LLC “P” appealed to the court with an administrative lawsuit to the Main Department of the State Tax Service in Kyiv, in which asked to declare illegal and cancel the tax notice-decision issued as a result of an unscheduled documentary on-site inspection of the company, which increased LLC “P”’s monetary obligation on value added tax. The inspection revealed an overstatement of the tax credit in the relationship between LLC “P” and its counterparties. The case was considered by the courts repeatedly, as a result of the last review of the case, the claims were denied. The plaintiff filed a cassation appeal. How did things develop further?
In deciding the case, the court took into account the following factors.
Factor 1
The courts found that during the period to be inspected, the plaintiff (performer) and Counterparty-1 entered into an agreement on the production and use of intellectual property rights (IP), the subject of which was the performance of works on the production (creation) of audiovisual works – two promotional videos. Also, the plaintiff (performer) and Counterparty-2 (client) entered into aa agreement on the performance of works, in accordance with the terms of which the contractor undertook to perform work on the creation of an audiovisual work – a promotional video. The plaintiff (performer) and Counterparty-3 (customer) entered into an agreement on the production and use of the object of IP law – an audiovisual work, under the terms of which the performer undertook to perform work on the creation of the video.
Factor 2
The courts found that in order to fulfill the contractual obligations to the above entities, the plaintiff entered into agreement with other contractors. In accordance with the terms of the contract with Counterparty-4, the latter undertook to perform work on the organization of the production process in order to create audiovisual works on the instructions of LLC “P”. According to the agreement concluded by LLC “P” with Counterparty-4, the latter undertook to provide the plaintiff with services for the development and creation of 3D graphics of images of products (goods/services), as well as services for the design of auxiliary graphic materials – promotional video. In accordance with the terms of the contract concluded by LLC “P” with Counterparty-4, the latter undertook on behalf of the plaintiff to perform work on the organization of the production process and video recording in order to create two videos with music. The terms of these agreements stipulate that the organization of production of videos contains the following conditions: the preparatory period, namely: the selection of the director, cameraman, locations, costumes, models of scenery and more; video recording with Alexa camcorder, etc. In accordance with the terms of the agreement concluded by LLC “P” with Counterparty-5, the latter undertook to provide the plaintiff with services for processing the footage, namely: editing, retouching and color correction of video, recording on analog and digital media to create a promotional video. Under the terms of the agreement concluded by LLC “P” with Counterparty-6, the latter undertook to provide the plaintiff with services for the formation of participants in the shooting of two promotional videos, the formation of participants for participation in the shooting of two promotional videos. The parties agreed that the work involves the search for participants, actors to participate in the shooting of videos, documentaries; the list of candidates for persons who will be involved in the production of videos, thematic videos, documentaries, will be agreed through the signing of relevant annexes to this agreement.
Factor 3
To confirm the actual implementation of business transactions, the taxpayer must have the relevant primary documents, which must be properly executed, contain all necessary details, be signed by authorized persons and in conjunction with the established circumstances of the case, in particular, on the possibility of business transactions, taking into account the time, location of property, the amount of material and labor resources economically necessary to fulfill the conditions stipulated by the agreements, must indicate the indisputable fact of actual business transactions, which is the basis for the formation of tax accounting by a taxpayer. The lack of proof of the actual conduct of the business transaction deprives the primary documents of legal significance for the purposes of tax benefits, and the buyer – of the right to form a tax credit even if properly executed in appearance and form, but unreliable and therefore legally defective primary documents, and despite the taxpayer having evidence of payment to the seller of the value of goods/services, if the movement of funds is not provided in connection with the business activities of the participants in these transactions.
Factor 4
As established by the courts, LLC “P” to confirm the reality of the disputed business transactions with counterparties under the above agreements the copies of primary documents disputed business transactions, in particular, agreements, acts of delivery and acceptance of works (services), tax invoices, payment orders.
Factor 5
The courts on the basis of proper and admissible evidence, examining the primary documents drawn up as a result of the plaintiff's relationship with its counterparties, concluded that there was no actual conduct of the disputed transactions, given not only individual deficiencies but all evidence in their entirety. In particular, the courts made a decision in view of: the impossibility of establishing the grounds for determining the value of goods and services sold to the plaintiff; lack of proper documentary evidence of the actual implementation of contractual relations, namely documents that would confirm the actual implementation of works/services: finding of participants for the shooting of commercials, evidence to confirm the direction of approval of the results of selection of candidates for filming, video recording, selection of candidates, both models, and the director, the operator, suits, models of scenery, a place of carrying out shootings and direct executors; documents that would confirm the actual implementation of the service of editing the footage, retouching and color correction of video, recording on analog and digital media in order to create a promotional video; failure to provide documentary evidence of the accompanying documents, namely the annexes to the contract for approval of candidates for shooting, as well as persons to be involved in the production, as specified in the agreements; impossibility to establish the volume of works and services provided to the plaintiff, their detailed content, place and time of execution; the inability to establish under what circumstances and in what way the obligations between the plaintiff and declared suppliers were agreed. The plaintiff also did not refute with proper evidence the arguments of the tax authority regarding the lack of actual conduct of these transactions.
Conclusions
Resolution of the Supreme Court of Ukraine of May 15, 2020 in case No. 826/4880/15: the court agrees with the conclusions of the courts of first and appellate instances that the plaintiff's counterparties did not actually sell the disputed works and services, but only provided the latter with accounting documents for illegal tax credit formation. Dismiss cassation appeal of LLC “P”.
