Assessee is EPTA S.p.A.

EPTA S.p.A. is an Italian Company that had a controlled transaction with its Hungarian subsidiary, Epta International KFT, in FY 2015. The Italian Revenue Authority issued an upward adjustment of €4,119,149 to EPTA's taxable income, relying on the fact that the Hungarian tax authorities had granted Epta International KFT a downward transfer pricing adjustment of €4,742,659 under Hungarian law. The Italian authority treated the absence of a corresponding upward adjustment in Italy as evidence of double non-taxation and artificial profit shifting.

EPTA challenged the assessment. The Provincial Tax Commission of Milan rejected the appeal. The Lombardy Court of Appeal then ruled in EPTA's favour, holding that the tax authority had not proven a transaction below normal value. The tax authority escalated the matter to the Supreme Court (Court of Cassation).

Assessee's Contentions -

The tax authority failed to determine the "normal value" of the controlled transaction and did not prove that prices between EPTA and Epta International KFT were below arm's length. The arm's length provision was therefore inapplicable on the facts.

The Lombardy Court of Appeal correctly found that without a proper "normal value" determination, the assessment lacked legal basis. A foreign adjustment alone cannot trigger an automatic corresponding upward adjustment in Italy.

Revenue's Contentions -

A downward TP adjustment of €4,742,659 was recognised by Hungarian authorities in the subsidiary's books. The absence of a corresponding upward adjustment in Italy constitutes evidence of double non-taxation and supports an upward assessment under the Italian arm's length rules.

The Italian arm's length rules require parity where a foreign jurisdiction grants a downward adjustment, Italy is entitled to make a corresponding upward correction to eliminate double non-taxation of group profits.

Supreme Court's Judgment -

The arm's length provision for cross-border related party transactions is aimed at preventing artificial profit shifting. The Hungarian downward adjustment, based on OECD criteria constitutes sufficient initial evidence by the tax authority. The Court quashed the appeal judgment and remanded for fresh assessment on the merits.

Once the tax authority demonstrates a price reduction via a foreign TP adjustment, the burden shifts to the taxpayer to prove the agreed consideration reflects market value and that the authority's assumption is incorrect. The taxpayer's silence on this point is not sufficient to rebut the presumption.

Holding -

The Italian Supreme Court held that the tax authority bears an initial burden to show intra-group transactions occurred at a price below normal value which can satisfy by evidencing a foreign downward TP adjustment on OECD criteria. Thereafter, the burden shifts to the taxpayer to prove the transaction reflected market value. The Court quashed the Lombardy Court of Appeal decision and remitted the case for fresh assessment.