II FSK 974/22 - Judgment of the Supreme
Administrative Court
Judgment date 2022-11-23 final judgment
SENTENCE
The Supreme Administrative Court, composed of:
Chairman - Judge NSA Tomasz Kolanowski, Judge NSA Maciej Jaśniewicz
(Rapporteur), Judge del. WSA Małgorzata Bejgerowska, having examined on 23
November 2022 at a closed session in the Financial Chamber the cassation
appeals: 1) the Head of the [...] Customs and Fiscal Office in G. 2) C. sp. z
o. o. with its registered office in L. against the judgment of the Provincial
Administrative Court in Gorzów Wielkopolski of 9 June 2022, ref. no. I SA/Go
103/22 in the case against the complaint of C. sp. z o. o. with its registered
office in L. against the decision of the Head of the [...] Customs and Fiscal
Office in G. of 22 December 2021, ref. no. [...] on corporate income tax for 2016
1) dismisses the cassation appeal of the Head of the [...] Customs and Fiscal
Office in G., 2) dismisses the cassation appeal of C. sp. z o. o. with its
registered office in L., 3) refrains from awarding the costs of the cassation
proceedings between the parties in their entirety.
STATEMENT OF REASONS
1.1 In a judgment of 9 June 2022, case file No.
I SA/Go 103/22, in a case on a complaint by C. spółka z ograniczoną
odpowiedzialnością with its registered office in L. (hereinafter:
'the Applicant' or 'the Company') against the decision of the Head of the
[...]Customs and Tax Office in G. (hereinafter: 'NUCS') of 22 December 2021 on
corporate income tax for 2016. The Provincial Administrative Court in Gorzów
Wielkopolski on the basis of Article 145 § 1 point 1 (a) and (c) of the Act of
30 August 2002. - Law on Proceedings before Administrative Courts (i.e.:
Journal of Laws of 2019, item 2325, as amended, hereinafter:
"p.p.s.a.") annulled the appealed decision. The full statement of
reasons for the contested decision is available at
https://orzeczenia.nsa.gov.pl/ (hereinafter: "CBOSA").
1.2 The Court of First Instance set out the
following facts. The NUCS initiated a customs and tax inspection against the
Applicant with regard to the correctness of the corporate income tax settlement
for 2016, it was completed with the issuance of the result of the inspection,
which was delivered to the Applicant on 2 March 2020. By an order of 24 April
2020, the completed customs and treasury control was converted into tax proceedings.
On 25 June 2020, a protocol was drawn up for the examination of the books and
documents of the Applicant covering the correctness of the corporate income tax
settlement for 2016, to which objections were raised. The tax authority of
first instance responded to them in a decision of 26 August 2020, in which it
determined the Company's corporate income tax liability for 2016. In order to
calculate the tax, the first-instance authority assumed revenues of PLN
22,196,325.25, deductible costs of PLN 21,381,674.62 and income of PLN
814,650.63. The settlement for the period under review resulted in a tax
liability of PLN 154,784. The subject of the dispute concerns the
understatement of sales revenue declared by the Company for 2016 by the amount
of PLN 1,803,592.08, which was overestimated by the authority of first
instance. The authority emphasised that the Applicant is an entity belonging to
the S. Capital Group. On the basis of the explanations and documents submitted
by it, it was established that between the controlled company and the entities
C. GmbH, P. GmbH and R. m.b.H., there are capital ties as referred to in
Article 11(1) of the Corporate Income Tax Act of 15 February 1992, in the 2016
version. (i.e.: Journal of Laws 2016, item 1888 as amended, hereinafter:
"u.p.d.o.p."). On 4 February 2019. The Company submitted for audit
transfer pricing tax documentation concerning, inter alia, transactions of
sales of finished goods to related parties in the period from 1 January 2016 to
31 December 2016, i.e. to: C. GmbH,. P. GmbH, R. m.b.H. In 2016. The applicant
mainly reported revenues: 1) from the sale of finished products (boxes, metal
enclosures, etc.) to related parties and other entities, 2) for the provision
of services (painting, etc.) to related parties and other entities. Nearly 95%
of the value of products produced by the Company was sold to related parties
during the period under review. In contrast, sales to unrelated parties
accounted for approximately 5% of turnover. The tax documentation indicated
that, in the Company, the valuation of the value of products sold to related
parties should follow the reasonable margin 'cost-plus' method. In describing
the method and manner of calculating income and determining the price of the
subject of the transactions, the applicant indicated that: "in the
transactions in question, the price was the sales value of the individual
finished products, determined each time on the invoices issued by the
Applicant. The price for individual products was determined on the basis of
previously agreed price lists or on the basis of current arrangements and
negotiations, taking into account changing market conditions. For the
transactions under review, prices were determined on the basis of the
reasonable margin ("cost-plus") method, as detailed in Article 11(2)
of the PPP. By letter of 18 February 2019 and 8 March 2019. The applicant
explained that it calculated the selling prices of the finished goods taking
into account the following elements: - material costs (e.g. nut, washer, pin,
lock, mass sticker, rubber seal, powder paint), - third-party service costs
(e.g. painting), - labour costs (e.g. bending, threading, assembling, pinning,
sandblasting, welding, punching, welding), - a mark-up of 30%. In addition, the
Complainant explained that the markup of 30% used by it was established in 2005
by the then proxy, which was not updated and was used in transactions carried
out for related parties and independent parties under individual orders. The
company also explained that it did not draw up a benchmarking analysis, as it
was difficult to find a company on the market that produced at least similar
special products, individualised to the needs of its customers. On the other
hand, with regard to the implementation of the production processes of
individual products and the purchase of materials necessary to continue these
processes, when asked by the authority whether this was done on the basis of
long-term contracts (agreements) or on the basis of orders carried out on an
ongoing basis, in a letter dated 24 May 2019. The applicant replied that it did
not have any long-term contracts with its customers (production and sales were
carried out on the basis of ongoing orders from customers - related parties and
independent parties). In addition, it explained that in the process of
production and sales to the related party C. GmbH (parent company) acted as a
subcontractor, i.e. these processes were planned on the basis of long-term
contracts concluded by C. GmbH with its customers. In the course of the
inspection, the authority of first instance called on the Applicant, inter
alia, to submit documents relating to the calculation of the sales prices of
finished goods applied to related parties. The Company did not make available
data in the form of notes, calculations, etc., which, in the opinion of the
authority, could constitute reliable and objective evidence of its actual
application in 2016 of such and not a different transfer pricing calculation
and of the actual application of the reasonable "cost-plus" margin
method. The company prepared its income statement on a comparative basis. The
body of first instance pointed out that the Applicant did not distinguish in it
such an item as management costs within the meaning of the Accounting Act, the
determination of which is necessary when the "cost-plus" method is
applied to transfer pricing settlements. It was also not possible to determine
the management costs on the basis of the Company's books, as the items making
up these costs were not distinguished. In the justification for the decision,
the authority of first instance stated that the Applicant did not apply the
reasonable margin 'cost-plus' method in 2016 as a method for calculating income
and determining transfer prices in transactions for the sale of products with
related parties, as the sum of the costs shown in the books related to the
production of boxes and enclosures is higher than the revenue from their sale.
As a result of the investigation, it was established that the terms and
conditions that were established in the transactions concluded in 2016 between
the Applicant and related parties differed from the terms and conditions that
would have been established between independent parties, as the Applicant sold
goods below their manufacturing costs. Consequently, the tax authority of first
instance estimated its income to the level of market values. When estimating
income, the most appropriate method is the one indicated by the taxpayer in the
transfer pricing documentation, in this case the "cost-plus" method.
However, this method could not be applied by the authority as the Company did
not have or did not submit the data necessary to make the calculations in
question. The inability to isolate from the total costs, only those costs that
are related to the production of boxes and enclosures meant that the authority
was unable to establish the cost base that should form the basis of the
findings for the estimate. The Company's listing of direct production costs
together with management costs (although permissible and appropriate from the
point of view of the Accounting Act) prevented the authorities from applying
the method chosen by the Applicant to the calculations. Having analysed the
estimation methods, the authority adopted the transactional profit method
referred to in Article 11(3) of the A.p.d.o.p. The authority's choice of
estimating the Complainant's transfer prices using the aforementioned net
transactional profit method was based on a detailed verification of the transactions
that were carried out by that Company in the audited year and on the basis of
the OECD Guidelines. The estimation was made on the basis of the transfer
pricing tax documentation with related parties, the financial statements, the
documents submitted by the Company for audit and the explanations submitted.
The authority analysed entities using figures obtained from the database of the
company I[...] (i.e. a company preparing and providing reports on companies -
financial databases, industry analyses, database tools for analytical purposes,
including those intended, inter alia, for transfer pricing benchmarking). As
part of the audit, the first instance authority used the Q[...] product (i.e.
the I[...] database tool). As a result of the verification carried out, the tax
authority sorted out from the I[...] database 8 entities engaged in the
machining of metal elements (PKD code 2562Z), which provided information that
formed the basis for making further calculations. After automatic and manual
selection, a group of the following entities was obtained: G. z o.o., J.LTD Sp.
z o.o., A1 Sp. z o.o., A2 Sp. z o. o. Z. Sp. z o. o., K. Sp. z o. o., A3 Sp. z
o. o. and D. Sp. z o. o. The authority pointed out that, pursuant to § 6(3) of
the aforementioned Ordinance of the Minister of Finance of 10 September 2009 on
the manner and procedure for determining the income of legal persons by way of
estimation and the manner and procedure for eliminating double taxation of
legal persons in the case of adjustments to the profits of related parties (id:
Journal of Laws 2014, item 851 as amended, hereinafter referred to as: "MF
Ordinance"), comparability factors were taken into account when performing
the comparability analysis, in particular: characteristics of goods or services,
functional analysis, contractual conditions, economic conditions and economic
strategy. The aforementioned factors determining the comparability of the
Applicant's activities in 2016 against the activities of other comparable
entities (G. Sp. z o.o., J.Sp. z o.o., A1 Sp. z o. o., A2 Sp. z o. o. Z.Sp. z
o.o., K.Sp. z o.o., A3 Sp. z o.o., D. Sp. z o.o.), are set out in the grounds
for the decision. On the basis of data from the I[...] database for a period of
3 years, i.e. 2014, 2015 and 2016, the authority performed a ratio analysis
based on the EBIT(2) operating margin ratio, i.e. a measure of the ratio of
operating profit to revenues at the income statement level, taking into account
revenues and other operating revenues and costs and other operating costs, and
excluding financial revenues and financial costs. In order to determine whether
the sales prices of finished goods (products) applied by the Applicant in 2016
were market-based (transactions with related parties accounted for
approximately 95% of sales), the first-instance authority calculated the
Applicant's EBIT(2) operating margin for 2016 in order to compare it with the
level of margins applied by the searched entities over a three-year period,
i.e. between 2014 and 2016. The Applicant's EBIT(2) operating margin for 2016
was minus 5.06%. Based on the calculated EBIT(2) operating margin ratios for
the individual companies for each year separately, the authority determined the
arithmetic average of the three-year median EBIT(2) operating margin for the
comparison group to be 3.66%. The first-instance authority, as a result of the
benchmarking exercise, set the market value of the margin ratio for the
comparable and unrelated companies at 3.66%, resulting in an upward revision of
the Company's income. Based on the calculations performed, the interquartile
area in the calculations made was between 2.10 % and 6.23 %. In contrast, the
Applicant's result for 2016 did not fall within the aforementioned range and
amounted to minus 5.06 %, i.e. it was lower in 2016 than the average results
realised by similar companies. The authority of first instance adjusted the
Company's loss (in the amount of PLN 994,019.08) and determined income
according to the indicator of 3.66 %. According to the authority of first instance,
the Company's net sales revenue in 2016 amounted to PLN 21,666,509.40, while
the Company reported PLN 19,862,917.32. This resulted in an understatement of
income by the amount of PLN 1,803,592.08. Consequently, the amount of corporate
income tax was determined at PLN 154,784.
1.3 The applicant appealed against the decision
of the authority of first instance. Following the appeal proceedings, the NUCS
on 22 December 2021 issued a decision upholding the decision of the body of
first instance in its entirety.
2.1 The Applicant filed a complaint alleging:
1) an error in the findings of fact by finding
that, due to the loss incurred in the 2016 tax year between the Company and
related parties as a result of the links, conditions were established or imposed
that differed from those that would have been established between independent
parties and, as a result, the Company does not report income or reports income
lower than that which would have been expected if the said links had not
existed, which consequently led the authority to find that the Company had
violated Art. 19(1) and 27(1) of the A.p.d.o.p. by understating its net revenue
from sales and, as a consequence, should have understated the amount of tax due
by PLN 154 784, in a situation in which the Appellant has repeatedly pointed
out that the price in transactions both with related parties and with unrelated
parties was established in the same manner, and the resulting loss is the
result of business risk and factors independent of the existing capital or
personal links with the Appellant.
2) Breach of substantive law, viz:
(a) Articles 7 and 11(1) of the AOP in
conjunction with § 3 para. 1 of the regulation of the Minister of Finance on
account of misinterpretation and misapplication by reason of the unjustified
overestimation of the applicant's revenue and, as a consequence, of the
determination of the liability to corporate income tax resulting from the
unjustified recognition that, in connection with the existing links between the
Company and its affiliates, conditions were established or imposed which
differed from those which would have been established between independent
entities, (b) Article 11(1)(a) of Council Regulation (EEC) No 2913/92 of 12
October 1992 establishing the Community Customs Code (OJ 1992 L 343, p. 1), as
amended by Regulation (EC) No 40/94 (OJ 1994 L 364, p. 1), which resulted,
according to the authority, in the applicant's demonstrating a lower level of
income than would have been expected had those connections not existed, whereas
the Company did not make such arrangements and prices were uniformly set for
both connected and unconnected parties, and the authority did not gather any
evidence that the applicant, in its business dealings with its connected
parties, set or imposed conditions different from those that would have been
set by independent parties;
(b) Article 11(1), (2) and (3) of the PPOA, in
conjunction with Art. with § 3, § 4, § 6, § 7, § 8 and § 11, § 15, § 16 and §
18 of the MF Regulation on account of misinterpretation and misapplication, by
reason of the inadequate analysis of the comparative data carried out by the
authority, in particular the unlawful choice of the method of determining the
applicant's income by means of the net transaction margin method using the
median average operating margin EBIT(2) in a discretionary manner as the
relevant indicator for estimating income while disregarding the market nature
of all values included between the lower quartile and the upper quartile of
operating margin EBIT(2), an unlawful selection of comparators and an
inadequate analysis of the functional profit of the applicant and of the
entities selected in the comparative analysis, resulting in the rejection from
the sample of entities which may be regarded as comparators and the inclusion
in the sample of entities which could not be considered as comparable entities,
as well as disregarding the characteristics of the goods, services or other
performances, the course of the transaction, including the functions performed by
the entities in the compared transactions, taking into account the assets
involved, the human capital and the risks incurred, the terms of the
transaction as set out in the contract or agreement or other evidence
documenting those terms, the economic conditions prevailing at the time and
place in which the transaction was carried out and the economic strategy of the
applicant and the international character of the transaction, including by
failing to take into account the fact that the applicant was in a learning
phase with regard to the opening of a new cable business and could therefore
incur higher costs directly affecting the whole of its activities and that its
projected sales turnover was not achieved and it was experiencing problems
relating to the absence of human resources;
(c) Article 11(1) in fine of the AOP, in
conjunction with Paragraph 6(2) and Paragraph 15(2) of the MF Regulation, on
account of the erroneous (c) Article 11(1) in fine of A.p.d.o.p. in conjunction
with Paragraph 6(2) and Paragraph 15(2) of the Decree of the Minister of
Finance on account of incorrect interpretation and application by reason of an
incorrect analysis of the comparability of the transactions, in particular with
regard to the determination of the range of market values and the ratio itself
which was used for the estimation of income, while the application of the
transactional profit method by the tax authorities should not increase the tax
burden on the taxpayer solely on account of the attainment of lower profits than
the average profits made by other entities, if a lower profit or failure to
attain profit by a given entity may be attributed to economic or organisational
factors;
(d) Article 11(2)(2) of the A.p.d.o.p. in
conjunction with Par. 18 of the Decree of the Minister of Finance through the
incorrect application of the transactional profit method, as a result of which
the tax authority found that the prices applied by the Company are non-market
prices, while in the tax documentation submitted by the Appellant of
transactions with related entities, the reasonable margin 'cost plus' method
was indicated as the method for price determination,
3) Rules of procedural law which could have had
a significant impact on the outcome of the case, i.e.: a) Article 122 in conjunction
with Article 180 § 1 and Article 187 § 1 of the Tax Ordinance Act of 29 August
1997 (i.e.: Journal of Laws 2021, item 1540, as amended, hereinafter:
"O.p.") by breaching the principle of objective truth by failing to
collect full evidence in the case and failing to fully consider the evidence
collected in the case, due to which the authority formulates theses
contradictory to the circumstances of the case in question, i.e. acknowledging
that the transactions in the indicated scope performed with related entities
were not performed on market terms, and in particular by:
- failure to gather evidence to show that the
terms and conditions of the model of cooperation with the related party adopted
by the Applicant deviated from market conditions and were aimed at the transfer
of income in order to obtain tax benefits;
- failure to carry out an inquiry aimed at
examining the impact of the launch of the new cable-manufacturing activity on
the terms and conditions of the transactions effected in terms of the additional
costs imposed on the applicant's entire activity, and, in particular, failure
to take account of evidence adduced in that regard during the tax procedure,
despite the unequivocal indication in the wording of the decision that the loss
on that part of the activity was not disputed by the authority;
- an erroneous analysis of the market nature of
the transactions carried out by the applicant by failing to adapt the
comparative analysis carried out to the circumstances in which the transactions
were carried out, that is to say, by failing to take account of the
inefficiency of the applicant caused by objective economic factors, including,
above all, the commencement of a new type of activity, the greater absence of
human resources, and by failing to take account of the international nature of
the transactions;
(b) Article 191 of the Code of Civil Procedure,
by the fact that the authority exceeded the principle of free assessment of
evidence, particularly in terms of emphasising the content of the evidence
carried out in the case in order to prove the theses assumed in advance by the
authority, above all in terms of considering the transactions examined as
having been concluded under non-market conditions and alleging intentional
actions, while the appearance of a loss in the profit and loss account in 2016
was an exceptional situation in the years 2014-2016, the Applicant in 2014
generated a net profit of 882. 199.59 PLN and in 2015 at the level of 23,444.51
PLN, and the authority, by failing to analyse from a macro and micro
perspective over a longer period of time the activity of the Applicant, did not
fulfil its burden of proving the existence of conditions differing from those
existing between unrelated entities;
(c) Article 123 O.p. by limiting the active
participation of a party in the proceedings, which resulted from the fact that
the body ignored most of the arguments presented by the Appellant in the tax
proceedings, the preceding customs and fiscal inspection and the proceedings of
the body of first instance, indicating only that the evidence applications and
allegations presented by the Appellant were irrelevant to the case, whereas,
for example, the far-reaching discretion of the authority in setting the value
for the estimation of revenue at the arithmetic mean of the median EBIT(2)
operating margin ratio for the years 2014-2016 of the 8 entities selected,
required re-examination and consideration in the appeal proceedings, when the
authority itself also considered the values of the EBIT(2) operating margin
ratio between the lower quartile and the upper quartile, oscillating between
1.61% and 6.53%, to be market values;
(d) Article 180 § 11, Article 181, in
conjunction with Article 187 O.p., by exceeding the principle of equal strength
of evidence by granting special evidentiary weight to measures opposing the
position presented by the Applicant, in particular the authority's flawed
comparative analysis and unjustified rejection of the reasonable
"cost-plus" margin method applied by the Applicant and the
settlements used for transactions with unrelated parties presented in detail in
the tax documentation from transactions with related parties of the Company for
2016;
(e) Article 2a, Article 120, Article 121 § 1
and 2, Article 124, Article 180, Article 181, Article 187, Article 191 O.p.
consisting in arbitrary findings of the tax authority with respect to the facts
on the basis of only partially collected evidence, violation of the principle
of material truth, exceeding the limits of free assessment of evidence,
violation of the principle of taxpayer's trust in tax authorities, resolving
irremovable doubts with respect to the content of tax law to the disadvantage
of the taxpayer, failure to fully and accurately explain the factual situation,
rejecting evidence in the form of explanations submitted by the Applicant
regarding the reasons for the loss in the 2016 tax year, failing to consider
the collected evidence exhaustively, and failing to collect evidence relevant
to the case in question, in particular with regard to claims to establish
whether conditions differing from those that would have been established
between independent entities were established or imposed between the Applicant
and related entities, and in connection with making the failures indicated
above;
(f) Article 210(1)(6) and (4) of the Code of
Civil Procedure, by failing to indicate the reasons for giving or refusing to
give credence to the evidence in question, all the more so since the evidence
indicated in the grounds of the decision to support the authority's findings is
in fact contradictory;
(g) Article 188 in conjunction with Article
180(1) of the Code of Civil Procedure, in particular by reason of the refusal
to supplement the evidence to the extent requested, that is to say, to carry
out a comparative analysis in accordance with the tax law provisions in force
in this area, given that a comparative analysis with numerous errors and
carried out in flagrant breach of the law in force was accepted as the main and
only evidence in the case for the purpose of determining the applicant's
income;
(h) Article 139(3) of the Code of Civil
Procedure by reason of the fact that the appeal proceedings were conducted for
more than 15 months without any evidentiary steps being taken, whereas the
settlement of a case in appeal proceedings should take place no later than
within 2 months of the date on which the appeal was received by the appellate
authority, and in a case in which a hearing was held or a party requested a
hearing - no later than within 3 months, which only reinforces the Appellant's
conviction that the appeal proceedings are blatant and that ostensible steps
were taken to issue a decision contrary to the applicable provisions of law.
2.2 In its reply to the complaint, the Body requested
that the complaint be dismissed.
2.3. The Provincial Administrative Court, in
overturning the appealed decision, explained that the essence of the dispute
concerned the legitimacy of the application by the authorities of the
institution of income estimation referred to in Article 11 of the A.P.C. in the
wording in force in 2016 and the MF regulation then in force. The court of
first instance referred to the content of Article 9a(1) and (4) of the
A.p.d.o.p. and Article 11(9) of the A.p.d.o.p. as well as to § 6 of the MF
Regulation and explained that the legislator in the quoted regulations exposes
the principle of the application of the arm's length price, requiring that
prices in transactions between related parties should be determined as if the companies
were functioning as independent entities, operating under market conditions and
carrying out comparable transactions under similar market and factual
circumstances. When a transaction deviates from those concluded between
independent entities under comparable circumstances, the tax authority may
require a profit adjustment if other circumstances indicated in Article 11 of
the AIA also occur. The legislative solutions adopted in Article 11 of the
A.p.d.o.p. (from 1 January 2019 in Article 11a et seq. of the A.p.d.o.p.) refer
to the recommendations contained in the OECD Transfer Pricing Guidelines for
Multinational Enterprises and Tax Administrations. The Guidelines were adopted
by the OECD Committee on Fiscal Affairs on 27 June 1995 and approved for publication
by the OECD Council on 13 July 1995 (they have been amended several times,
including in 2010 and 2017). The OECD Transfer Pricing Guidelines do not
constitute a source of law in the territory of Poland and, therefore, may not
lead to either an extension of the powers of the tax authorities provided for
in the Act or of the taxpayer's statutorily regulated obligations, however,
their provisions are an important guideline supporting the process of
interpreting the norms contained in Article 11 of the A.l.t.d.o.p. The key
issue in the case was to determine whether Article 11 of the A.l.t.d.o.p. was
applicable in the factual realities established in the course of the tax
proceedings, allowing the authority to determine the Company's income and the
tax due without taking into account the conditions arising from existing
relationships. As provided for in Article 11(2) of the A.p.d.o.p., the income
referred to in paragraph (1) is determined by estimation, using the following
methods: (1) comparable uncontrolled price, (2) resale price, (3) reasonable
margin ("cost plus"). In turn, pursuant to Article 11(3) of the AOP,
if it is not possible to apply the methods listed in paragraph (2), the
transactional profit methods shall be applied. The competence of the tax
authority to estimate the income of a taxpayer, arising from this provision, is
admissible upon fulfilment (proof) of all the prerequisites contained in this
provision. In other words, the tax authority is entitled to determine the
taxpayer's income and the tax due, without taking into account the conditions
arising from existing connections, if: firstly, the taxpayer has a capital
relationship with another entity, secondly, due to the existence of such
relationships, the taxpayer performs services on more favourable terms and
conditions that differ from those generally applicable at the time and place of
performance, and thirdly, as a result of those relationships and the
performance of services on more favourable terms and conditions, the taxpayer
does not report income or reports income lower than that which would be
expected if the terms and conditions of those services did not differ from
those resulting from those relationships. Referring to the first premise, the
Court of First Instance noted that the Appellant did not question the
connections within the meaning of Article 11(1)(2) of the A.P.C.. It also
argued that when verifying the corporate income tax liability of the related
party that understated income or did not obtain it, the authority should first
and foremost focus on the documentation maintained pursuant to Article 9a(1) of
the A.p.d.o.p. and verify whether the factors indicated therein that affect the
value of the transaction allow it to be deemed to have been concluded on market
terms. It is in the interest of the taxpayer entering into a transaction with a
related party to specify in writing all the relevant conditions of the
transaction, affecting its value and at the same time independent of the
existing links between the parties. The court noted that the Appellant
submitted tax documentation that did not support the correct application of the
reasonable margin 'cost-plus' method as a method for calculating income and
determining transfer prices in product sales transactions with related parties.
From the evidence on record, including the documents submitted by the
Complainant and the assertions relating to the determination of the price for
goods sold to related parties, there were no reasonable grounds for the
Company's inappropriate sales price. Sales were made at amounts that did not
take into account all costs incurred. The authority of first instance, having
regard to the Applicant's claims, made calculations using the scheme (direct
costs + indirect costs - overheads + mark-up), i.e. taking into account the
Applicant's data from the 2016 income statement. These calculations showed that
revenues should be significantly higher than those declared by the Applicant.
Operating expenses, other operating expenses and financial expenses less the
amount of management expenses indicated by the Company, amounted to PLN
18,585,522.89. This amount multiplied by a mark-up of 30% (according to the
Company's explanations, applied in 2016) should give sales revenue of PLN
24,161,179.76, i.e. significantly higher than the "net revenue from sales
of products" declared by the Applicant in the amount of PLN 19,572,534.96.
Furthermore, the authority of first instance demonstrated that in 2016. The
Applicant did not apply the markup level of 30% indicated by it, and it
amounted to - 6.80%. The mark-up that the Applicant actually realised had
nothing to do with the objectives that should accompany the running of a
business. In the opinion of the Court of First Instance, the tax authorities
were correct in stating that the costs indicated by the Company for the
start-up of cable production or smaller orders than it had expected were not
the cause of the loss, which resulted from the lack of income from the
production of boxes and enclosures. The tax authorities were right to conclude
that the reasonable margin ("cost-plus") method described by the
Complainant in its transfer pricing documentation, as referred to in the
aforementioned Article 11(2)(3) of the A.P.C., was not reflected in the
transactions actually carried out in 2016, for the benefit of related parties.
It is evident from the financial situation of the Applicant that, in 2016, the
prices applied by it not only did not allow it to make a profit from its
business activities, but even did not cover the costs incurred in connection
with the production and sales carried out. In contrast, the 'parent company'
figures show that as at 31 December 2016, it had made a 5.83 per cent profit.
It follows from the above that the Applicant applied more favourable conditions
to related parties in 2016 than it should have applied, thus resulting in less
income than would have been expected if the conditions of these benefits had
not deviated from those resulting from these relationships. In the Court's
view, the tax authorities, in estimating the amount of income, correctly
rejected the methods of comparable uncontrolled price, resale price and
reasonable "cost-plus" margin, as set out in detail on pages 177 to
188 of the decision of the authority of first instance, and the reasoning
presented was shared by the Court. The first-instance authority was right to
adopt the transactional profit method referred to in Article 11(3) of the AOP
as the most appropriate method for estimating the amount of income in
transactions of sales of products to related parties. Paragraph 15(1) of the MF
Regulation indicates that in a situation where income cannot be determined by
traditional methods, it is permissible to apply transactional profit methods,
i.e. the profit sharing method or the net transactional margin method. The net
transaction margin method chosen by the authority indicates that the cost base
includes, in addition to indirect and direct costs, also overheads, i.e. costs
related to the management of the company as a whole, such as management or
maintenance costs of organisational units of a company-wide nature. The main
difference between the cost-plus method and the net transaction margin method
comes down to the cost base adopted for the calculation. In the cost-plus method,
the basis for calculation is direct costs, while in the net transaction margin
method, all costs at the operating level, which in practice means direct costs
plus overheads. The authorities were right to apply the net transaction margin
method, as on the basis of the data submitted by the Company, it is not
possible to separate the overheads. The authority of first instance, with
regard to the transfer prices applied by the Company in 2016, performed its
analysis taking into account the figures obtained from the I[...] company's
database. These data are mainly derived from financial statements made
available in the National Court Register (KRS), published in the Monitor Polski
B, in the Monitor Sądowy i Gospodarczy and from other sources (CSO database,
etc.). In order to create the basis for obtaining data as comparable as
possible with the Applicant for 2016, bearing in mind the regulations of § 6 to
§ 11 of the MF Regulation and the OECD Guidelines, the authorities used the
following criteria: - common data : - PKD 2007: 25.62.Z - machining of metal
elements; - only active entities; - entities with a website (due to the
possibility of verifying the functional profile); - legal form; - entity size
classification; - financial data resulting from the submitted financial
statements for five consecutive years (in one case for four years): -
comparative variant of the Profit and Loss Account; - non-consolidated
statements; - turnover: min. 2 million; max. 40 million; - independent
entities; - entities not related by equity. The selection of the aforementioned
criteria was made taking into account the data of the Applicant, which in 2016
obtained net sales revenues of PLN 19,862,917.32 in connection with its
activity within the scope of PKD 25.62.Z - machining of metal elements (data
from the National Court Register and resulting from the actual subject of its
activity). The body of first instance made a selection for the data contained
in the I[...] database, obtaining a result of 89 entities.
Subsequently, entities which had the status of subsidiaries (i.e. having
shares in subsidiaries) in the number of 9 were excluded from the selected
entities, which resulted in the result of 80 entities. Subsequently, 4 entities
were discarded from the group of 80 entities that had the above-mentioned
capital ties indicator in the I[...] database, resulting in a database of 76
entities with a capital ties indicator. As a result of further manual
verification, 8 entities with the highest level of comparability were selected from
the selected 76 companies, i.e. entities whose description of the subject of
activity placed on the website indicated the most similar, similar to the
description of the subject of activity of the Applicant. As a result of the
verification, 8 entities were identified that provide potential information
consistent with the arm's length principle. On the basis of data from the
I[...] database for a period of 3 years, i.e. 2014, 2015 and 2016 in relation
to the group of selected 8 entities, the body of first instance performed an
indicator analysis, based on the EBIT(2) operating margin indicator, i.e. a
measure of the ratio of operating profit to revenue. The selection of the above
indicator was made taking into account the OECD Guidelines, which recommend that
tax authorities use in benchmarking studies, inter alia, profitability
indicators that can be used when estimating income (profitability) using the
net transaction profit method. Pursuant to § 6(1) of the MF Regulation, the
determination of income of a related party by way of estimation is preceded by
an analysis by the tax authorities and tax inspection authorities of the terms
and conditions agreed between related parties and an examination of the
consistency of those terms and conditions with the terms and conditions that
would have been agreed between independent parties, or the terms and conditions
that would have been agreed between a given party and an independent party in
comparable circumstances of the case, hereinafter referred to as a 'comparability
analysis'. It follows from the provisions of the MF Regulation that the
comparability analysis is the basic tool used to examine whether the terms and
conditions set by related parties in transactions between each other are of a
'market' nature or do not deviate from those that would be set between
unrelated parties in a comparable situation, while taking into account that the
conclusion of transactions between two independent and unrelated parties is, in
principle, governed by market forces. In turn, the application of the arm's
length principle is reflected in § 6(2) of the MF Regulation. Its essence is
that none of the possible differences between the transactions or entities
being compared can materially affect e.g. the price or the margin of the subject
of the transaction, or that adjustments can reasonably be made to eliminate
these differences. Having regard to the provisions of the MF Regulation and the
'external comparative data' used by the authority as the Applicant did not
carry out transactions with unrelated parties in 2016, to an identical or
similar extent to the transactions carried out with related parties, the way to
carry out the comparison was to identify and analyse aggregate data relating to
an entity whose object of activity was similar to the object of the controlled
transaction for which the comparative analysis was carried out. The analysis
carried out at the level of the entity's activities usually takes the form of a
financial analysis of the performance of the comparable entity, which is
measured by a selected indicator. In the case, the authority used the EBIT(2)
operating margin indicator. Pursuant to Paragraph 7(3) of the MF Regulation,
where the method used does not require strict comparability of the objects of
the transaction, the comparability analysis referred to in Paragraph 1
(comparability analysis of the objects of the transaction) should be carried
out with reference to the industry to which the transaction relates, with
particular regard to the provisions of Paragraphs 8 and 10. Thus, the method
chosen by the authority to estimate the amount of the Applicant's income in
2016, i.e. the net transaction profit method, having regard to the
above-mentioned regulations and the data in the authority's possession, was the
most appropriate. The conditions for the comparability of transactions are set
out in detail in § 6(3) of the MF Regulation, indicating the following five
basic factors determining the comparability of two transactions juxtaposed in
terms of transfer pricing analysis: characteristics of goods or services,
functional analysis, contractual conditions, economic conditions and economic
strategy. The aforementioned factors conditioning the comparability of the
Complainant's activities in 2016 against the activities of other comparable
entities (G. Sp. z o. o., J. Sp. z o. o., A1 Sp. z o. o., A2 Sp. z o. o., Z.
Sp. z o. o., K.Sp. z o. o., A3 Sp. z o. o., D. Sp. z o. o.), were set out in
detail by the first-instance authority on pages 155-181 of its decision. The Court
did not share the Appellant's allegation that only four entities out of the
eight accepted by the authority carried out an activity similar to that of the
Appellant, consisting in the sale of industrial enclosures; in the Court's
view, the mere limitation to the existing data on the websites indicated by the
Appellant did not, in itself, provide a precise possibility of comparing the
products manufactured by the Appellant. Following the course of the
Complainant, it would still have been necessary to know the exact technical
parameters of the enclosures manufactured and the scope of the work required to
manufacture them. Moreover, in addition to manufacturing metal boxes and
enclosures, the Appellant also provided services to affiliated entities. In contrast,
the authority of first instance, in its decision, indicated the general
characteristics of the objects of the entities accepted for analysis. It shows
that all these entities, like the Appellant, were engaged in the production,
processing of metal elements. The Court also did not share the Appellant's view
that the selection criteria with respect to the size of transactions were
incorrectly set in the range of 2 - 40 million, since the Appellant's
transactions were in the range of 20 million. According to the Court, the
authorities correctly selected the group of entities from the territory of
Poland also according to the size of the entity, guided by such size of the
entity having in mind, the criterion indicated in the Accounting Act of 29
September 1994 (Journal of Laws of 2016, item 1047, as amended). The court
shared the position of the authorities with regard to the RRI, RSRI, RALI
ratios applied by the first-instance authority at the level of up to one per
cent, as the first-instance authority in the decision correctly justified the
reason for applying such a ratio for the purpose of conducting the benchmarking
selection of transfer prices in the I[...] service.
On the other hand, the court shared the plea of
the complaint concerning the infringement by the authority of the principle
resulting from the regulation of § 9, section 2, item 2 of the regulation of
the MF, according to which, when analysing the comparability of transactions,
one should take into account the period in which the transaction is performed
and factors related to the passage of time. This means that the authority
should make comparisons concerning the period under review, i.e. the year 2016 itself,
and not referring to the years 2014-2016, in the case of the years 2014-2015,
no analysis of the market in which the Applicant and the entities included in
the examination, acted in order to eliminate the existing differences between
2016 and the years 2014-2015, which could affect the revenues achieved. The
recommendations indicated by the authority in this regard in the OECD
Guidelines cannot replace the regulations of the Act or the MF Regulation. The
court of first instance shared the Applicant's position with regard to the
application of the median average. The authority of first instance, which was
accepted by the Appellate Body, emphasised that the statistical analysis it
conducted used positional measures, as the comparative analysis is an approximation
of the prices used in transactions between unrelated parties. In order to
establish a range of prices, statistical tools in the form of quartiles were
used to analyse the results. In the analysis conducted, it was assumed that the
appropriate range of results is the inter-quartile area (first quartile,
median, third quartile). Hence, according to the authority, in practice, the
most common assumption is that market values are those that fall between the
value of the lower quartile and the upper quartile of the study population. The
inter-quartile range is used to define the rules generally applicable in the
market. The inter-quartile area in the case of 2016, ranges from 1.61% to
3.89%, so since the market value of the EBIT(2) operating margin is already the
value of the bottom quartile of 1.61%, and the estimation made is to determine
the margin obtained in comparable transactions by independent parties - § 18 of
the MF Regulation (and such market transactions are already at the level of the
bottom quartile), there is no legal basis for determining the market values of
EBIT(2) using the arithmetic average of the median operating margin. In
addition, the Court shared the view that it follows from the regulation of
Article 11(1), (2), (3) and (4) of the A.p.d.o.p. that it can only apply to
related parties, which follows from the literal interpretation of the
provision. In the Court's view, it was impermissible to extend its application
to entities and transactions not expressly indicated therein. Adopting the
position of the tax authorities in this regard, it would have to be concluded
that the provision de faco applies not only between related entities, but also
to transactions between any of the related entities and unrelated entities,
which is contrary not only to the wording of the aforementioned provisions, but
also to their purpose. The above means that the authorities, in determining the
Appellant's income using the EBIT(2) operating margin, unjustifiably determined
it by referring to the entire activity of the Appellant when the authorities
themselves emphasised that transactions with affiliated entities amounted to
95%, thus 5% of transactions should not be subject to regulation pursuant to
Article 11(1)-(3) of A.p.d. sections 1-3 of the A.p.d.o.p. For these reasons,
the WSA in Gorzów Wielkopolski, in view of the finding of an infringement of
substantive and procedural law provisions having a significant impact on the
outcome of the case, annulled the contested decision in its entirety.
3.1 Two cassation appeals were filed against
this judgment.
3.2 The authority's attorney filed a cassation
appeal and challenged the above judgment in its entirety, alleging:
I. pursuant to Article 174(1) p.p.s.a. a
violation of substantive law which affected the outcome of the case:
1) Article 145 § 1(1)(a) of p.p.s.a. in
conjunction with Article 11(1)-(3) of the A.p.d.o.p. and § 9(2)(2) of the MF
Regulation consisting in indicating that the authority made comparisons
concerning the controlled period, i.e. 2016 itself, whereas the authority made
an analysis of comparability over a three-year period (2014-2016);
2) Article 145 § 1(1)(a) p.p.s.a. in
conjunction with Article 11(3) u.p.d.o.p. and in conjunction with Art. in
conjunction with Paragraph 3 and Paragraph 18 of the MF Regulation by stating
that there is no legal basis for determining the market values of EBIT(2) by
applying the arithmetic mean of the median operating margin, whereas the
authority correctly determined, by way of an estimate, the revenue by establishing
the basis for the estimate and also correctly applied the arithmetic mean in
applying the transaction margin method, as it follows from Paragraph 18 para. 1
of the MF regulation implies that the margin obtained in comparable
transactions by independent parties should be determined;
3) Article 145 § 1.1(a) of Ustawa o zwalczaniu
nieuczciwej konkurencji (the Act on Combating Taxes) in connection with Article
11(1)-(3) of Ustawa o p.d.o.p. (the Act on Combating Taxes) consisting in the
assumption that the authorities, when determining the Company's income with the
application of the EBIT(2) operating margin, unjustifiably determined it with
reference to the entire activity of the Company, while the tax authorities
correctly applied the provision of Article 11(1)-(3) of Ustawa o p.d.o.p. (the
Act on Combating Taxes), as they do not stipulate the condition of their
application to that part of the Company's activity which concerns transactions
with related entities, but specify only subjective connections between
counterparties.
II. pursuant to Article 174(2) p.p.s.a.
infringement of procedural provisions which could have had a significant impact
on the outcome of the case:
1. Article 145 § 1 (1) (c) of the Code of Civil
Procedure, read with Article 223 § 1 (1) of the Code of Civil Procedure,
consisting in the annulment by the Court of First Instance of the contested
decision in the situation when the body examined the case, took the necessary
evidence, decided the case on its merits and thus the complaint should be
dismissed;
2) Article 145(1)(1)(c) of Ustawa o zwalczaniu
nieuczciwej konkurencji (the Act on Combating Unfair Competition) in
conjunction with Article 120 and Article 191 of Ustawa o zwalczaniu nieuczciwej
konkurencji (the Act on Combating Unfair Competition) and Article 11(1) to (3)
of Ustawa o zwalczaniu nieuczciwej konkurencji (the Act on Combating Unfair
Competition) by repealing the contested decision in spite of the fact that the
body examined the case and conducted the necessary evidence procedure to prove
that the opposing party had incorrectly determined the income,
3) Article 145, paragraph 1, subparagraph 1(c)
of p.p.s.a. in conjunction with Article 141, paragraph 4 of p.p.s.a. by unclear
and imprecise justification of the decision as to the facts of the case and by
the Court of First Instance limiting itself to indicating only what actions the
tax authorities took improperly or unjustifiably without stating the reasons
and grounds for such a position
4. Article 151 in conjunction with Article 145
§ 1 (1) (c) and Article 3 § 1 of the P.p.s.a. and Article 1 § 1 and § 2 of the
Act of 25 July 2002. Law on the system of administrative courts (i.e.: Journal
of Laws of 2019, item 2167, as amended, hereinafter: "p.p.s.a.") by
defective performance of control of the body's decision in terms of its
compliance with the law and acknowledging that, for reasons relating to the
occurrence of a breach of substantive and procedural law provisions having a
significant impact on the outcome of the case, the contested decision should
have been annulled, whereas the above-mentioned provisions were not breached
and the complaint should have been dismissed pursuant to Article 151 p.p.s.a.
In view of the above allegations, the tax
authority's proxy requested that the contested judgment be reversed in its
entirety and the complaint dismissed, or alternatively that the contested
judgment be reversed in its entirety and the case be referred back to the
Voivodship Administrative Court in Gorzów WIkp. for re-examination and that the
costs of the cassation proceedings, including the costs of legal
representation, be awarded according to prescribed norms.
3.3 The Company filed a reply to the cassation
complaint of the tax authority. In its pleading of 11 October 2022, it requested
that the NUCS cassation appeal be dismissed and that the costs of the
proceedings for both instances be awarded.
4.1 The Appellant's attorney filed a cassation
appeal and challenged the above judgment in its entirety, alleging:
I. Infringement of procedural provisions to the
extent affecting the outcome of the case - Article 174(2) p.p.s.a., i.e:
(a) failure to comply with Article 1 § 2 p.s.a.
and Article 3 § 2 p.s.a. in conjunction with Article 141 § 4 p.s.a. by reason
of defective performance of the court's constitutional duty to review the
decision, in terms of its legality, in connection with the infringement by the
court of first instance of Art. 141 § 4 of p.p.s.a. expressing itself in the
assumption in the justification of the judgment that the authority correctly
established the factual state of the case which allowed the application of
Article 11(1) of the A.p.d.o.f. as the substantive and legal basis of the
contested decision. As a consequence, there was an error of subsumption
expressed in the fact that the factual state established in the case was
incorrectly deemed to correspond to the hypothetical state provided for by the
legal norm of Article 11(1) of the ustawa p.d.o.p., while it does not follow
from the evidence gathered in the case that the terms and conditions of
transactions with related parties differ from the terms and conditions that
would be established between independent entities and, as a result, the
taxpayer does not disclose income or discloses income lower than would be expected
if the aforementioned connections did not exist;
(b) Infringement of Article 1(2) p.p.s.a. and
Article 3(2) p.p.s.a. in conjunction with Article 141(4) p.p.s.a. by reason of
defective performance of the court's constitutional duty to review the decision
in terms of its legality, in connection with the infringement by the court of
first instance of Art. 141 § 4 p.p.s.a. expressing itself in the Court's
assumption in the justification of the judgment that, in the factual situation
established in the case, it was not possible to apply one of the traditional
methods of estimating income set out in Article 11(2) of the APS, while the
Applicant in 2016 carried out transactions with unrelated entities at the level
of 5% of revenue (value of approximately PLN 1,000,000.00) which allowed the
application of the method set out in Article 11(2)(1) of the A.p.d.o.p.
(comparable uncontrolled price). Consequently, there was a breach of Article
11(2)(1) of the A.p.d.o.p;
(c) infringement of Article 1(2) of Ustawa o zwalczaniu
nieuczciwej konkurencji (the Act on Combating Unfair Competition) and Article
3(2) of Ustawa o zwalczaniu nieuczciwej konkurencji (the Act on Combating
Unfair Competition) in conjunction with Article 141(4) of Ustawa o zwalczaniu
nieuczciwej konkurencji (the Act on Combating Unfair Competition) by reason of
defective performance of the court's institutional duty to review the decision
for compliance with the law, in connection with infringement by the Court of
First Instance of Article 141(4) of Ustawa o zwalczaniu nieuczciwej konkurencji
(the Act on Combating Unfair Competition) expressing itself in the assumption,
in the grounds of the judgment, that the body correctly established the facts
of the case which made it possible to apply Article 11(3) of the A.p.d.o.p. in
conjunction with Paragraph 4(4), Paragraph 11(1) and (2) and Paragraph 12(1)
and (2)(1) of the MF Regulation as the substantive law basis of the contested
decision. As a consequence, there was an error of subsumption expressed in the fact
that the factual state established in the case was erroneously deemed to
correspond to the hypothetical state provided for in the legal norm of Article
11(3) of the A.p.d.o.p. and, as a consequence, the Court of First Instance
erroneously assumed that the most appropriate method for estimating revenue in
transactions with related parties is the net transaction margin method.
II. infringement of substantive law through its
misinterpretation or misapplication - Article 174(1) p.p.s.a:
(a) Article 11(1) of the p.d.o.p. (a) Article
11(1) of the A.p.d.o.p.: a) Article 11(1) of the A.p.d.o.p.: by reason of
misinterpretation and misapplication consisting in the Court's acceptance as
correct the position of the authority as regards the determination by the Appellant
of terms and conditions of transactions with a related entity which differ from
the terms and conditions which would be determined between independent
entities, as a result of which, in the view of the Court, the authority rightly
concluded that the Appellant does not disclose income or discloses income lower
than that which would be expected if the aforementioned connections did not
exist, and thus the authority correctly concluded that the Complainant's income
and the gift payable should be determined without taking into account the
conditions arising from those links, whereas, in the Complainant's view, the
authority had not gathered sufficient evidence to confirm that the Complainant,
in its economic relations with related parties, set or imposed conditions that
differed from those that independent parties would have agreed between
themselves, in particular in the absence of a reference of the transactions
carried out with related parties to the transactions that the Complainant
carried out with unrelated parties in 2016;
(b) Article 11(3) of the A.p.d.o.p. in
conjunction with Paragraph 15(1) and Paragraph 18 of the MF Regulation for
misinterpretation and misapplication by holding that the authority was right to
apply the transaction margin method, whereas, in the Appellant's view, the
authority had not proved that there were premises preventing the application of
all the methods listed in Article 11(2) of the A.p.d.o.p., and the
impossibility of separating management costs does not constitute a legal basis
for excluding the methods of estimating income indicated in Article 11(3) of
the A.p.d.o.p. and in view of the implementation of transactions also with
unrelated entities in 2016;
(c) Article 11(1), (2) and (3) of the
A.p.d.o.p. in conjunction with Art. with § 3, § 4, § 6, § 7, § 8 and § 11, §
15, § 16 and § 18 of the MF Ordinance due to misinterpretation and
misapplication, due to the court's finding that the comparative analysis
carried out by the authority with regard to the selection of 8 entities, the
range of transaction size in the range of 2-40 million, the application of the
RRI, RSRI and RALI at the level of 1% was correctly justified, whereas,
according to the applicant, at least 4 of the 8 entities did not have
industrial metal enclosures in their offer, the transactions with the
applicant's related party were in the range of 20 million, the RRI, RSRI and
RALI should have been set at a level below 1% (for unrelated parties).
Pointing to the above violations, it was
requested that the contested judgment be overturned in its entirety and the
case be referred back to the Provincial Administrative Court for
re-examination, and that the costs of the proceedings, including the costs of
lawyers' fees in accordance with prescribed norms for both instances, be
awarded, and in the event that the complaint is dismissed pursuant to Article
184 p.p.s.a. as a result of acknowledging that the contested judgment, despite
erroneous grounds, is in conformity with the law - that court costs and the
costs of lawyers' fees be waived.
4.2 NUCS did not file a reply to the Company's
cassation appeal.
The Supreme Administrative Court considered the
following:
5.1 The cassation complaints of both parties do
not deserve to be upheld, although some of the allegations of the cassation
complaint filed by the tax authority are justified.
5.2 At the outset, it should be pointed out
that, in accordance with Article 183 § 1 p.p.s.a., the Supreme Administrative
Court examines the case within the limits of the cassation appeal, and ex
officio takes into consideration only the invalidity of the proceedings. The
analysis of the case file indicates that none of the prerequisites indicated in
Article 183 § 2 p.p.s.a. occurs. Therefore, the Supreme Administrative Court's
considerations may only concern the infringements of the provisions indicated
in the cassation appeal and their justification as a cassation ground. A
necessary condition for recognising that a party correctly invokes one of the
cassation grounds is to indicate which provisions of the Acts were violated,
what the violation consisted of and what effect it could have had on the
outcome of the case. It should be emphasised that in the light of Article 176
of the Civil Procedure Code, a cassation appeal is a formalised legal remedy
and should meet not only the requirements for a pleading in court proceedings,
but also the requirements for its construction. This entails the obligation to
properly construct the grounds for cassation, which includes both the
obligation to correctly cite them and to substantiate them. In order for a
cassation appeal to be fully subject to substantive examination, it should
indicate a specific provision of substantive law infringed by the court,
indicating what, according to the appellant, the court's incorrect
interpretation or application of that provision consisted in, what the correct
interpretation should be or what other provision should have been applied, as
well as what the infringement of the provisions of court proceedings consisted
in and what significant impact it could have had on the outcome of the case
(the content of the judgment) (Article 174, paragraphs 1 and 2 of the Code of
Civil Procedure). Cassation pleas not meeting these conditions prevent the
Supreme Administrative Court from assessing their legitimacy. The court may not
presume the party's intentions and independently supplement, expand, precise or
concretise cassation charges (cf. the judgment of the Supreme Administrative
Court of 16 November 2011, ref. no. II FSK 861/10, publ. CBOSA). In view of the
content of the above regulation, the precise formulation of the cassation
grounds and their justification by the party filing this specific appeal is an
extremely important issue, determining the scope of the instance control performed
by the Supreme Administrative Court. The cassation court is obliged to refer to
all allegations raised in the cassation appeal (cf. the resolution of the
Supreme Administrative Court of 26 October 2009, ref. no. I OPS 10/09, publ.
ONSAiWSA 2010, no. 1, item 1). On the other hand, it is not permissible to
interpret the scope of the appeal and its directions or to make the allegations
of the cassation complaint more specific. Therefore, it needs to be emphasised
that a cassation appeal is a formalised means of appealing against decisions of
provincial administrative courts and, irrespective of the requirement that it
be drawn up by a professional attorney, it must meet the requirements set out
in the provisions of p.p.s.a., and one of the basic elements of a cassation
appeal is the indication of the grounds for cassation and their justification,
which follows from Article 176 § 1(2) of p.p.s.a. These general remarks were
necessary due to the manner in which allegations were formulated in both of the
cassation appeals.
5.3 First, the Supreme Administrative Court
refers to the allegations of the cassation appeal of the Appellant Company. In
a situation where a cassation appeal alleges a violation of substantive law and
a violation of procedural rules, the procedural allegations are examined first.
The subsumption of a given state of facts under an applied provision of
substantive law should be reviewed when it turns out that the state of facts
adopted in the appealed judgment is correct or has not been effectively
challenged, or when there were no other formal defects in the proceedings
before the court of first instance. In constructing the pleas in cassation
concerning procedural law, the Appellant raised in each of them a violation of
Article 1 § 2 p.u.s.a. The pleas put forward in this way concerning this
provision do not merit consideration, since it defines the basic function of
administrative courts and proceedings pending before them. Moreover, it
indicates the essence of judicial review of administration. The norm expressed
therein is first and foremost of a constitutional nature and an administrative
court may violate it when it neglects to control an effectively filed
complaint, examines a case that does not belong to its cognisance, applies a
control measure other than those specified in the p.p.s.a., or applies a
criterion for control of public administration activity other than compliance
with the law (cf. e.g. judgments of the Supreme Administrative Court: of 2
December 2014, in case II FSK 2684/14 and of 14 July 2015, in case II FSK
1706/13, publ. CBOSA). This regulation is referred to in Article 3 § 1 p.p.s.a.
ordering administrative courts to apply the measures specified in the Act. One
cannot accuse the WSA in Gorzów Wielkopolski of failing to control the legality
of the appealed decision or failing to apply a measure provided for by law,
since, as it results from the decision and its justification, Article 145 § 1
point 1(a) and (c) of p.p.s.a. was adopted as the basis for issuing the decision.
5.4 The allegations of violation of Article 141
§ 4 p.p.s.a. raised in each of the points of the cassation appeal concerning
procedural law are also unfounded, also due to their incorrect construction.
Infringement of this provision was also indicated in all the pleas of
infringement of procedural law, pointing to the incorrect assumption in the
grounds of the judgment by the Court of First Instance that the authority had
correctly established the facts of the case to the extent indicated in the
cassation appeal. Then, the plea thus put forward was additionally connected
with infringements of substantive law, which were either incorrectly applied
or, in the opinion of the Company, could not have been applied. Thus, it should
be noted that a violation of Article 141 § 4 p.p.s.a. may constitute an
independent cassation ground essentially in two cases: firstly, if the
justification of the provincial administrative court does not contain a
position as to the factual state adopted as the basis for the appealed decision,
and secondly, if the justification of the appealed judgment was drawn up in a
manner that makes its review by the Supreme Administrative Court impossible
(cf. e.g. judgments of the Supreme Administrative Court: of 12 October 2018,
ref. no. I GSK 2769/18 and of 25 August 2020, ref. no. II FSK 1342/18, publ.
CBOSA). By means of the allegation of a violation of Article 141 § 4 p.p.s.a.,
one may question the "completeness" of the justification, and not the
correctness of the substantive decision or the correctness of the findings made
by the tax authorities. In this respect, it should be emphasised that the
justification of the contested judgment contains all the elements required in
Article 141 § 4 p.s.a. and, despite the summary nature of the considerations
contained therein, is subject to instance control, as it refers to the merits
of the case. Meanwhile, the plea alleging infringement of the above provision
does not refer to the questioning of the completeness of the justification of
the contested judgment, but questions its substantive correctness, including
with respect to the defective recognition of individual facts or even the
failure to establish certain facts in accordance with the position of a party.
As already indicated above, the author of the cassation appeal cannot, in the
context of this plea, argue that the facts accepted by the Court of First
Instance are inconsistent with reality. In accordance with the resolution of
the Supreme Administrative Court of 15 February 2010, ref. no. II FPS 8/09
(published in the CBOSA), Article 141 § 4 p.p.s.a. may constitute an
independent cassation ground if the justification of the decision of the
Voivodship Administrative Court does not contain a position as to the facts
adopted as the basis for the appealed decision. As indicated in the
justification of the cited resolution, it is permissible to question factual
findings with the allegation of a violation of Article 141 § 4 of p.s.a., if
the justification of the provincial administrative court decision does not
contain an unambiguous standpoint as to the facts adopted as the basis for the
decision, which may clearly affect the outcome of the case. Such a situation
does not occur in the case under consideration, as the Court of merit, in
principle, shared the findings of the tax authority, which it expressed in the
wording of the justification, in some cases even referring to specific pages of
the justification of the decision. In order to fight against the factual
findings of the tax authority, which, in the opinion of a party, were
defectively accepted by the Provincial Administrative Court, it would be
necessary to raise a plea of infringement of Article 145 § 1(1)(c) p.p.s.a. in
connection with the norms of completion from the tax procedure. However, this
was not done in the cassation appeal. What was additionally raised within the
allegations of violation of procedural law in this part of the petitum of the
cassation appeal was the incorrect application of the indicated provisions of
substantive law, as norms violated as a result of defective factual findings.
In this regard, it should be emphasised that it is not possible to effectively
invoke in a cassation appeal the allegation of faulty application of
substantive law in a situation where, at the same time, the findings of fact on
which the appealed decision or an element thereof was based are not contested
(cf. e.g. judgments of the Supreme Administrative Court: of 1 December 2010,
ref. no. II FSK 1506/09; of 21 October 2014, ref. no. II FSK 2440/12; of 6
April 2020, ref. no. II FSK 67/20; publ. CBOSA). This is a consequence of the
fact that misapplication, i.e. an error of subsumption of substantive legal
provisions, as a rule, in each case remains in close connection with the
findings of fact of the case and may be demonstrated on the condition that
these findings are first refuted or proved to be defective.
5.5 The allegations of the Company's cassation
appeal concerning the violation of substantive law are also unfounded. In the
plea of misinterpretation and misapplication of Article 11(1) of the A.C.C.,
the Company argued that there were no premises for its application at all, as
the terms and conditions of transactions with related parties did not differ
from those that would have been agreed between independent entities. In
substantiating this allegation, the Company pointed out, on the one hand, the
objective factors present in 2016 that did not allow it to reach the assumed
revenue ceiling and, consequently, income, and which were not taken into account
by the tax authority. On the other hand, it argued that in the year under
review it also carried out a transaction with unrelated parties under identical
terms and conditions as with related parties, which was disregarded by the tax
authority. When interpreting Article 11(1) of the A.P.C. and then applying this
regulation, the tax authorities did not rely, contrary to the Company's
position, solely on the fact that it made a loss. Of fundamental importance for
the application of the mechanism for estimating income for 2016 was the fact
that it was demonstrated by the tax authority that the Complainant performed
services to related parties on more favourable terms, understood as deviating
from the terms generally applied. In this context, the WSA in Gorzów
Wielkopolski correctly pointed to the regulation in Article 9a(1) of the
A.p.d.o.p. concerning tax documentation of transactions with related parties.
It is of major importance for the control of the application of market
conditions with related parties, and its type depends on the nature of
production or services provided by a given taxpayer and their complexity. The
tax documentation required by Article 9a(1) of the AIA should include a
presentation of the subject matter of the transaction, the nature and scope of
the business conducted, the organisational structure, ownership links,
functions performed by the parties to the transaction, assets involved, risks
incurred, etc. It should also include all anticipated costs associated with the
transaction, the forms and timing of payment (transaction costs) and the
methods and manner of calculating profit and the price of the subject of the
transaction and payment, i.e. all those elements that may affect the price of
the transaction. The documentation of transactions with entities referred to in
Article 9a(1) of the A.P.C. should also include a determination of the economic
strategy and other pricing factors, if they had an impact on the value of the
transaction or if they were taken into account in determining that value. It is
the tax documentation of the taxpayer's transactions with related parties that
creates the opportunity to present all circumstances giving rise to the market
nature of these transactions. It therefore has a guarantee function for the taxpayer
in the light of Article 9a of the VAT Act (cf. e.g. judgment of the Supreme
Administrative Court of 12 October 2016, ref. no. II FSK 2288/14, publ. CBOSA).
As aptly pointed out in the judgment of the Supreme Administrative Court of 7
November 2019, ref. no. II FSK 3920/17 (publ. CBOSA), when verifying the
corporate income tax liability of the related party that has understated income
or has not obtained it, the authority should first and foremost focus on the
documentation maintained pursuant to Article 9a(1) of the VAT Act and verify
whether the factors indicated therein, affecting the value of the transaction,
allow it to be deemed to have been concluded on market terms. It is in the
interest of a taxpayer entering into a transaction with a related party to
specify in this document all the relevant conditions of the transaction,
affecting its value and, at the same time, independent of the existing links
between the parties. The company completely ignores in the cassation complaint
that the tax documentation of the transaction submitted by it did not confirm
its use of the "cost-plus" method of calculating the sales price to
related parties with a mark-up of 30% on the direct costs constituting the cost
base (depreciation, value of materials and energy used, third-party services,
salaries and wages with mark-ups). The submitted tax documentation shows that
in the Company, the valuation of the value of the products sold to related
customers should follow the reasonable margin "cost-plus" method. In
addition, the Company, in describing the method and manner of calculating
income and determining the price of the subject of the transaction, explained,
among other things, that in 2016, in transactions to related parties (i.e. to:
C. GmbH,. P.GmbH, R. mbH), the price was the sales value of individual finished
products, determined each time on invoices issued by the Applicant. The price
for the individual products was determined on the basis of pre-agreed price
lists or on the basis of ongoing arrangements and negotiations, taking into
account changing market conditions. This was to be the method provided for in
Article 11(2) of the A.p.d.o.p., consisting in setting the price for the sale
of goods and rights and the provision of services in transactions with a
related party at the level of the sum of the cost base and profit mark-up,
comparable to the cost base and profit mark-up established between independent
parties, which take into account comparable functions, risks incurred and
assets involved. In the explanations submitted during the tax proceedings, the
Company additionally stated that it calculated the selling prices of finished
goods taking into account the following elements: - material costs; -
third-party service costs; - labour costs; - a mark-up of 30%. It further
explained that the 30% mark-up applied by it was established in 2005 and was
not updated, and was applied in transactions carried out for related parties
and independent parties under individual orders and orders. At the same time,
it did not submit any documents related to the calculation of the sales prices
of finished goods applied to related parties. It should also be emphasised that
the Appellant, when preparing the profit and loss account in the comparative
variant, did not separate in it such an item as management costs within the
meaning of the Accounting Act, the determination of which is necessary in the
event of a reliable application of the "cost-plus" method to transfer
pricing settlements. The tax authority was therefore correct in concluding that
the sales prices to related parties were not correctly calculated based on
market standards. At the same time, it must be emphasised that the Company did
not have any long-term contracts with customers, and production and sales were
based on current orders from customers, including related and independent
entities. In the business relationship concerning the production and sale of
products to the related party C. GmbH (as parent company), the Applicant acted
as a subcontractor, and these processes were planned on the basis of long-term
contracts concluded by C. GmbH with its customers. The company did not in any
way contractually secure its own turnover volume or even the planning of the
supply of its products and services in the medium term. Most importantly,
however, it is apparent from the evidence gathered, including the documentation
obtained from the Applicant, that sales were made at amounts that did not take
into account all costs incurred and that there was no rational reason for such
sales prices. According to the tax authority's calculations, the revenues
obtained by the Company according to the reasonable "cost-plus"
margin method indicated by itself should have been higher by approximately PLN
4.5 million. Meanwhile, the margin realised by the Applicant was negative and
actually amounted to -6.80%. This indicates that the Company's method of
pricing to related parties, contrary to its position, did not assume the
achievement of an adequate profit, and the tax documentation submitted for the
Complainant's transactions with related parties did not assume a mark-up of
30%, which would have translated into a profit for 2016 rather than a loss.
Therefore, it is not possible to agree with the Company's position that only
objective factors influenced the negative financial result and were the only
reason for the application of Article 11(1) of the A.T.C. Properly interpreted
and applied in the tax case, the income determination mechanism presented by
the Company itself should lead to the determination of income, not loss.
Therefore, it became necessary to determine the income of the Appellant and,
consequently, also the tax due without taking into account the conditions
established and resulting from relations with the entities indicated in Article
11(1)(2) of the A.p.d.o.p. In this context, the tax authority rightly assumed,
which was accepted by the Court of First Instance, that the position of the
Company was characterised by contradiction, since, on the one hand, it
indicated that the prices applied by it were agreed on the basis of price lists
or on the basis of current arrangements and negotiations taking into account
changing market conditions. On the other hand, it stated that in the process of
production and sales to the main customer and a related party, C. GmbH (the
parent company) acted as a subcontractor, i.e. these processes were planned on
the basis of long-term contracts by C. GmbH with its customers and not with the
Appellant, which had no influence whatsoever on their shape and the level of
prices offered in them. The sales prices of finished goods to C. GmbH therefore
depended not on internal calculations made by the Company, but had to take into
account the prices that resulted from the long-term contracts concluded between
C. GmbH and its contractors. In addition, the problems with ensuring the level
of employment and production realisation indicated as the reason for the loss
do not correspond to the reason for the loss, as stated by the Applicant,
resulting from a decrease in orders from affiliated entities. Indeed, the tax
authority correctly noted that since there had been a decrease in the planned
turnover, the staff shortage should therefore be irrelevant in view of the
reduced demand for the goods produced. However, also in this context, the
authorities' findings on staffing levels do not support the thesis of staff
shortages in 2016, as the level of production staff increased by almost 20%
during the period of that year. There is also no basis for assuming that the
prices in transactions with unrelated parties, which accounted for
approximately 5% of revenues, were indicative of market conditions for all
transactions carried out by the Company in 2016. The passive role of the
Company during the tax proceedings, which was unable to indicate the overall
cost base in the transactions for both related and unrelated parties, must be
emphasised in this context. On the other hand, it emphasised the individual
valuation of each order or assignment. There was also no indication, in respect
of transactions with unrelated parties, of the cost base by type and value of
costs incurred, price spreadsheets, correspondence and agreements with
counterparties for individual transactions. The Company's assertions that it
used the "same prices" for transactions with unrelated parties, on
which sales volumes were in fact marginal, could therefore not be accepted a
priori as credible.
5.6 The allegations of a breach of Article
11(3) of the AOP in conjunction with § 15(1) and § 18 of the MF Regulation are
also not raised. The applicant submits that the correct interpretation of these
provisions assumes that the possibility to apply the transaction profit method
exists only if it is not possible to apply the methods listed in Article 11(2)
of the A.p.d.o.p., including in particular the comparable uncontrolled price
method. This was raised in the context of realising revenues of approximately
5% in 2016 in transactions with unrelated parties with a volume of
approximately PLN 1 million. It should be emphasised that, according to the
Company's position expressed during the tax proceedings, the products it
manufactures are of an individualised nature and each transaction, including
with unrelated parties, was performed under an individual order or commission.
In this context, the tax authority pointed out the impossibility of applying
this method (also the variant of internal price comparison), primarily due to
the provisions arising from § 12(1) and (2) of the MF Regulation. Pursuant to
this provision: the comparable uncontrolled price method consists in comparing
the price of the subject of a transaction established in transactions between
related parties with the price applied in comparable transactions by
independent entities, and on this basis determining the market value of the
subject of the transaction concluded between related parties - paragraph 1. The
comparison referred to in paragraph 1 shall be made on the basis of prices,
which may be used to establish the market value of the subject of the
transaction. 1, shall be made on the basis of prices applied by a given entity
on a given or comparable market in transactions with independent entities
(internal price comparison), or on the basis of prices applied in comparable
transactions by other independent entities (external price comparison) - para.
2. In the opinion of the tax authority, which was accepted by the WSA in Gorzów
Wielkopolski, the application of this method was impossible primarily due to
the level of turnover with independent entities, which amounted to only 5% of
the total realised revenues for 2016. Moreover, at the request of the
authority, the Company was unable to determine the overall cost base for
transactions with unrelated parties and the calculation of the mark-up towards
these parties. The Company's claims that, since data from an entity that
realised revenues of approximately 2 million was used for the transactional
profit method applied, 5% of the turnover with unrelated parties could be
considered as the comparative base, are therefore unfounded. This position
ignores the impossibility of establishing, in the reality of the case at hand,
which, as already indicated above, was not challenged in the cassation appeal
by allegations of procedural law, the cost base in individual transactions with
unrelated parties of the Company in 2016. Thus, it was not possible to apply
the methods listed in Article 11(2) of the AOP in the case, which, in the light
of Article 11(3) of the AOP, entitled the tax authority to apply the transactional
profit method.
5.7 The allegations of infringement of Article
11(1), (2) and (3) of the A.p.d.o.p. in conjunction with Paragraph 3, Paragraph
4, Paragraph 6, Paragraph 7, Paragraph 8 and Paragraph 11, Paragraph 15,
Paragraph 16 and Paragraph 18 of the Ordinance of the MF are also unfounded. It
is not possible to agree with the assertions of the Company's cassation appeal
that the tax authority based the applied transaction profit method in the
variant of the net transaction margin on an incorrectly conducted selection of
8 entities, both with regard to the comparability of their transactions and
obtained turnover. The search for comparable entities was based primarily on
their core business activity identified through the PKD code. This choice should
be regarded as justified, as the selection for comparison of entities dealing
with machining of mechanical elements, which are manufacturing companies, meant
the selection of entities operating in the same market segment as the
Applicant. Indeed, one should bear in mind the provision of § 7(3) of the MF
regulation, from which it follows that where the method used does not require
strict comparability of the objects of the transaction, the comparability
analysis should be carried out with reference to the industry to which the
transaction relates. It follows from the selection made by the tax authority
and described in the justifications of the tax authority's decisions that the
selected 8 entities, which were producers, not only had a leading object of activity
coinciding with the Company's profile, but also operated in the same market
segment. It is difficult to expect that these were only entities with not only
identical production profile, but also still having production and sales of
products and services related to other divisions of the Polish Classification
of Activities (PKD) to an identical extent as the Company. This would mean, in
practice, that it would be impossible to establish comparable entities due to
differences in side or marginal forms of economic activity. Suffice it to point
out that the Company's income from the sale of cables did not generate even 1%
of revenues. It should be remembered that the methods of determining income
based on Article 11(2) and (3) of the VAT Act and the provisions of the
Ordinance of the Minister of Finance are estimates. It follows from the essence
of the estimate that its application results in an approximate value, a
specific projection of the value of the estimated resources. Therefore,
requiring the establishment of detailed, precisely corresponding to the
production and sales profile of a given taxpayer, comparable entities is de
facto impossible. In a market economy, it is natural that despite a convergent
production profile for a given group of market participants, they may also
produce other goods with similar characteristics. This, however, cannot
constitute incomparability of entities identified through PKD, if, in addition,
the tax authority confirmed information on the actual performance of this subject
of activity on the basis of generally available data. These resulted from the
offer of selected entities posted on the global Internet. Neither did these
entities have to be exclusively engaged in the production and sale of metal or
industrial casings and cabinets. The Court of First Instance therefore
correctly observed that the way to carry out the comparison is to identify and
analyse aggregate data concerning an entity whose object of activity is similar
to the subject of the controlled transaction for which the comparative analysis
is carried out. Nor can one agree with the Company's position that the criteria
for the selection of comparable entities in terms of the size of transactions
set in the range of 2 million to 40 million were incorrect. The applicant's
objection is aroused in particular by accepting for the comparative base an
entity that generated revenues of PLN 2 million. Establishing such a range of
revenues for comparable entities cannot be considered incorrect. It must be
emphasised, therefore, that the central point in estimating related entities is
the analysis of the comparability of transactions, to which the regulations in
§ 6 - § 11 of the MF Regulation refer. They concern the subject matter of
transactions affecting the market value of the good or service in question. At
no point do they prescribe that the analysis be limited by reference to the
turnover volume of the entity being compared, but only to the terms and
conditions of the transaction that would be agreed between independent
entities. Reference is made only to the size of the assets involved in § 8(2)
of the MF Regulation, however, with regard to those which are most relevant to
the creation of value and profits arising from the transaction. Thus, it should
be pointed out that the declared revenues achieved by the Company in 2016
amounted to just under PLN 20 million. It is close to the arithmetic average to
those obtained by the entities accepted for comparison. Besides, the lowest
volume of realised turnover of the compared entity constituted 10% of the
Company's turnover and thus cannot be considered too low. The fact that it is
only twice as high as the Company's revenue generated from unrelated entities
is irrelevant to the correctness of determining such a ceiling of the
comparable sample. Also, the adoption by the tax authority of the criterion of
the RRI, RSLI and RALI ratios for comparable entities at a level of less than
1% must be considered correct. It cannot be expected that it will be possible
to select entities from publicly available databases that do not show
relationships and transactions with related parties at all. However, it will be
sufficient if the volume of these transactions, as characterised by the
operational linkage ratios referred to above, is insignificant, marginal. This
condition is met by adopting a ratio of less than 1%. The lack of precise
indication as to why the authority set such a ceiling on the analysed ratios
cannot be treated as a violation of the substantive law norms indicated in the
cassation appeal. In view of the above-mentioned remarks concerning the need to
base the key for selection of entities accepted for the comparability analysis
on the PKD classifications, the Company's objections as to the fact that,
according to the information on the websites, only 4 of the selected entities
sold industrial enclosures cannot be shared. The fact that the identification
and selection of entities for the comparability analysis was based, among other
things, on data from the websites of these entities does not mean that only
those entities from the machining of metal elements, which produce enclosures
(industrial enclosures) with specific parameters, could be recognised as having
a comparable subject of activity. Once again, it should be emphasised that the
method used is an estimation method, which makes it possible to derive
approximate values for unrealised income. This is done in the transactional
profit method described in § 18(1) of the MF regulation by examining the
realised net profit margin with related parties in relation to the level of
margin that independent parties obtain in comparable and not identical
transactions. Among the factors to be taken into account when applying the net
transaction margin method, § 18(4) of the MF Regulation lists factors such as
competition from other market participants and fungible goods, management
efficiency and strategy, market position, differences in cost structure and
cost of capital and degree of experience in the business. This does not imply,
however, that it is necessary to look for an entity carrying out exclusively or
almost exclusively transactions with independent entities of identical scope
and content as those carried out by the taxpayer in question with related
parties. As already indicated, it is sufficient to rely on the core business
characterised by the PKD, as § 6(3)(1) of the MF regulation prescribes that
when analysing comparability, such comparability factors as the characteristics
of goods, services or other performances are to be taken into account, not
their sameness. This therefore does not imply the need to analyse individual
sales transactions between independent entities. The postulate of comparing
individual transactions between different independent entities, on the one
hand, and between the Company and related entities, on the other hand, should
be regarded as impossible in the case of estimating income on the basis of
Article 11(1) and (3) of the VAT Act. This is what the criteria for selection
of entities for the comparative base on the basis of regulations from § 6 - §
11 of the Ordinance of the Minister of Finance serve.
5.8 In this state of affairs, the Company's
cassation appeal should be deemed groundless and, as such, dismissed pursuant
to Article 184 p.p.s.a.
6.1 Turning to the examination of the cassation
complaint of the tax authority, it should be indicated that its allegations
concerning the infringement of two norms of substantive law are justified. The
remaining allegations should be considered unjustified.
6.2 Similarly as in the case of the Company's
cassation complaint, the allegation of a breach of procedural law in Article 3
§ 1 p.p.s.a. and Article 1 § 1 and § 2 p.u.s.a. is completely missing, as the
WSA in Gorzów Wielkopolski did not breach them for the reasons already
indicated above. As regards the infringement of Article 151 in conjunction with
Article 145 § 1(1)(c) of the p.p.s.a. it should be pointed out that these are
blanket provisions and in order to be effective they require the indication in the
cassation appeal of the standards for completion, which were not indicated in
the allegation concerning the "defective control of the body's
decision". The allegations of infringement of Article 145(1)(1)(c)
p.p.s.a. in conjunction with Article 223(1)(1) of the Code of Civil Procedure
and in conjunction with Articles 120 and 191 of the Code of Civil Procedure are
also unfounded, as the Court of First Instance did not indicate in the grounds
of its judgment the infringement of the provisions of the tax procedure raised.
It is true that it cited, inter alia, the provision of Article 145(1)(1)(c) of
the Code of Civil Procedure as the basis for setting aside the judgment, but it
did not indicate the reasons for setting aside the final decision on the grounds
of a procedural violation. Therefore, it should be considered that it was only
a clerical mistake, as the grounds for revoking the NUCS decision were
exclusively infringements of substantive law, i.e. the grounds under Article
145 § 1(1)(a) p.s.a.
6.3 The allegation of a violation of Article
141 § 4 p.p.s.a. is also unfounded. The Court of First Instance succinctly, but
clearly and precisely, pointed out the breaches of substantive law which, in
its view, proved that the final decision was defective. The fact that it did
not analyse in every possible aspect the violations of law noticed and raised
in the grounds of the judgment under appeal does not mean that the Court of
merit did not sufficiently disclose its position on the legal assessment. At
the same time, when questioning the interpretation and application of the
substantive law, it indicated what, in its view, should be the correct
interpretation of the law and how the tax authority should proceed when
re-examining the case. Moreover, the explanation of the legal basis of the
decision and the indications as to further proceedings allowed both the tax
authority to formulate the charges of the cassation appeal and the Supreme
Administrative Court to carry out substantive instance control.
6.4 The allegation of violation of Article
11(1)-(3) of the A.T.C. and § 9(2)(2) of the MIF Ordinance turned out to be
justified, as the tax authority correctly performed the comparability analysis
over a three-year period for the years 2014-2016. There is no doubt in the
judicature that the OECD Transfer Pricing Guidelines do not constitute a source
of law in the territory of Poland and, therefore, they cannot lead to either an
extension of the powers of the tax authorities provided for in the law or the
statutorily regulated obligations of the taxpayer. However, it is indicated at
the same time that their provisions are an important guideline supporting the
process of interpretation of the norms contained in Article 11 of the VAT Act
(cf. e.g. judgments of the Supreme Administrative Court of 18 June 2018, ref.
no. II FSK 1665/16 and of 9 December 2021, ref. no. II FSK 2360/20, publ.
CBOSA). It follows from the OECD guidelines that the comparative analysis
should cover both the year under review and earlier years. It was aptly pointed
out in this context in the body's cassation appeal that, in accordance with
Article 11(9) of the Public Finance Act, in the wording in force in 2016, the
minister competent for public finance, when issuing a regulation on the manner
and procedure for determining income by way of estimation, was to, inter alia,
take into account the OECD guidelines in particular. It is therefore of primary
importance to decode the meaning of the term 'the period over which the
transaction is carried out and the factors related to the passage of time', as
referred to in § 9(2)(2) of the MF Regulation. It refers to transaction
conditions that may affect the market value of the objects of the transactions
being compared. It follows from this provision that the analysis should include
both the period of the transaction and factors related to the passage of time.
The Tax Act, as well as the provisions of the MF Regulation, do not define the
concept of the 'period of the transaction'. The provisions of the a.p.d.o.p. in
Article 8 provide for the tax year, which according to paragraph 1 is the
calendar year. However, this is not the same concept as a period, which,
according to the linguistic meaning, means "duration of something"
(cf. M. Szymczak [ed.], Słownik języka polskiego, Warsaw 1984, vol.
II, p. 506), or "a certain interval of time" (https://sjp.pl/okres).
It should also be remembered that, pursuant to § 9(2)(2) of the MF Regulation,
when analysing the comparability of transactions, not only the 'period' but
also factors related to the passage of time should be taken into account. At
the same time, the legislator did not decide to limit the period of the
comparability analysis to the period understood as the tax year, but determined
it quite flexibly, ordering that additional factors related to the passage of
time be taken into account. This, in turn, in conjunction with the indications
arising from the OECD guidelines, allows for the adoption for the analysis of
comparability of transactions, also a broader period of time than one tax year
in which transactions with related parties were performed. Besides, in the
realities of the case at hand, limiting the analysis to 2016 would amount to
acting to the disadvantage of a party and violating Article 134 § 2 of the A.P.S.A.,
as it would then be necessary to apply a higher transactional profit ratio than
the one adopted in the contested decision, as discussed in more detail below.
6.5. The allegation of a violation of Article
11(3) of the P.s.a. in conjunction with § 3 and § 18 of the Ordinance of the
Minister of Finance as regards the necessity to take into account the market
values of EBIT(2) by applying the arithmetic mean of the median operating
margin should also be deemed justified. The position of the WSA in Gorzów
Wielkopolski, based on the assumption that since the market value of operating
margin EBIT(2) is already the value of the bottom quartile amounting to 1.61%,
this value, as obtained in comparable transactions by independent entities,
should be deemed to be the market value, is incorrect. It must be emphasised
that while the choice of estimation method in transfer pricing cases is partly
determined by the content of the legislation, the way of estimation is left to
the tax authority by the legislator. The manner of estimating income is
influenced by the realities of the specific case, including the data arising
from the taxpayer's tax books and the comparative data obtainable by the
authority. This method is intended to ensure that the standards associated with
determining the taxpayer's income are met as if they corresponded to
transactions entered into by independent parties. The adoption of a statistical
method based on the use of a statistical measure, the interquartile range (IQR)
analysis, should be considered correct. The use of IQR comparative analysis can
increase the reliability and validity of the analysis and, most importantly, is
also accepted in international practice and OECD guidelines. In principle, the
use of this statistical measure is not disputed by the Court of First Instance
in the reasons for the judgment under appeal. The interquartile distribution is
a convenient parameter in the analysis of structure, telling about the
variability of some characteristic of the middle 50% of units in a series,
disregarding the extreme 50%. This is done by discarding the 25% smallest and
25% largest units in the series. The IQR includes the 50% of all values in the
range that fall between the first and third quartiles. In statistics, it is
assumed that in a sample with a normal distribution, the population of results
for a given indicator is distributed around the median, which is the middle
value of the designated interval. While results that are higher or lower than
the median are also representative of the population as a whole as is the
median, for scores that lie around the extremes (i.e. the minimum and maximum
values of the set), there is a risk that such observations may be anomalous and
therefore unrepresentative of market outcomes. It should be remembered that the
interquartile range measures the difference between the first and third
quartiles, which themselves count as measures of location. The interquartile
range is not in itself a measure of central tendency, but defines an interval
that takes into account the median, which is a measure of central position.
Therefore, an index based on the median should be considered the most reliable
and helpful in reconstructing the tax base by estimating, on the basis of a
statistical method, a measure of central tendency that includes the
interquartile range. Indeed, it should be noted that § 18(1) of the MF
regulation speaks of determining the net profit margin at the level of the
margin obtained in comparable transactions by independent entities, and not of
the lowest possible or actually realised margin. The tax authority cannot,
therefore, be accused that, since the market transactions are already at the
level of the bottom quartile, it could not use the arithmetic average of the
median operating margin, which most fully reflects the averaged level of the
margin between independent parties. Since, as indicated above, the tax
authority correctly adopted the three-year period of 2014-2016 for the
comparability analysis, it thus correctly set the value of the median average
at 3.66%. Moreover, in the realities of the case at hand, the adoption of the
median for 2016 would amount to acting to the disadvantage of a party, as
provided for in Article 134(2) p.p.s.a., since the median for 2016 was 3.89%.
6.6 On the other hand, the allegation of the
cassation complaint of the authority concerning the violation of Article
11(1)-(3) of the A.p.s.a. should be considered unfounded, as the tax authority
incorrectly applied the assessment and determined the income of the Applicant
and the tax due also in relation to transactions and income obtained from
unrelated entities. The Court of First Instance rightly pointed out, as regards
this issue, that the provisions of the aforementioned regulations may be
applied only to related entities, which results from a literal interpretation
of Article 11(1) of the A.l.t.d.o.p. It should be recalled that Article 11(1)
in fine of the A.l.d.o.p. specifies, firstly, the prerequisite for the
application of this regulation, i.e. firstly, the premise for the application
of this regulation, i.e. the establishment, as a result of the links described,
inter alia, in Article 11(1)(2) of the A.p.d.o.p., of conditions differing from
the conditions that would be established between independent entities, as a
result of which the entity does not disclose revenue or discloses revenue lower
than would be expected if the said links did not exist. Secondly, this
provision confers the competence to determine the income of the entity
concerned and the tax due without taking into account the conditions arising
from those links. Pursuant to Article 11(2) of the A.l.p., the revenue referred
to in paragraph 1 is determined by estimation. The estimation in the face of
this revenue is applied to revenue which was obtained in transactions with
related parties, and not to all revenue obtained in a given tax year, including
that from unrelated parties. The position presented by the tax authority
regarding the interpretation of Article 11(1) and (2) of the VAT Act to the
extent indicated would mean its application to entities and transactions not
expressly indicated therein. Meanwhile, a correct interpretation of the
provision under analysis leads to the conclusion that it applies only to
transactions between related entities, which, as the Court of merit correctly
noted, coincides with the purpose of this provision.
6.7 In this state of affairs, the Supreme
Administrative Court ruled as stated in the operative part and also dismissed
the cassation appeal of the body pursuant to Article 184 of the Act on
Administrative Law, as the appealed judgment, despite a partially erroneous
justification, complies with the law. At the same time, it should be pointed
out that the expression of a different legal assessment by the Supreme
Administrative Court in the justification of the judgment than by the Court of
First Instance makes it binding on the tax authority as the one referred to in
Article 153 of p.s.a.
6.8 The costs of the cassation proceedings were
decided pursuant to Article 207 § 2 p.p.s.a. It should be pointed out that in
the cassation proceedings two cassation appeals filed by both parties were
subject to consideration. However, neither of them was upheld, so the costs of
the proceedings were ruled pursuant to Article 207 § 2 p.p.s.a.