Court confirmed legality of additional accrual of 11.24 million UAH for violation of tax legislation

Cassation Administrative Court as a part of the Supreme Court upheld conclusion of the courts of previous instances and position of the supervisory body that the taxpayer (buyer and his counterparty) lacks necessary conditions to achieve results of the corresponding business and economic activity due to the actual absence of managerial or technical personnel, fixed assets, production assets, warehouses, vehicles may testify in favor of the impossibility of delivering the corresponding goods and the actual failure to carry out operations, provided such circumstances are confirmed by the relevant evidence.

As a result, lack of proof of the actual implementation of business operation deprives primary documents of legal significance for purposes of forming tax benefit and the buyer – right to form this tax benefit, even in the presence of correctly executed external signs and form, but unreliable and therefore legally defective primary documents, and, despite the taxpayer having proof of payment to the seller of the cost of goods/services, if the movement of funds is not ensured by the connection with economic activity of participants of these operations.

In addition, the courts noted that the taxpayer should act with due diligence when choosing a counterparty and entering into contracts, since the subsequent actual execution of such contracts, obtaining profit and right to receive certain preferences, in particular, formation of the VAT credit, depend on this.

Moreover, examining selection criteria and other circumstances that the plaintiff was guided by when choosing his counterparties, the courts found that the conclusion of contracts with counterparties was of a one-time nature. Until now, the plaintiff did not have any business relations with the specified persons, negotiations and agreements regarding the conclusion of supply contracts were conducted by telephone, and copies of contracts were sent by postal means. Such actions of the plaintiff, in opinion of the courts, cannot indicate his due diligence in choosing appropriate counterparties.

Panel of judges agrees with conclusion of the courts of previous instances, made in this case, that formal existence of contracts, deeds, tax invoices and other documents is not in itself sufficient and indisputable documentary confirmation of the actual performance of contractual relations.

Primary documents cannot be evidence of the actual performance of delivery operations if there are circumstances in case that exclude the possibility of exchanging such services between business entities.

Having analyzed primary documents provided by the plaintiff in their overall relationship, the courts of previous instances came to the conclusion that they cannot testify to the unconditional confirmation of real implementation of the disputed business operations between the counterparties, in respect of which audit was carried out.

Cassation administrative court summarizes that, under the circumstances established in this case, the plaintiff has not confirmed reality of business operations for the supply of products as a result of relationships with counterparties and therefore the court considers conclusion of the courts of previous instances to be justified that the plaintiff does not have a right to receive tax benefits for formally declared operations.

Therefore, by the decision of the Cassation Administrative Court as a part of the Supreme Court the taxpayer’s cassation appeal was dismissed, decisions of the courts of previous instances, which refused to satisfy claims for recognition of tax notifications-decisions as illegal and their cancellation for the total amount of 11.24 million UAH were left unchanged.