrections under R.G. practice No 19654/2013 Cons. est. Riceardo Guide on accounting and currency matters. In addition, when the method of allocation of transaction profits is applied to operating profits, it may be difficult to identify the appropriate operating expenses associated with transactions and allocate costs between transactions and other activities of associated companies;

(e) the same circular 42/IIDD/1981 already specified that the adequacy of a method is assessed on a case-by-case basis (conf.: OECD, Guidelines, 1995) and, moreover, the TPSM method is valued in circular 58/E/2010;

(f) the d.m. 14/05/2018 of the Ministry of Economy and Finance ("Guidelines for the application of the provisions of Article 110, paragraph 7, of the Income Tax Consolidation Act, approved by Presidential Decree no. 917 of 22 December 1986, on transfer pricing. "

(g) according to the OECD: "The selection of a transfer pricing method always aims to find the most appropriate method for a particular case. To this end, the selection process should take into account: 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, determined in particular through functional analysis; the availability of reliable information (in particular on independent comparables) necessary for the application of the method selected and/or the other methods; the degree of comparability between controlled transactions and transactions between independent enterprises, including the reliability of comparability adjustments that are necessary to eliminate significant differences between them";

5. 2. in 2019, the Eu Joint Transfer Pricing Forum (JTPF), established by the European Commission, published the document "The application of the profit split method within the EU" to answer two questions: when to use this method (i.e. under what circumstances it can be considered the most appropriate method) and how to use it for profit sharing. The document starts from the following consideration (page 2): "The OECDr.g. n. 19654/2013 Cons. est. Riccardo Guida guidelines of 1995 referred to the PSM as a method of "Iast resort", to be used when other methods could not be reliably applied (para. 3.50). Yet, since the revision of the OECD Guidelines in 2010, the PSM is considered a pricing method to be applied in an equally reliable manner as the other methods in accordance with the "most appropriate method" criterion. [Editor's note: The 1995 OECD Guidelines referred to MSP as a "last resort" method to be used when other methods could not be applied reliably (paragraph 3.50). However, since the revision of the OECD guidelines in 2010, MSP has been considered to be a pricing method to be applied as reliably as other methods in accordance with the 'most appropriate method' criterion; he adds (Section 3 Use of the profit split method, p. 5):

"The PSM, like any other transfer pricing method, should be chosen as the most appropriate method only after the accurate delineation of the transaction including the functional analysis. In addition, the PSM must be appropriate for the particular circumstances that it is aimed to be applied to. The OECD Guidelines on the use of the PSM list the following indicators for determining whether the PSM may be considered the most appropriate transfer pricing method in a specific set of circumstances: 3 the existence of a unique and valuable contribution by each party to the controlled transaction and/or 3 a high level of integration regarding business transactions to which the transaction relates and/or 3 The shared assumptions of economically significant risks or separate assumption of economically closely related risks by the parties to the transaction; [n. d.r.: "MSP, like any other transfer pricing method, should be chosen as the most appropriate method only after the accurate delimitation of the transaction, including functional analysis. Furthermore, MSP should be appropriate for the particular circumstances to which it is intended to be applied. The OECD Guidelines on the use of MSP list the following indicators to determine whether r.g. No 19654/2013 Cons. est. Riccardo Guida MSP may be considered the most appropriate transfer pricing method in a specific set of circumstances: 3 the existence of a unique and valuable contribution by each party to the controlled transaction and/or sr a high level of integration with respect to the commercial transactions to which the transaction relates and/or - the shared assumption of economically significant risks or the separate assumption of economically closely correlated risks between the parties to the transaction;"]; specifies (3.1. (6) 'The OECD Guidelines mention that contributions are unique and valuable when they are not comparable to contributions made by uncontrolled parties in comparable circumstances and they represent a key source of actual or potential economic benefits.'; clarifies (Section 4 How to split the profit, p. 13): 'The splitting factors are grouped in the following broad categories: A. People-based factors, B. Sales/volume based factors, C. Asset-based factors, D. Cost-based factors, E. Other factors': A. People-based factors, B. Sales/volume based factors, C. Asset-based factors, D. Cost-based factors, E. Other factors'; with respect to point (D) states (p. 15): 'The cost-based splitting factors are often used in the joint performance of the value creating activities. The contribution in the form of a value creating activity is then reflected on the costs borne in the performance of that activity. (n.a.r.: 'The cost-based splitting factors are often used in the joint performance of value creating activities. The contribution in the form of value creation activities is then reflected on the costs borne in the performance of that activity"; r.g. no. 19654/2013 Cons. est. Riecardo Guida

5.3. as noted in the doctrine, the above means that, among the various allocation keys, the OECD Guidelines expressly provide that cost-based allocation keys can be used when it is possible to identify a strong correlation between the costs incurred and the added value created during the transactions under analysis. However, the allocation keys are sensitive to the accounting classification of costs and to the existence of any differences (i.e.: high labour-cost country vs. low labour-cost country); intra-group cost allocation is not irrelevant for the reliability of MSP in practice. In this respect, it is highlighted that the selected allocation keys should be "compliant" for reliability of results (OECD, Revision of Chapters of the Transfer Pricing Guidelines, Paris, 2010, § 2.116). In essence, with regard to costs: "Allocation keys. allow [...] to capture the economic rationale of profit sharing in vertically integrated multinational groups in relation to the capital used. The fundamental economic relationship is that between operating profit and capital employed. The correct structuring of this economic relationship (i.e. the correct structure of the economic relationship between operating profit and capital employed,

5.4. carried out this legal premise, returning to the grounds of the appeal, the Regional Tax Commission, given that the challenge was constructed as a hypothesis of tax avoidance (see p. 6 of the judgment) - an aspect which, according to the abovementioned case-law of the Court of Justice (Case C-431/01, paragraph 6 of the judgment), is not in line with the principle of the 'arm's length principle'. 898/2019, 16948/2019), does not constitute the core of the transfer pricing discipline which, contrary to what the CTR states, is aimed at preventing the risk of an undue allocation of the taxable income between multinational associated companies - with an assessment in fact, which can be verified here from the point of view of its intrinsic logical-legal consistency (see infra), denied that the office (burdened with the relevant burden of proof) had demonstrated the 'violation of the normal value' of the transfer prices applied (see p. 6 of the judgment). p. 7 of the judgment), i.e. that the distribution of profits (or profits) among the associated undertakings violated the principle of free competition, r.g. no. 19654/2013 Cons. est. Riccardo Guida departing from the economic result that the various companies would have derived from the described transactions (related to the management of the pipeline) by acting as independent parties operating on the free market; in particular, the Regional Commission considered it legitimate and correct to use the method of distribution of profits from the transactions, which, as mentioned above, is also provided for by the OECD Guidelines, and, conversely, denied that the corrective measures adopted by the tax authorities, consisting in recognizing the importance of the different incidence (in the financial statements of the associated companies) of the pipeline maintenance costs, were based on "very precise and not optional elements", capable of making the "normal value" more consistent and closer to reality; the appellate court, in essence, evoking the principles of law governing the regulation of transfer pricing, found that the (contested) profit sharing between the associated undertakings was based on an economically sound basis and that, on the contrary, all the elements annexed by the Agency, none excluded (including, therefore, the aspect of the different incidence of maintenance costs, repeatedly mentioned in the appeal decision), were unable to provide evidence to the contrary, i.e. to show that the profit sharing in transactions between the associated undertakings was not in conformity with 'normal value'; the Regional Commission's statement cannot be accepted since, in essence, the strong asymmetry of intra-group costs, which was complained of by the tax authorities from the administrative phase, has not been taken into account. § This means that the question, addressed to the CTR, whether the considerable asymmetry of intra-group costs was compatible with the chosen revenue allocation method, i.e. whether, in the specific case, the resistance/reliability test of the Transactional Profit Split Method had been passed, which reveals a false application of the article. 110, t.u.i.r., as supplemented and mediated by OECD Guidelines, and as a flaw in the overall argumentative structure of the ruling;r.g. no. 19654/2013 Cons. est. Rireardo Guida

6. the third and fourth plea are absorbed by the effect of the acceptance of the first and second plea;

7. it follows that, once the first and second plea are accepted, once the third and fourth plea are absorbed, the judgment is quashed, with referral to the Friuli-Venezia Giulia Regional Tax Commission, in a different composition, including for the costs of the legality hearing;

PQM

the Court upheld the first and second pleas, declared the third plea to be admissible, and the fourth plea in law, in the light of the judgment under appeal, refers back to the Commission regional tax authorities of Friuli-Venezia Giulia, in different composition, also for the costs of the legality hearing.

Thus decided in Rome on 25 February 2020