S. spółka z o.o. had deducted licence fees paid for the use of a trademark owned by a related party.
Following an audit, the tax authority issued an assessment where these deductions had been disallowed.
An appeal was filed with the Administrative Court which later upheld the tax assessment, and S. spółka z o.o. then filed an appeal with the Supreme Administrative Court.
Judgment of the Supreme Administrative Court
The Court ruled in favour of S. spółka z o.o. and set aside the decision of the Administrative Court and the tax assessment.
Excerpt
“In the present case, it should have been considered that the tax authorities created their own clause, assessing the case on the basis of the entirety of the acts performed between the applicant and its controlled companies – going beyond the scope of Article 11(1)-(4) of the u.p.d.o.p. Indeed, in the legal state of affairs in 2015, there was no legal basis for assessing legal acts and deriving negative tax consequences for the applicant. Therefore, the view of the Court of First Instance indicating the broad application of Article 11 of the u.p.d.o.p., allowing the reclassification of legal actions, is incorrect. In view of the obvious personal links between the parties to the transaction, the authority could only question the amount of the price of that transaction, i.e. the amount of the fee for granting the licence, and to that extent apply a price adjustment using the appropriate method. On the other hand, on the basis of Article 11(1) of the u.p.d.o.p., it was not competent to recognise that in fact the parties had entered into a completely different contract, i.e. a contract for the administration of intangible assets, and to make an adjustment to the Company’s income based on the valuation of this contract.
Consequently, the Supreme Administrative Court considered as legitimate the charges of the cassation appeal which concern the infringement of substantive law – Article 11(1)-(4) u.p.d.o.p. in conjunction with Article 2a O.p. The remaining allegations raised in the cassation appeal are unfounded or are of secondary nature only and may be considered legitimate as a consequence of the infringement of Article 11(1)-(4) of the A.p.d.o.p. found. It should be emphasised that Article 11(1) of the A.p.d.o.p. could not constitute a self-contained basis for “redefining” the disputed transaction. Challenging the scheme of operation applied by the applicant must have a clear legal basis. The tax authorities may not apply other provisions as a solution equivalent to an anti-circumvention clause, and therefore could not apply the referenced regulation of the Minister of Finance on transfer pricing in the case.
In view of the inclusion of the most significant allegation concerning the violation of substantive law, it is necessary to refer to the allegations of procedural law only to the extent necessary for the consideration of the dispute.
First and foremost, the allegation of infringement by the Court of First Instance of Article 141(4) p.p.s.a. is unfounded. The statement of reasons of the contested judgment fulfils the essential formal requirements resulting from this provision, makes it possible to reconstruct the motives for the decision and to carry out an instance control, and thus there are no grounds for holding that this provision was infringed by the Court to a degree which could have a significant impact on the outcome of the case. In view of the multiplicity of allegations in the complaint, the Court referred to them to the extent necessary to carry out a review of the appealed decision. The Supreme Administrative Court also found no grounds to declare the proceedings null and void in connection with hearing the case in closed session under the simplified procedure, in a situation where the Court of First Instance was obliged to hear the case at a hearing, which resulted in a flagrant breach of the principle of the right to a court and a fair trial and the principle of openness of court proceedings. In this regard, it should be emphasised that the applicant was notified of the authority’s request to hear the case in closed session by being served with the response to the complaint, which included the request. Within 14 days of the notification, the applicant did not take a position by requesting an oral hearing, nor did she object to the hearing of the case in closed session. Therefore, if the applicant did not object to the absence of an oral hearing, as requested by the authority in the response to the application served on the applicant, the Tribunal considered the case in closed session under the simplified procedure. On the other hand, it should have been inferred from the wording of the authority’s request that the authority was seeking a hearing on the merits of the case and not a consideration of formal issues.
The plea in law of the cassation appeal concerning the infringement by the Court of First Instance of Article 145 § 1(2) and § 2 of p.p.s.a. is also unfounded, because, in the absence of the reasons set out in Article 247 § 1 item 3 O.p., it had no grounds to apply the control measure provided for in that provision, i.e. the annulment of the decision, due to the violation of Art. 127 in connection with Article 122 in connection with Article 187 § 1 in connection with Article 191 in connection with Article 220 § 1 in connection with Article 235 in connection with Article 233 § 1 point 1 of the P.C. in connection with Article 94 para. 2 of the KAS Act in connection with Article 221a § 1 of the P.C.
It should be recalled that in accordance with the principle of two-instance proceedings, the appellate body is obliged to re-examine and resolve the case settled by the decision of the body of first instance. Therefore, it cannot limit itself to reviewing the decision of the first instance body. Because of this principle, as soon as the proceedings before the second instance authority are initiated as a result of an appeal, the obligation arises to treat the appeal proceedings as a repetition of the examination and determination of the same case. The decision of the body of second instance is the same act of application of the law as the decision of the body of first instance, and the action of the body of second instance is not of a controlling nature, but is an action on the merits, equivalent to the action of the body of first instance. The decision to uphold the contested decision is a decision on the merits, in which the appellate body, after carrying out the investigation, decides the same administrative case as the first instance body. As a result of the proceedings, the appellate body then takes the same position as the body of first instance, both as regards the factual findings and the legal assessment of the evidence gathered in the case (cf. H. Dzwonkowski, Commentary to Article 127 of the Tax Ordinance Act, LEX OMEGA 43/2012, A. Rotkiewicz-Szarnowska, Decisions of the Appellate Body (in:) Podstawowe instytucje postępowania administracyjnego, pod. red. P. Krzykowski, A. Skóra, T. Majer, wyd. UWM, Olsztyn 2020, pp. 220-221). In the case, the justification of the contested decision contains independent findings of the body of the second instance as to the facts, referring to all the evidence gathered in the case. It is apparent from the grounds of the contested decision that the body of second instance, considered the case in its entirety, i.e. it carried out the investigation procedure twice and established the facts twice by making an independent assessment of the evidence gathered. It also addressed the allegations raised in the appeal filed. The fact that the appellate authority reached analogous conclusions to those reached by the authority of first instance does not provide grounds to discredit the appealed decision to the extent the Company expects in its cassation appeal.
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