Court supported position of tax officials regarding denial of reality of the plaintiff’s economic operations with his counterparties

Cassation administrative court as a part of the Supreme court cancelled decision of the Appellate court and upheld decision of the Court of first instance, which supported position of Main Directorate of the State Tax Service in Kharkiv region in case of denial of reality of the plaintiff’s economic operations with his counterparties.

Recognizing argumentations of the controlling body regarding unreality of economic operations, the Court of first instance took into account the following circumstances: absence of physical, technical, technological conditions and qualified personnel objectively necessary for performance of economic operations for supply of products to the plaintiff’s address, among the specified suppliers, in particular, non-submission by the specified business entities of reporting related to the use of labor resources (tax calculations of the income amounts accrued (paid) for the taxpayers’ benefit and amounts of tax withheld from them form № 1DF); non-confirmation of transportation, loading, unloading, storage, acceptance of products due to the lack of relevant documents; lack of quality certificates or product passports; according to the analysis results of information from the Unified Register of Tax Invoices for purchase of products and services by the specified counterparties-suppliers, corresponding nomenclature in a supply chain has not been established; according to data from the Unified Register of Pretrial Investigations counterparties appear in criminal proceedings.

The Supreme Court noted that transport documents are not primary documents regarding economic operation of purchase (supply), at the same time, assessing relevant argumentation of Main Directorate of the State Tax Service as unfounded, the Appellate court did not take into account specified circumstances regarding the nature of activities of counterparties and requirements of the National Standard of Ukraine B V.2.7-127:2015, which objectively testify not in favor of the claimant’s argumentation that economic operations had a real nature. The First-instance court's assessment of the plaintiff's lack of documents regarding transportation, unloading, acceptance and storage of products is correct in view of amount of operations for the purchase of products documented by the plaintiff, number of suppliers and commonality of their characteristics. Assuming absence of documents regarding transportation of products, the general business practice assumes their presence. At the same time, the plaintiff has no documents regarding transportation of products in operations with 39 counterparties.

Panel of judges noted that current tax legislation does not make the taxpayer's right to expenses and/or tax credit dependent on the fulfillment of tax obligation by other taxpayers – suppliers of products (services). However, if circumstances are established in the court process that indicate that the taxpayer was or could be aware of illegal activity of his counterparty, which consists in the illegal minimization of tax liabilities, in particular, in creation of artificial grounds for increasing costs and/or tax credit or in case that the taxpayer acted without due diligence or care when choosing a counterparty who does not fulfill tax obligation, under established circumstances that refute reality of economic operations, tax benefit received by such taxpayer in the form of a right to spend and tax credit is groundless.

Taking into account the specified circumstances regarding nature of the counterparties' activities and availability of this information in official sources, it is impossible to claim that the plaintiff exercised due diligence choosing these counterparties and that the plaintiff had no reasonable grounds to doubt a good faith of the specified business entities.

As a result, the Appellate court had no reason to apply principle of the taxpayer’s individual responsibility, because, contrary to argumentations of Main Directorate of the State Tax Service, the plaintiff did not prove that he acted with due diligence choosing a counterparty and took reasonable measures to verify authenticity of primary documents on the basis of which he formed indicators of their financial and tax accounting.

Cassation administrative court summarizes that the availability of primary documents is mandatory, but not the only sufficient condition for formation of tax credit and expenses, since the fulfillment of obligation under the deed requires preparation of other documents. Formal drawing up of only primary document is not indisputable proof of reality of specific business operation, if the controlling body provides argumentations that call into question its implementation, in particular, argumentations regarding the impossibility of making deliveries by counterparties due to their lack of material and labor resources to carry out business activities and at the same time nomenclature of the purchased products does not match nomenclature of delivered products according to data from the Unified Register of Tax Invoices; episodic or time-limited to which dates of issuance of documents for the supply operation fall, financial and tax reporting of counterparties, failure to reflect relevant tax obligations in this reporting.

Therefore, by the decision of the Cassation administrative court as a part of the Supreme court as of 28.12.2022, cassation appeal of Main Directorate of the State Tax Service in Kharkiv region was upheld, decision of the Appellate court as of 20.02.2020 was cancelled and decision of the Kharkiv district administrative court as of 23.10.2019, which refused to satisfy claims on recognition of tax notifications-decisions for the total amount of 11.16 million UAH as illegal and their cancellation – remained in force.