Court supported position of tax officials regarding the refutation of reality of economic operations for the purchase of wood processing wastes

Cassation administrative court as a part of the Supreme Court overturned ruling of the Appellate court and supported ruling of the Court of first instance, which supported position of Main Directorate of the State Tax Service in Mykolaiv region in case No. 1340/5998/18 regarding the refutation of reality of the plaintiff's economic operations for the purchase of wood processing wastes.

Court of first instance, rejecting the claim, came to conclusion about fictitious nature of the plaintiff's business operations with counterparties specified in the verification act, taking into account the following circumstances: absence of conditions and resources necessary for execution of business operations by the plaintiff's specified counterparties; non-compliance of product nomenclature, which are indicated in documents provided by the plaintiff as supplied by these contractors (wood processing wastes), with product nomenclature for which they were buyers according to information from the Unified register of tax invoices and lack of the product’s origin source (wastes of wood processing production), end consumer of which was the plaintiff; lack of information in invoices issued for the purchase of products (services) by the plaintiff from counterparties about official responsible for implementation of business operations and correctness of primary documents, since only signatures are affixed to documents, which does not allow identification of participants in business operations; transportation of product took place before its purchase; discrepancy between the quantity of purchased and actually transported products is established; product supply chain, its manufacturer has not been established (there is so-called "break" in the supply chain); product-transport invoices are partially compiled in violation of the established order, namely: there is no specific address of the loading and the unloading points; missing driver's license numbers, missing power of attorney to receive materials; there is no registration of vehicles specified in the product-transport invoices; plaintiff did not provide quality passports, certificates of conformity, other documents regarding quality of the purchased products; representation of counterparties in criminal proceedings.

The Supreme Court noted that positions of persons responsible for implementation of business operation and correctness of its registration, their personal signature are mandatory requisites of primary document, since indication of this information makes it possible to identify participants of business operations.

Panel of judges noted that presence or absence of certain documents, as well as deficiencies in their execution, cannot be basis for concluding that there are no business operations and for denying formation of tax credit for the VAT payer at the expense of amount of this tax in price of purchased products (services), if other objective data indicate changes in structure of assets and liabilities, the payer's own capital in connection with economic activity. This conclusion corresponds to legal position of the Supreme Court, expressed, in particular, in ruling in case No. 825/3419/14as of 12.06.2018.

However, taking into account that all the expense invoices provided by the plaintiff do not indicate positions of persons responsible for implementation of business operation and correctness of its registration, such a deficiency is of systemic nature, which, in combination with other case circumstance, objectively casts doubt on the veracity of information in expense invoices regarding business operation indicated in them.

Cassation administrative court drew attention to the fact that the same applies to the shortcomings in registration of product-transport invoices, which are pointed out by Main Directorate of the State Tax Service in Mykolaiv region. A mere reference to the VAT payer's lack of documents for transportation of purchased products cannot be a sufficient reason for depriving the payer of a right to tax credit, if case circumstances do not raise doubts that the product supply took place. However, under a different set of circumstances in case, absence of product-transport invoices or significant deficiencies in their design, as document accompanying the cargo during transportation, may testify against the fact of product delivery as basis for increasing amount of tax credit.

Clauses 25 and 26 of Section 1 of the Rules for product transportation by road transport in Ukraine, approved by Order of the Ministry of Transport of Ukraine No. 363as of 14.10.1997, registered in the Ministry of Justice of Ukraine on 20.02.1998 under No. 128/2568 (hereinafter – Rules No. 363) stipulate that cargo and transport documentation is a set of legal documents, on the basis of which accounting, acceptance, transfer, transportation, delivery of cargo and mutual settlements between participants of the transport process are carried out.

Product-transport invoice is one document for all participants in the transport process, intended for accounting of products and material values on the way of their movement, calculations for cargo transportation and accounting of performed work; it is one of documents that can be used for writing-off of products and material values, posting, warehouse, operational and accounting, which can be made in a paper and/or electronic form and must contain the mandatory requisites provided by these Rules.

Paragraph 1.1 of Rules No. 363 establishes that main document for product transportation is a product-transport invoice, form of which is given in Annex 7 to these Rules.

Documents provided for by Rules No. 363, including the product-transport invoice, are not documents of primary accounting that confirm the purchase and/or sale of commodity values (products). Product-transport invoice is intended for accounting for movement of products and material values and calculations for their transportation by the road transport.  

Cassation administrative court summarizes that although the product-transport invoice is not a primary document when the dispute concerns establishment of reality of business operation, its presence and proper execution is adequate evidence of movement of products, considering that transportation is one of delivery stages. This also applies to other documents that must accompany delivery according to legal norms, contract terms or general practice.  

Absence of such document or significant deficiencies in its compiling may call into question real nature of business operation, especially taking into account other circumstances that testify to its non-marketability, for example, objective impossibility of conducting business operations by the counterparty, taking into account tax information regarding the nature of his/her activity; failure to establish the product origin source based on the analysis results of the supply chain according to data from the Unified register of tax invoices (the so-called "break" of the supply chain); non-compliance of delivery with types of economic activity of counterparties in the supply chain; presence of criminal proceedings against the counterparty; absence of accounting documents, preparation of which is provided for by legal norms or is generally accepted according to the customs of business turnover, and/or significant deficiencies in their preparation, etc.

Assessment by the Court of first instance of documents on the basis of which plaintiff declared tax credit for operations with counterparties complies with the above procedural norms. Court of first instance took into account defendant’s argumentations, which were not refuted by the plaintiff, regarding nature of activities of the specified counterparties; deficiencies in preparation of expense invoices and product-transport invoices, including regarding indication in the last vehicles for which state registration was not carried out, while these vehicles are indicated with registration numbers. Instead, the Appellate court unjustifiably ignored these circumstances.

Therefore, by ruling of the Cassation administrative court as a part of the Supreme Court dated 05.05.2023 in case No. 1340/5998/18, the cassation appeal of Main Directorate of the State Tax Service in Mykolaiv region was satisfied, ruling of the Appellate court as of 28.12.2020 was annulled and decision of the Lviv District Administrative Court as of 05.06.2019, which refused to satisfy claims for recognition of tax notifications-decisions for the total amount of 1.82 million UAH as illegal and their cancellation, remained in force.