Court confirmed legality of adopted tax notifications-decisions

Court of appeal supported the controlling authority’ position regarding legality of adopted tax notifications-decisions, which reduced negative amount of the value-added tax and increased amount of monetary obligation from the value-added tax payment for products (works, services) produced in Ukraine by a total amount of 1 003 399 25 UAH.

Representatives of Main Directorate of the State Tax Service in Poltava region, during the trial, drew the Court's attention to the fact that plaintiff’s main activity since establishment of enterprise was Classification of economic activity type 42.11 - Construction of roads and highways, in August 2021 the enterprise changed its main activity to Classification of economic activity type 56.10 - Activities of restaurants, provision of mobile catering services, which is also confirmed by data from the Unified State Register of Legal Entities, Individuals-Entrepreneurs and Public Organizations. No evidence was provided to the Court that plaintiff plans to use granary in economic activities.  

Court of appeal supported and agreed with conclusions of the Court of first instance that acquisition of granary, and accordingly services for its construction, is not related to economic activity and is not aimed at generating income for the enterprise, and therefore is not intended for use in transactions that constitute the plaintiff's economic activity.

In addition, both during the audit and the case trial, the plaintiff did not provide evidence that would refute conclusions of the controlling authority regarding non-confirmation of use of the purchased granary, and accordingly, services for its construction within the scope of plaintiff’s economic activity.

Therefore, the VAT on this product was not used in transactions that are subject to taxation, therefore it is necessary to accrue tax liabilities according to Paragraph 198.5 Article 198 of the Tax Code of Ukraine.

Panel of judges notes that in the absence of the taxpayer’s economic purpose, such transactions are not committed within the framework of economic activity, which is objectively aimed at making a profit, and therefore consequences of economic transactions committed without economic purpose are not subject to reflection in tax accounting.

Court also noted conduct of transit financial flows aimed at carrying out transactions to provide tax benefits mainly with the counterparties that do not fulfill their tax obligations, for artificial tax credits that are not real in essence.

In this way, it was established that the plaintiff’s counterparty lacks necessary conditions for carrying out economic activities in terms of purchasing, selling, marketing, storing, shipping goods, etc. due to the lack of vehicles, premises, and material and labor resources, which indicates lack of opportunities to provide construction services.

The plaintiff’s representative did not provide the Court with evidence that would confirm legality of the taxpayer’s allocation of the VAT amounts to tax credit for economic transactions with the counterparty.

Having examined evidence available in the case materials, the panel of judges concluded that explanations provided by the plaintiff and primary accounting documents do not refute conclusions of the tax authority regarding existence of violations identified during the audit.

In view of above specified, the panel of judges agreed with conclusions of the Court of first instance regarding validity of conclusions of the audit report on the plaintiff’s failure to comply with requirements of tax legislation and, as a result, legality of disputed tax notifications-decisions.

By the decision of Poltava district administrative court dated 09.02.2024, left unchanged by the ruling of Second administrative court of appeal as of 10.12.2024 in case № 440/6417/23 – the claim was refused in full.