The tax authorities had issued a notice of assessment in which royalty payments had been adjusted on the basis of the arm’s length principle.
“I_ 3.1.8 – 9,027,469.67 euros – Transfer prices – Royalties
After verifying all documentation submitted by dependent companies F…Hipermercados, SA and P…Distribuição Alimentar, SA, at the request of the Tax Administration during external inspections of a general scope carried out on the books of each of the said companies, relative to royalty costs paid by them to a Swiss entity – J… -, it was possible to conclude that the costs in question derived respectively from a contract for the use of the F. . to that entity for a period of no less than 30 years and of a usage contract of the trademark P… to the same Swiss entity, for a period of no less than 30 years, with F…and P…continuing to deduct from their income, charges directly related with the management, promotion and development of the trademarks assigned by them, as well as bearing all the inherent risks.
Due to the fact that F…and P.. have assigned their brands, by means of an operation that could not be carried out between independent entities, and continue to bear the costs associated with the management and development of these brands, as well as all the inherent risks, additionally bearing a royalty for the use of an asset that in practice continues to be theirs, a positive adjustment is made to the taxable profit of the subsidiary F.. Hipermercados, SA, to the amount of 4,116,392.00 euros and to a positive adjustment of the taxable profit of the subsidiary P… – Distribuição Alimentar, SA, to the amount of 4,911,077.67 euros (cf. item 111-1.8 of this document).”
An appeal was filed by the company and the assessment was later annulled in the Tax Court.
The tax authorities then filed an appeal with the Administrative Court of Appeal claiming that the decision of the Tax Court should be annulled due to lack of reasoning.
Judgment of the Court
The Administrative Court of Appeal upheld the appeal brought by tax authorities and declared the nullity of the judgment appealed against for failure to specify the factual grounds of the decision. The case was remanded to the Court of First Instance for a new decision to be issued therein, including the grounds of fact, proven and unproven, as well as an analysis of the evidence produced.
Extracts from the judgment
“Having examined the case-file, it can be seen that some of the listed witnesses were questioned (cf. minutes on pages 9036 and 9043) and that, with regard to the remaining witnesses, use was made of the witness evidence provided in another case (nº 137/08), which involved the same RIT and the same corrections, but with regard to the 2003 financial year (cf. order on pages 8997).
It is also noted, from the content of the minutes of the examination of the witnesses in the present case-file, that they replied as to the matter contained in points 130 to 169 and 716 to 719 of the legal document. And, as to the evidence used in case nº 137/08, the witnesses therein responded as to the matter identified in the request on pages 8994 of the records.
However, a careful reading of the contested decision shows that the evidence contains no reference to the statements of the witnesses examined. It is not even mentioned that the witnesses were questioned, nor is there any reference to the reasons for not taking their statements into consideration.
In addition to the above, there is the circumstance that the sentence mentions, in the assessment of the law, that the Impugner joined to the file various documents relating to the expenses under analysis, which it claims support the effectuation of the expenses in question. However, the list of evidence does not make any reference to these documents and the facts on which they are based. The sentence further mentions that the documentation was corroborated by testimonial evidence.
Further on, the sentence mentions that the inquired witnesses demonstrated to have knowledge of the way the Impugner operates, having highlighted some specific statements.
Moreover, also in the assessment of the law, the sentence bases its understanding on documents whose existence was not proven, such as, among others, the trademark assignment contract, the Licence Agreement and the study that establishes the comparison with independent entities.
The vicissitudes described above lead this Court to conclude that, in effect, the sentence appealed against suffers from the nullity found against it.”
“With this appeal, the appellant claims that this Court should decide on the validity of the request formulated by her but, in order for this to happen, it is essential that the decision appealed against should state the reasons why it was decided not to take into account the testimonial evidence produced on the same matter that is now considered relevant.
The CPC has the power to change the factual decision made by the “a quo” court provided that the prerequisites set out in Article 712(1) of the CPC (now 662) are met, and it is therefore incumbent on the CPC to re-examine the evidence on which the contested decision which is the object of the controversy was based, as well as to assess, of its own motion, other evidential elements which have served as a basis for the decision on the disputed factual points?
Going back to what we have been saying above about the extent of the appellate court’s powers of cognition on the matter of fact, we note that these do not imply a new trial of fact, since, on the one hand, this possibility of cognition is confined to the points of fact that the appellant considers to have been incorrectly judged and provided that he meets the requirements set out in Article 690-A nos. 1 and 2 of the Civil Procedure Code. On the other hand, the control of fact, on appeal, based on the recording and/or transcription of statements made in court, cannot annihilate (even by the very nature of things) the judge’s free appraisal of evidence, built dialectically on the basis of immediacy and orality (see on this problematic A.S. Abrantes Geraldes in: “Temas da Reforma do Processo Civil”, vol. II, pages 250 and following)”.
Therefore, in light of the above, we must, agree with the Appellant, recognise that the contested decision suffers from a nullity consisting of the failure to specify the factual grounds of the decision (Article 125(1) of the CPPT), since it does not distinguish between proven and unproven facts, omitting a critical examination of the witness evidence provided.
We have already seen that, with the present appeal, the Appellant also intends the Court to assess and rule on possible errors of judgment concerning, on the one hand, the verification of the prerequisites for the use of indirect assessment and, also, with regard to the quantification of the taxable amount thus determined.
However, in the present case, this does not appear to be possible. As stated in the above-mentioned TCAN judgment of 18/01/12, “The reasoning of the matter of fact proven and not proven at first instance, the critical explanation by the judge of such matter, is essential for the appeal court to be able to rule on it, should it be questioned on appeal. In the absence of such reasons in the contested decision, the Court of Appeal is inexorably constrained and prevented from fully exercising its powers and is unable to give a decision, in fact and in law, as it should”.
It is true, and the Court does not disregard, that Article 712 (now 662) of the CPC sets parameters and guidelines for judging, on appeal, the decision on the facts of the case handed down in the first instance. However, “it is not within the court’s jurisdiction (i.e. the appeal court’s jurisdiction) to pass judgment on the facts of the case without any such judgment having been made in the first-instance court” – cf.
Therefore, we may conclude that, effectively, the appealed sentence is null due to the lack of specification of the factual grounds of the decision, referred to in Articles 125, no. 1 of the CPPT and 668 (now 615), no. 1, paragraph b) of the CPC (…)”.
Returning to the case at hand and accepting that transcribed above, we also consider the nullity of the sentence appealed against for lack of specification of the factual grounds of the decision, referred to in Articles 125, no. 1 of the CPPT and 615, no. 1, al. b) of the CPC, to have been verified.”
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