Court confirmed legality of position of tax officials

Decision of the Supreme Court as a part of the panel of judges of the Cassation Administrative Court supported position of Main Directorate of the State Tax Service in Dnipropetrovsk region in case No. 160/15514/20 that original documents submitted by the Claimant, which were compiled for his purchase of agricultural products (sunflower seeds) from the LLC "Z", LLC "Y", LLC "P" do not confirm the fact of economic operations.

Cassation Court established that the fact that the plaintiff has tax and expense invoices is not unconditional proof of reality of economic operations, while for tax accounting it is the fact of product delivery by the performer (supplier) that is indicated in primary documents provided by the taxpayer for confirmation to confirm tax credit. Court made such assessment of documents taking into account circumstances regarding the lack of necessary conditions and resources (production assets, storage facilities, vehicles, limited (insufficient) number of employees) in the LLC "Z", LLC "Y", LLC "P" for supply of sunflower seeds in the absence of official data (in reports of the 1DF form) regarding involvement of employees under the civil law agreements, necessary areas of agricultural land) and according to information from the Unified register of tax invoices, acquisition of services of relevant nature by the specified business entities, which would allow to make a conclusion, has not been confirmed, that they were able to carry out supply of sunflower seeds to the plaintiff’s address.

Court 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, in case of establishing in the court process circumstances that indicate that the taxpayer was or could be aware of the illegal activity of his counterparty, which consists in the illegal minimization of tax obligations, in particular, in creation of artificial grounds for increasing expenses and/or tax credit, or in case when 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 expenses and tax credit is groundless.

Panel of judges also noted that, taking into account circumstances regarding nature of activities of the LLC "Z", LLC "Y", LLC "P", as well as the fact that the plaintiff did not provide substantiated argumentations regarding economic and business feasibility of purchasing sunflower seeds from the counterparties-suppliers who are not producers of these products and which have not been provided with documents regarding the sunflower origin, it is impossible to claim that the Plaintiff exercised due diligence when choosing these counterparties, and that the Plaintiff could not have reasonable grounds to doubt the good faith of the specified business entities. Plaintiff, carrying out activity of production and sale of sunflower oil, must be interested in the supply of high-quality raw materials, which determined his interest as a sunflower producer. This, in turn, requires due diligence in choosing supplier, finding out its capabilities to supply sunflower, especially if supplier undertakes to supply sunflower of its own production.

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

Therefore, by decision of the Supreme Court as a part of the panel of judges of the Cassation Administrative Court as of 05.05.2023 in case No. 160/15514/20, cassation appeal of the Main Directorate of the State Tax Service in Dnipropetrovsk region was satisfied, decision of the Third Administrative Appellate Court as of 31.08.2021 was canceled, decision of Dnipropetrovsk District Administrative Court as of 01.03.2021 was left in force (by decision of the Court of first instance, satisfaction of claims for 18.4 million UAH was refused).