NINTH ARBITRAL APPELLATE COURT

127994, Moscow, GSP-4, passage Solomnaya Storozhka, 12 e-mail address: 9aas.info@arbitr.ru

web-site address: http://www.9aas.arbitr.ru.

CONSTRUCTION

¹ 09АП-6255/2019

г. Moscow Case No. A40-29025/17

23 April 2019

The resolution part of the Resolution was announced on April 16, 2019 The Resolution was made in full on April 23, 2019.

Ninth Arbitration Court of Appeal composed of: presiding judge S.L. Zakharov,

judges: EV Pronnikova, S.P. Sedov,

at the record keeping by the secretary of the court session S.E. Israfilov, having considered the appeal in open court session in the hall № 13

public joint stock company "Uralkali"

the judgment of the Moscow City Arbitration Court dd. 26.12.2018 passed by the judge A.N. Nagornaya in case No. A40-29025/17 (75-227)

at the request of Uralkali public joint stock company to the Federal Tax Service

third party: Interregional Inspectorate of the Federal Tax Service for the largest taxpayers № 5

invalidation of the decision of 05.12.2016 № 13-1-14/0088DSP, with participation:

from the applicant: Y.V. Pyaskorskaya, arguments dated 17.05.2018; N.V. Shvedskaya, arguments dated 23.04.2018;

from the defendant: V.V. Zvankov dated 08.11.2018; I.E. Kabisov dated 21.01.2019; I.G. Streltsova dated 21.01.2019;

from the third person: V.V. Zvankov, dated 25.10.2018; I.E. Kabisov, dated 24.12.2018; I.G. Streltsova, dated 24.12.2018;

 

ESTABLISHED::

Public Joint Stock Company "Uralkali" (hereinafter - the applicant, the company, PJSC "Uralkali") has applied to the Arbitration Court of Moscow with an application to the Federal Tax Service (hereinafter - the tax authority) for invalidation of the decision of 05.12.2016 No. 13-1-14/0088DSP "On refusal to be held liable for a tax offense upon verification of completeness of calculation and payment of taxes in connection with transactions between related parties".

By the decision of the Moscow City Arbitration Court dated 16.06.2017 the claim of the applicant was satisfied and the challenged decision of the tax authority was declared invalid.

By the decision of the Ninth Arbitration Court of Appeal of 18.10.2017 the said decision was annulled, the claim of the applicant was denied.

By the Resolution of the Moscow District Arbitration Court dated 14.03.2018 the court acts in the case were cancelled, the case was sent for a new consideration to the Moscow City Arbitration Court.

During the new hearing, the Interregional Inspectorate of the Federal Tax Service for the largest taxpayers № 5 was involved in the case as a third party, which does not make independent claims about the subject of the dispute.

By the decision of the Moscow City Arbitration Court dated 26.12.2018 the claim of the applicant was dismissed.

Disagreeing with this decision, the applicant appealed to the Ninth Arbitration Court of Appeal, in which he asked to cancel and adopt a new judicial act to satisfy the claimed claim.

At the court session of the court of appeal the representatives of the applicant supported the appeal on the arguments stated in it. Representatives of the interested person and the third person objected to the satisfaction of the appeal on the arguments stated in written responses to it.

The legality and validity of the adopted decision have been verified by the court of appeal in the order established by Articles 266, 268 of the Arbitration Procedure Code of the Russian Federation (hereinafter referred to as the Arbitration Procedural Code of the Russian Federation).

Having studied the materials of the case, having listened to the explanations of the representatives of the persons participating in the case, the court of appeal comes to the conclusion that there are no grounds for satisfaction of the appeal on the following grounds.

As it follows from the case materials, on the basis of the notification of the company about the controlled transactions, submitted on 20.11.2013, the tax authority carried out an inspection of the completeness of calculation and payment of taxes in connection with transactions between interdependent persons.

Based on the results of the audit, he drew up a report dated 27.06.2016 № 13-1-14/0043dsp and adopted a decision of 05.12.2016 № 13-1-14/088DSP, according to which the company was charged additional corporate income tax in the amount of 980,156,716.54 rubles, penalties for his failure to pay 3,281,584.49 rubles, proposed the necessary corrections to the accounting and tax accounting documents.

The tax authority considered that the Company had incorrectly applied the method of comparable profitability (hereinafter, the SR method) to justify the market price level in transactions for the supply of potassium chloride with an interdependent counterparty - Uralkali Trading SA (Switzerland) (hereinafter, Uralkali Trading SA), which led to an understatement of the tax base for income tax for 2012 and, as a result, underpayment of tax to the budget. In its decision, the tax authority concluded that the comparable market price method (hereinafter, the SRC method) was applicable in this case, as information on comparable market prices is available in a publicly available source of information, namely, in the Argus Media price information agency quotes, and assessed additional income tax based on price information published by the relevant agency.

The company disagreed with the contested decision and challenged it in court.

In accordance with part 1 of article 198 of the Russian Federation, citizens, organizations and other persons have the right to apply to the arbitration court with the statement on recognition as invalid of substandard legal acts, illegal decisions and actions (inaction) of the bodies which are carrying out public powers, officials if they believe that the challenged substandard legal act, decision and action (inaction) do not correspond to the law or other regulatory legal act and violate their rights and legitimate interests in the sphere of business and other economic activity.

Refusing to satisfy the claim of the applicant, the court of first instance proceeded from the fact that the contested decision complies with the tax law and therefore does not violate the rights and legitimate interests of the company in the sphere of entrepreneurial activity. At the same time, the court of first instance agreed with the position of the tax authority that the SR method was applied by the company on the basis of improperly confirmed data, and also recognized that in the case under consideration, based on the established factual circumstances, the tax authority used the SR method with the use of Argus Media price agency data to verify the marketability of prices in controlled transactions.

The Court of Appeal, contrary to the arguments set out in the complaint, which are limited to disagreement with the above findings of the court, considers them to be true, based on the evidence in the case and made with the correct application of substantive law, based on the following.

in accordance with paragraph 1 of Article 105.3 of the Tax Code of the Russian Federation (hereinafter - ncr), if in transactions between related parties commercial or financial conditions are created or established that differ from those that would have occurred in transactions recognized under Section v.1 of the said Code as comparable between persons who are not interdependent, then any income (profit, revenue) that could have been received by one of these persons, but because of this difference were not received by him, shall be accounted for for the purposes of taxation.

in accordance with paragraph 2 of Article 105.3 of the Russian Tax Code, for the purposes of taxation of income (profit, revenue) of interdependent persons who are parties to a transaction that could have been received by such persons but were not received as a result of the difference between the commercial and (or) financial terms of the said transaction and the commercial and (or) financial terms of the same transaction to which the parties are persons who are not recognized as interdependent, shall be determined by the federal executive body authorized to control and supervise taxes and dues from the application of the Code.

By virtue of Clause 1, Article 105.7 of the Tax Code of the Russian Federation, when performing tax control in connection with transactions between related parties (including when comparing commercial and/or financial conditions of the analyzed transaction and its results with commercial and/or financial conditions of comparable transactions and their results), the tax authority uses the following methods: 1) the method of comparable market prices; 2) the method of the price of subsequent sale; 3) the cost method; 4) the method of comparable profitability; 5) the method of profit distribution.

It is allowed to use a combination of two or more methods (paragraph 2 of Article 105.7 of the Code).

At the same time, due to the direct indication in paragraph 3 of Article 105.7 of the Russian TC, the priority method is the comparable market price method. Other methods may be used if application of the comparable market price method is impossible or if its application does not allow to draw a reasonable conclusion about correspondence or non-conformity of prices applied in transactions to market prices for taxation purposes.

Based on subparagraph 2 of paragraph 1 of Article 105.15, paragraph 5 of Article 105.17 of the Tax Code to determine the comparability of commercial and (or) financial conditions of controlled transactions with the conditions of comparable transactions between persons who are not interdependent to apply the methods specified in paragraph 1 of Article 105.7 of the Code or a combination thereof.

At the same time, it follows from the above norms in their interrelation with the norm of paragraph 3 of Article 105.7 of the Tax Code that the taxpayer must prove the validity of the application of a particular method in the documentation on the controlled transaction (including the impossibility to apply a priority method), as well as document the calculations made.

Under the general rule provided for in paragraph 5 of Article 105.17 of the Tax Code, the tax authority for the purposes of tax control shall apply the method (combination of methods) applied by the taxpayer. Application of another method (combination of methods) is possible if it proves that the method (combination of methods) applied by the taxpayer based on the conditions of the controlled transaction does not allow to determine comparability of commercial and (or) financial conditions of the controlled transaction to the conditions of comparable transactions between persons who are not interdependent (paragraphs two, three).

Thus, the tax authority is entitled to provide evidence that the application of the method chosen by the taxpayer based on the conditions of the controlled transaction is unjustified, and the calculations made are not based on documented information.

When considering this case, it was found that the company applied the method of comparable profitability to justify the conformity of prices applied in transactions with Uralkali Trading SA.

The comparable profitability method consists in comparing the operating profit margins of a party to the transaction under analysis with the market interval of operating profit margins in comparable transactions determined in accordance with the procedure provided for in Article 105.8 of the Russian TC (paragraph 1 of Article 105.12 of the Russian TC).

At the time of the audit, the Company submitted the prepared documentation on the controlled transactions (hereinafter, the documentation) confirming that the sales profitability level of 12 independent companies whose activities are comparable to those of Uralkali Trading SA is between 1.83% and 5.59%, and the sales profitability level of Uralkali Trading SA (the party under review) is 1.81%, which led to the conclusion that the price applied in the controlled transactions was in line with the market level.

At the same time, when considering the case, it was found that the company did not meet the conditions for application of the SR method.

In particular, the tax authority found that part of the goods purchased under controlled transactions were sold by Uralkali Trading SA to its interdependent entity, Uralkali Trading Chicago (USA), which does not comply with subparagraph 1 of paragraph 5 of Article 105.12 of the Tax Code.

The company's arguments that the share of sales of Uralkali Trading SA to Uralkali Trading Chicago is insignificant (as the company pointed out, it amounts to 9.83% of total sales) were rightfully rejected by the court of first instance, as unjustified by the materials of the case (only the trader's letter is presented in confirmation), as well as unimportant from the point of view of the provisions of the Tax Code on the conditions of application of the SR method.

Also, the tax authority found that a significant part of the expenses of Uralkali Trading SA in the structure of the expenses were the costs of supporting the activities of the dependent company Uralkali Trading Gibraltar, the relevance of which to the controversial transactions is also not reliably confirmed by the case materials.

In addition, neither during the audit, nor the materials of the case the company has not provided reliable information that served as a source for calculating the profitability of Uralkali Trading SA. The case file contains a letter of confirmation from the company, according to which the revenue, cost, selling and administrative costs, profit (loss) from sales and profitability of sales for transactions by sea and rail correspond to those specified in the documentation for the shopping center, which in itself can not serve as proper evidence to confirm the reliability of information specified in this documentation.

Thus, in this case the company in violation of subparagraph 2 of paragraph 1 of Article 105.15 of the Tax Code has not documented the validity of the calculation of profitability Uralkali Trading SA.

In the appeal, the company also expresses its disagreement with the findings of the tax authority and the court of first instance on the inconsistency of the companies included in the sample on which the calculation of the profitability interval, the conditions specified in Article 105.8 of the Tax Code.

At the same time, these arguments have no legal value and are not accepted by the court of appeal, because in the absence of a documented calculation of the profitability index of the company under test, the application of the SR method was in any case carried out by him illegally.

Besides, it was found out that by applying the SR method, the company calculated the trader's profitability level based on the annual activity results.

However, such approach, as the court of first instance reasonably pointed out, does not comply with the provisions of the Tax Code of the Russian Federation, in particular, the provisions of paragraphs 1 and 8 of Article 105.12 of the Tax Code of the Russian Federation, from which it follows that the operating profitability of the company under test is calculated on the basis of a controlled transaction (a group of homogeneous transactions) and not on the basis of the results of the audited period.

Thus, since in the case under review the conditions for application of the SR method were not met, which was proved by the tax authority, it was entitled to apply another method for the purposes of tax control.

The Court of Appeal rejects the company's arguments that the tax authority had to prove in the case under review that the trader's profitability index indicated in the documentation was overestimated by presenting an alternative documentary calculation, as well as to calculate a correct, in its opinion, profitability interval in case of rejection of the relevant calculations made by the company.

As stated above, the obligation to document the validity of the applied method and the reliability of the calculations made for the purposes of its application rests with the taxpayer. Accordingly, the establishment of the fact of non-compliance with this obligation by the taxpayer gives the tax authority the right in accordance with paragraph 5 of Article 105.17 of the Tax Code to apply a different method of control.

In the case under consideration, the tax authority, having established the unreasonableness of the company's application of the SR method for the purpose of determining the conformity of prices in controlled transactions to the market level of the SR method, applied the SR method.

Paragraph 1 of Article 105.9 of the Russian TC provides that the method of comparable market prices is a method of determining whether the price of goods (works, services) in a transaction under review corresponds to the market price by comparing the price applied in the transaction under review with the market price interval determined in accordance with the procedure provided for in paragraphs 2-6 of this Article.

Applying the method under consideration, the tax authority compared the prices in the controlled transactions with the prices quoted by Argus Media information and pricing agency (hereinafter, Argus Media) for potassium chloride on the basis of FOB CIS supply.

The comparison revealed a deviation of transaction prices from the minimum limit of the market price interval, which served as a basis for adjusting the prices applied in controlled transactions of the company for tax purposes.

Clause 6, Article 105.9 of the Tax Code states that when using data from information and pricing agencies on prices (price intervals) for identical (homogeneous) goods (works, services) for the purpose of applying the method of comparable market prices in accordance with Clause 7, Article 105.7 of the said Code, the minimum and maximum values of the market price interval may be recognized as the minimum and maximum values of prices, respectively, for transactions made in the same period of time under comparable conditions.

When considering the case, the Company referred to the fact that the transactions on the basis of which Argus Media quotations were calculated are not fully comparable with the controlled transactions, and the tax authority based on these quotations did not make the necessary adjustments, which led to the erroneous results obtained by applying the SRC method.

These arguments were validly dismissed by the court based on the following.

In accordance with clause 2 of Article 105.5 of the Tax Code of the Russian Federation, for the purposes of the said Code the comparable transactions are deemed to be comparable with the analyzed transaction if they are executed under the same commercial and/or financial conditions as the analyzed transaction.

If commercial and/or financial conditions of the compared transactions differ from commercial and/or financial conditions of the analyzed transaction, such transactions may be recognized as comparable with the analyzed transaction, if differences between these conditions of the analyzed and the analyzed transactions do not significantly affect their results, or if such differences may be taken into account by applying, for tax purposes, appropriate adjustments to the conditions and/or results of the compared transactions or the analyzed transaction (clause 3).

The court of first instance has rightly pointed out that full comparability of the analyzed and compared transactions for the purposes of application of the SRC method is required in the case provided for by paragraph 2 of Article 105.9 of the Tax Code.

In its turn, for the application of information sources containing generalized price data in certain groups of homogeneous transactions, including data from information and pricing agencies, the Tax Code specifies certain rules for comparison.

At the same time, paragraph 6 of Article 105.9 of the Russian TC, which establishes the procedure for applying the SRC method, does not contain a specific list of comparable conditions to be taken into account when determining comparability of commercial and/or financial conditions of the compared transactions with the conditions of the analyzed transaction.

In this connection, to determine comparability, when using data from information and pricing agencies, the terms and conditions of the analyzed transaction are used, which are determined with due regard to Clause 3, Article 105.5 of the Russian TC, and the terms and conditions of selecting transactions, which price indicators are based on.

Based on the results of the analysis of the relevant data, the court of first instance came to a reasonable conclusion that Argus Media quotes can be used in the case under consideration.

Thus, the court found that, depending on the particle size distribution (mass fraction), potassium chloride is divided into two main categories: standard and granular.

This characteristic of potassium chloride is the main indicator that can affect the price of its specific brand, and therefore, this gradation is an accepted global trade practice in the potassium chloride market.

Information and pricing agencies that perform pricing analysis of the mineral fertiliser market, including Argus Media, also divide potash into standard and granulated potash in order to quote it.

On this basis, the court concluded that Argus Media publishes price quotations for the goods corresponding to the qualitative characteristics of the goods sold in the analysed transactions (standard potassium chloride (pink and white) and granulated 7 grades).

At the same time, they legally rejected the company's arguments that each separate nomenclature (brand) of potassium chloride has its own special characteristics, which affects the price of the goods sold, and this fact was not taken into account by the tax authority when applying the SRC method.

As established by the court, Argus Media publishes a range of prices, not a single weighted average price for all brands of goods, where the minimum quote is the lowest price for standard or granulated potassium of all brands presented, and the maximum price is the highest.

At the same time, in this case the tax authority has adopted the lowest quotes (minimum quotes at contract prices) as comparable transactions with regard to the company's controlled transactions in accordance with the provisions of Article 105.9 of the Tax Code.

The Court found that Argus Media quotes reflect data on transactions with the minimum volume of 5,000 tons in terms of volumes of supply, however, it mainly analyzes transactions for tanker lots for vessels of 60,000-85,000 tons.

In the analyzed transactions the goods were mainly sold in lots of 5000 tons and more.

The company's arguments that Argus Media quotations are calculated in aggregation and do not allocate the corresponding volumes have been validly rejected, as Argus Media determines the minimum volume of consignment for which a separate valuation for that consignment is formed, from which a ranked range of prices with minimum and maximum values is subsequently formed, at that Argus Media does not aggregate the specified prices and does not publish weighted average estimations of consignments.

According to the shipping time Argus Media publishes quotations for transactions for which shipments are made after 3 months from the price setting date.

Delivery of goods under the analyzed transactions was made within two months from the date of conclusion of an additional agreement setting the price.

At the same time, the court found that in the period from August 2011 to December 2012 there was no volatility of prices on the potassium chloride market.

Therefore, in the circumstances of this case, the delivery period of the goods is not an essential condition for ensuring comparability of the analyzed and compared transactions.

It was also found that the potassium chloride quote applied by the tax authority on the basis of FOB CIS supply, according to Argus Media methodology, reflects prices for the goods at the following ports: St. Petersburg, Reni, Nikolaev, the Caucasus and Ventspils.

In turn, the analyzed transactions were carried out on the following bases: St. Petersburg, Reni, Nikolaev, Caucasus, Ventspils: DAF Batevo, FOB Ventspils, FOB Caucasus, DAF Grodekovo, DAF Zabaikalsk, CPT Klaipeda, FOB Nikolaev, DAF Mamonovo, FOB Reni, FOB St. Petersburg, CPT St. Petersburg, DAF Vertsilya, DAF Uzhgorod.

In this regard, a reasonable conclusion was made that this quotation can be used as a comparable transaction for the shipping bases of FOB St. Petersburg, FOB Reni, FOB Nikolaev, FOB Caucasus, FOB Ventspils. For transactions with different shipping bases this quotation can be used as a comparable transaction subject to adjustment for delivery terms.

At the same time, it was found that the respective adjustments were made in the challenged decision of the tax authority on the basis of the company's primary documents (railway transportation and transshipment costs were taken into account).

With regard to payment terms, Argus Media methodology states that for Indian contracts a loan (payment delay) of 180 days is provided. According to FOB CIS quoting methodology, the lower limit of the quote is determined by calculating netback from cfr India quote.

The Court found that for the analyzed potassium chloride sales transactions the payment delay is also provided, actually the payment was made within 180 days.

The prices under analyzed transactions were set in US dollars and Euro.

Argus Media quotation was published in US dollars.

Transaction currencies are given by the tax authorities to a comparable type using the euro to the U.S. dollar rate of the European Central Bank.

Thus, according to the analysis, the commercial and financial conditions of the transactions, on the basis of which Argus Media quotes are calculated, correspond to the commercial and financial conditions of the controlled transactions, and the differences, which could have had a significant impact on prices, were taken into account by the tax authority by applying adjustments.

When considering the case, the company stated that the agency also took into account the transactions of CJSC BPC, which is an interdependent entity with the company, which, in its opinion, excluded the possibility of applying such quotations.

At the same time, the court found that the agency took into account BPC's potash sales to independent customers, information on BPC's transactions with the company, as well as information on transactions between BPC and other companies affiliated to the company.

Therefore, the company's arguments that in this case the comparison was actually made with transactions to which it is a party are unjustified.

The company has also pointed out that functions of the parties to the transaction were not taken into account when making quotations. In turn, BPC was a reseller of goods purchased from the company. Therefore, controlled transactions are not comparable to transactions about which information was used by the agency to form quotations, which excludes their application for tax control purposes.

At the same time, according to Argus Media Methodology, provided that there are a sufficient number of transactions on the market, the information about which is reliable and representative, the upper limit of the price range is taken as the highest, and the lower limit is taken as the lowest transaction price for the trading period.

Accordingly, Argus Media does not form the quotation of standard "fob CIS, in bulk, contract" potassium chloride based solely on the prices of "BPC" CJSC transactions. These transactions were taken into account, among other things, when forming this quotation by settlement from the most liquid world markets. At the same time Argus Media does not publish weighted average transaction prices when forming the mentioned quotation, but publishes a range of prices with determination of upper and lower price range limits in transactions the information about which was used for forming the quotation.

In the same case, the tax authority used the lowest quotes for all transactions used in the calculation as comparable transactions with respect to controlled transactions of the company.

In such circumstances the court of appeal agrees with the findings of the court of first instance that the tax authority has legally used the minimum quotes published by Argus Media for the standard "fob CIS, bulk, contract" when comparing the prices in the Company's transactions with Uralkali Trading SA.

The Court of Appeal believes that the court of first instance in a new examination of the case, contrary to the arguments presented in the complaint, fully complied with the instructions of the Moscow District Arbitration Court, which were given in its decision of 14.03.2018.

During the consideration of the case, it was found that the company applied the SR method on the basis of documentary unconfirmed data on the actual profitability of Uralkali Trading SA, as well as made methodological mistakes in the application of this method (the trader's profitability index is calculated not on the controlled transaction, but on the results of the audit period; the sample of companies for calculating the interval of profitability includes companies that do not comply with the provisions of the Tax Code of the Russian Federation), in connection with which he concluded that the prices in controlled transactions are in line with the market.

In its turn, the tax authority correctly applied the SRC method, the application of which showed that in controlled transactions there was an understatement of prices in comparison with their market level in comparable transactions, in connection with which price adjustments were made to determine the actual tax liabilities of the company.

The significant amount of additional tax accrued was a direct consequence of the adjustment and was due to the significant volume of turnover under controlled transactions.

Having established that the Company's application of the SR method in this case was unmotivated and not documented by the court, the court reasonably acknowledged that its actions were aimed at obtaining tax savings.

Also at the new hearing of this case, the court of first instance assessed the arguments and evidence presented by the parties, including the additional expert opinions presented by them. The evidence available in the case files in their totality was sufficient to establish the legally significant circumstances of the case, and therefore, there was no need to conduct a forensic examination in the case. The appellate court proceeded from the presence in the case of necessary evidence for adoption of the legal and grounded decision, rejecting the application of the company for appointment of the forensic examination.

Taking into account that the circumstances of the case are fully investigated by the court, the submitted evidence is evaluated according to the rules of Article 71 of the APC of the Russian Federation in their totality and interconnection, the court of appeal has no grounds for revaluation of the circumstances established in the case. In turn, the rules of substantive law have been correctly applied by the court contrary to the arguments of the complaint.

Taking into account the above, guided by Article 71 of the Code of Administrative Offences of the Russian Federation, the Court of Appeal, in its turn, applied the substantive law norms contrary to the arguments of the complaint. 266, 268, 269, 271 of the Arbitration Procedure Code of the Russian Federation,

DELIVERY :

The decision of the Moscow City Arbitration Court dd. 26.12.2018 in case No. A40- 29025/17 shall be upheld, the appeal shall be upheld.

The decision of the Ninth Arbitration Court of Appeal comes into force from the date of its adoption and may be appealed within two months from the date of the decision in full in the Arbitration Court of Moscow District.

Presiding judge S.L. Zakharov

 

Judges E.V. Pronnikova

 

S.P. Sedov