The role of the referee is to follow whats written in the code. They dont have to give explaination of the situation about why they make a particular decision AS LONG AS it is in accordance to the code. Emotionally we can argue that Panucci may not be an "essentially" active part of the Italian team in that particular moment. Unfortunately, the code clearly states that in such situation its not an offside, so the referee gave a correct decision from this perspective.