R O M Â N I A

HIGH COURT OF CASSATION AND JUSTICE

The Administrative and Tax Litigations Chamber

Decision No 6059/2020

Public sitting of 17 November 2020

On these appeals;

From an examination of the case-file, finds as follows:

I. The circumstances of the case

1. Subject-matter of the application

By application for a writ of summons, registered on 14 September 2016, at the Timisoara Court of Appeal, Administrative and Fiscal Litigation Division, the applicant A. S.A., in contradiction with the defendants Administrația Județeană a Finanțelor Publice Maramureș and Direcția Generală Regională a Finanțelor Publice Timișoara, requested:

(i) annulment in its entirety of the decision to resolve the appeal no. 1044/77/29.02.2016, issued by the defendant Regional General Directorate of Public Finance Timișoara and communicated to the applicant on 11.03.2016, rejecting the administrative appeal lodged against Tax Inspection Report no. x/13.07.2015 as inadmissible and against Tax Decision no. x/13.07.2015 as unfounded;

(ii) annulment in its entirety of Tax Decision No x/13.07.2015 and Tax Inspection Report No x/13.07.2015, in respect of the additional tax liabilities established against the applicant, in the total amount of RON 26,599,255, consisting of corporate income tax in the amount of RON 26,552,586 (of which RON 15,904,844 as the principal liability, RON 8. 362,319 RON interest and 2,285,423 RON late payment penalties) and VAT in the amount of 46,669 RON (of which 38,849 RON principal, 1993 RON interest and 5827 RON late payment penalties), with the consequence of exonerating the company from the payment thereof and refunding the amounts paid by the company in this respect, together with the related legal interest;

(iii) declare the unlawfulness of the adjustment of the company's income by the tax authorities by establishing additional income in the amount of RON 99,133,355 relating to production activities in the period 2008-2013, given that the prices charged by the applicant comply with the market value principle, as evidenced by the local transfer pricing documentation;

(iv) annulment in part of the Order of Measures No 4300/03.07.2015, issued by the Maramureș County Administration of Public Finances in respect of Measures 1 and 2, aimed at correcting errors in the 394 Informative Declaration on purchases/shipments made on the territory of Romania and correcting errors in the 390 Declaration on intra-Community purchases/shipments, with the consequence of exonerating the applicant from the obligation to comply with those measures;

(v) annulment of the Order of Measures No 6369/25.08.2014, issued by the Maramureș County Administration of Public Finances, ordering the company to provide certain accounting documents and supporting documents relating to certain company records;

(vi) annulment of the Tax Inspection Suspension Decision no. x/26.08.2014, relating to the period 26.08.2014-25.09.2014, which ordered the suspension of the tax inspection in order to comply with the Measures Order no. 6369/25.08.2014, with the consequence of excluding the aforementioned period from the calculation of the tax inspection suspension period and the annulment of the accessory tax obligations calculated for that period;

(vii) order the defendants to pay the costs of the present proceedings.

2. Judgment of the Court of First Instance

By civil judgment no. 384 of 21 December 2017, the Timisoara Court of Appeal, Administrative and Tax Division ordered the following:

(i) rejected the objection of inadmissibility of the request for annulment of the tax inspection report;

(ii) partially admitted the action brought by A. S.A., in contradiction with the defendants, the County Administration of Public Finances of Maramureș and the Regional General Directorate of Public Finances of Timișoara;

(iii) annulled Tax Inspection Report No x/13.07.2015 and Tax Decision No x/13.07.2015, both issued by the defendant AJFP Maramureș;

(iv) annulled in part the decision to settle the appeal No 1044/77/29.02.2016, as regards the tax inspection report and the tax assessment decision;

(v) dismissed the remainder of the action, with regard to the application for annulment of the Order of measures no. 4300/03.07.2015, the Order of measures no. 6369/25.08.2014 and the Tax Inspection Suspension Decision no. x/26.08.2014, issued by AJFP Maramureș;

(vi) ordered the defendants to pay the applicant's costs in the amount of RON 40,050 as expert's fee (RON 19,500), lawyer's fee (RON 20,000) and court stamp duty (RON 550).

3. Appeal in the case

An appeal against civil judgment No 384 of 21 December 2017, delivered by the Timisoara Court of Appeal, Administrative and Fiscal Litigation Division, was brought by the defendants Administrația Județeană a Finanțelor Publice Maramureș and Direcția Generală Regională a Finanțelor Publice Timișoara.

3.1 By its appeal, the defendant, Direcția Generală Regională a Finanțelor Publice Timișoara, seeks to have the judgment under appeal set aside and, on appeal, to have the application for interim measures dismissed, relying on the ground for setting aside provided for in Article 488(2) of the EC Treaty. (1), point 8 of the Civil Procedure Code.

3.1.1. The first plea in law in the appeal relates to the admissibility of the application for annulment of the tax inspection report (RIF) No x of the AJFP Maramureș, and to the erroneous decision on the plea of inadmissibility of that head of claim.

The appellant-respondent submits that the application for annulment of the RIF is inadmissible in the light of Articles 85 to 87 and 205 of O.G. No 92/2003 on the Code of Tax Procedure and Article 106 of the Methodological Norms for the application of the Code of Tax Procedure.

The RIF contains the findings of the inspection from a factual and legal point of view and forms the basis of the tax assessment decision, the latter being the debt instrument which produces effects on the taxpayer and becomes enforceable title, under the terms of the Tax Procedure Code. The tax inspection report does not meet the conditions laid down in Article 44 of the Code of Tax Procedure in order to be considered a tax administrative act. The provisions of Article 18(1)(a) and (b) are not applicable in this case. (2) of Law No 554/2004, but Article 8 of the same law, which provides that the subject of the action for annulment is the administrative act.

3.1.2. The issue of the contested corporation tax was wrongly dealt with by the judge hearing the case.

3.1.2.a) As regards the comparison of the applicant's net profit with that of B., the court drew the wrong conclusions. The applicant is affiliated to the Electrolux group. Comparing the applicant's financial results with those of the group to which it belongs, it emerged that, during the period under review, the applicant was loss-making while C. made a profit. With reference to paragraphs 1.70 and 1.71 of the OECD Transfer Pricing Guidelines, when an affiliated company consistently makes a loss while the group as a whole is profitable, the data may call for a special analysis of the transfer pricing elements, as this loss-making company may not receive an adequate reward from the group of which it is part and with which it does business for the benefits derived from its activities.

An analysis of the way in which the prices at which the applicant's products are sold to other companies in C. are determined shows that those prices are imposed by the group, and that there is a uniform group policy of remunerating the manufacturing companies within the group and those carrying out distribution activities.

According to the document called "Framework Documentation 2013", Annex 28 of the transfer pricing file, transfer prices are established on the basis of budgeted estimated costs, comprising direct material cost, direct labour cost and direct manufacturing costs, as well as indirect manufacturing costs and processing costs, plus a margin of 2.5%.

Compared to this mark-up, the mark-up applied to B.'s direct and indirect production costs was between 27.04% and 34.87% over the period 2008-2013, as shown in B.'s public financial statements. It is true that B. is an entrepreneur whose activity involves several functions and risks, which may lead to higher mark-ups or higher losses, but it is worth noting that the mark-up applied to the cost of goods sold by B. is 11-14 times higher than that established for A. S.A..

During the entire period subject to tax inspection, the applicant incurred losses, while C. made a profit. In the years 2010, 2011 and 2013, with a turnover of more than 400.000.000 RON, the applicant always recorded a net loss.

3.1.2.b) By comparing the applicant's operating margin with B.'s gross margin, the tax body proceeded to analyse how the prices of the applicant's products sold to group companies were established.

The court erred in finding that the comparison between the operating cost margin of 2.50% established by the transfer pricing policy for the applicant's household appliance manufacturing activities and B.'s gross cost margin was erroneous, given that the applicant failed to identify the source of the cost of goods sold values used for the calculation of B.'s gross cost margin, according to RIF p. 5.

A comparative analysis of the applicant's sales invoices for household appliances to C. on the one hand and to independent companies on the other found that, for identical products, in similar quantities, at similar times of the year, the applicant sold to independent companies, under conditions presumed to be competitive and negotiated, at unit prices at least 25% higher than the prices at which it sold the same products to group companies.

In that context, the Court of First Instance wrongly held that the transfer prices complied with the market value principle, given that the goods and services purchased by the applicant from group members were too expensive in relation to the market value and that the applicant sold its products to group companies at prices below the market value.

The test of compliance with the market value principle in the transactions carried out by the applicant with its affiliated partners was carried out with the correct application of Article 11(11)(a) of the Directive. (2) of the Tax Code and Order No 222/2008, in relation to the content of the transfer pricing file submitted by the applicant.

The conditions of delivery/transport differ in the two types of transactions with goods carried out (production and distribution), the court pointed out, with the applicant bearing the transport costs of deliveries to third parties such as D., E., F., G., but not bearing the costs of deliveries to related parties.

The conclusions of the court are not lawful and well founded, since there are no provisions in the methodological rules for the application of Article 11 of the Tax Code which make it compulsory for the tax inspectorate to divide the assessment by category of activity.

The applicant also wrongly classifies the independent companies with which it has dealt as third party distributors, since those companies are traders in household appliances and not distributors.

The claims relating to differences in payment terms, quantities and discounts/ rebates in dealings with third party customers compared to related parties are also unfounded.

The court's assertion that the prices charged to related parties for production and those charged to third-party distributors for marketing cannot be compared is incorrect, since that is not capable of determining whether or not the prices charged in transactions with related parties are at market level. The applicant does not, however, point out where the strict criteria for the application of the transfer pricing comparison method were not used.

3.1.2.c) Analysing the functions carried out and the risks assumed by the applicant, it is found that it produces cookers and cooker accessories to order and sells them to affiliated entities in the group, and the market risk can be divided into sales volume risk and price risk, with the production division having a limited sales volume risk. The functions carried out by the applicant in the production activity are those related to stocks, inventory, orders, production, etc., and among the risks assumed are those related to investments in production capacities, production efficiency risk, currency risk. The applicant concluded in the documentation submitted that it is a producer with limited functions and risks in relation to related parties and, in order to test whether the transfer price complies with the market value principle, it carried out a comparative analysis with 8 independent comparable companies having the same activity and which are also producers with limited functions and risks.

As regards the adjustment of the margin to the operational cost of production with the amount of restructuring costs with compensation payments and the amount of additional depreciation expenses, the transfer pricing file has to be analysed. In this file (p. 81 and Annex 13), the complainant adjusted the expenses by excluding these two types of costs from the calculation of the profitability indicator compared to that of the 8 independent companies.

Thus, expenses of the nature of severance payments to dismissed employees and additional depreciation expenses resulting from the revaluation of fixed assets were eliminated from the calculation of operating profit for the production activity in the period 2009-2013.

Contrary to the findings of the court, by eliminating those expenses, the applicant artificially increased the operating profit from the production activity sold to affiliated entities, an adjustment which was made for the period 2009-2013, that is to say, only for the years in which the applicant's financial indicator was outside the range of comparison, and not for 2008 when the financial indicator was within the range of comparison.

As regards the applicant's representative's explanations for those adjustments, they were that: the decision to lay off some employees was due to the downturn in the white goods market; the method of forming transfer prices is based on direct and indirect production costs, which do not include period costs (the costs of the staff laid off are overheads, which do not in any way contribute to the production of the good); C. should not have to bear costs of the kind at issue since it is the applicant which negotiates the wage obligations; the severance payments in the redundancy process are exceptional.

However, it is clear from the documents in the file that the Electrolux group's sales increased during the period in question, which refutes the claim that the market fell. Contrary to the findings of the court, the formation of prices by excluding costs of a compensatory nature relating to the dismissed staff does not comply with the principle of market value and has no legal basis. It must also be borne in mind that in 2010 the applicant received a credit note from the group representing financial aid in respect of the costs of dismissing staff, and that the justification for receiving that aid or the reason why it was granted only in one of the years in which dismissals took place was not provided, which confirms the imposed nature of the transfer pricing policy and the inconsistency in its application.

With regard to the provisions of Order No 3055/2009 approving the accounting regulations in accordance with the European directives, the inclusion/non-inclusion in direct and indirect costs of certain expenses for the period is irrelevant, given the use by the applicant, in order to test compliance with the market value principle, of the net trading margin method, referred to in Article 11(1)(b) of the Directive. (2) of the Tax Code and point 29 of the Methodological Rules. That method involves comparing a financial indicator (profit margin at operating costs) obtained by the applicant from sales of products to affiliated entities with the same financial indicator of independent companies operating on the same market. The financial indicator selected includes any other operating expenses.

The Court's argument that the costs of severance payments to dismissed staff are not, according to Order No 3055/2009, of a financial or extraordinary nature, but are operational costs, operating costs, which are taken into account when determining the profitability indicator profit margin in relation to operating (operational) costs, is incorrect.

The court's argument concerning the extraordinary nature of the redundancy process must be analysed in the strict terms of the applicable law. It is found that a redundancy is not considered by Order No 3055/2009 to be an extraordinary event. Moreover, the applicant states that it did not make a similar adjustment in the case of comparable companies, that is to say, it did not exclude any expenses from the calculation of their profitability indicator.

Therefore, the applicant compared its amended profitability indicator with the unamended profitability indicator of each of the 8 independent companies, which the court of first instance wrongly found to be in accordance with the applicable rules.

As regards the additional depreciation charges resulting from the revaluation of fixed assets, the applicant considered that they were also extraordinary costs which should be removed from the calculation of the profitability indicator, but without providing any clear regulatory argument.

The position taken by the Court of First Instance to the effect that those costs had to be eliminated from the calculation of the applicant's profitability indicator subject to comparison is unlawful, since it was expressed in breach of Article 19(1)(b) of Regulation No 40/94. Article 19(1) and (5) in conjunction with Article 11(1) and (5). (2) of the Tax Code and points 23, 24, 29, 32 and 33 of the Implementing Rules of the Tax Code. The latter costs are provided for in the accounting rules and international financial reporting standards and are not extraordinary. According to Order No 3055/2009, expenses of a depreciation nature are operating expenses and are therefore relevant in determining the financial result.

The price in transactions between affiliated persons must comply with the arm's length principle and transfer prices are taken into account when determining the profits of affiliated persons.

The appellant-respondent refers to the OECD Guidelines, which define the concepts of: direct costs, indirect costs, net dealing margin method, arm's length principle.

The tax authorities are entitled to make adjustments when the resident affiliate's net profit margin from controlled transactions is not within the range of comparability resulting from an analysis of the profitability of comparable independent companies. Adjustments are made to the median value (from the middle of the comparator range), in accordance with Article 2(2). (3) of Order No 222/2008.

In the present case, since the two types of expenses were eliminated by the applicant in breach of the legal provisions and in order to create an appearance of compliance with the market value principle, the tax authority relied on the method used by the applicant and adjusted the amount of income which the applicant should have realised from the sale of its products to affiliated entities on the basis of the median value submitted in the transfer pricing file, considered to be the transfer price in accordance with the market value principle (that is to say, 7.07% for 2009, 3.98% for 2010, 0.42% for 2011, 2.09% for 2012 and 1.5% for 2013).

With the exception of the value for 2008, the applicant's values were outside the range of comparison, so that the taxable income was correctly adjusted to the median value, and the court's findings on this point were unfounded.

3.1.2.d) As regards the adjustment of income from production activity separately for each year subject to tax inspection, it complies with the provisions of Order No 222/2008, referring to the income that the applicant should have obtained in each of the years 2009, 2010, 2011, 2012, 2013.

With regard to the deductions relating to the applicant's overtaxation, the provisions of paragraph 1.48 and Article 3 of Annex No 1 to Order No 222/2008 are applicable, the appellant-respondent submitting that neither the act of tax inspection nor the decision on the administrative appeal were aimed at verifying the applicant's overtaxation.

And in accordance with the OECD Guidelines, if the transfer price established by the taxpayer is not within the range of comparison, the competent tax authority establishes the median value as the correct transfer price which reflects the market price. The median value is the value in the middle of the range of comparison, and where no median value can be identified, the arithmetic average of the two middle values of the range of comparison is taken.

The defendant-appellant also points out that the OECD Guidelines are not a normative act accepted by Romania by approval, accession or ratification and, as a result, do not have legal force superior to OPANAF No 222/2008. Domestic legal rules are supplemented by the OECD Guidelines only where domestic rules do not expressly provide for this. In the present case, clear domestic rules are applicable, so that the court's finding that the Guidelines must also be applied is also wrong.

3.1.3. Another contentious issue which was wrongly assessed by the court is that relating to the differences resulting from the storage/disposal of realised production.

Resuming the presentation of the factual situation relating to the unloading of production made and sold on the basis of an analysis of the accounts, the defendant-appellant points out that, according to the accounting statements provided by the applicant, the final debit balance of account 331 "Work in progress" for 2009 was RON 2,441,097, while in 2010 the applicant took over the initial debit balance of the said account in the amount of RON 3,109,169, resulting in a difference of RON 668,071, which could not be justified. The applicant submitted a succession of erroneous accounting notes, subsequently corrected, from which it appears that the amount was initially recorded in account 308.300 "Difference in standard material prices" and subsequently recorded in account 331. Therefore, the difference represents an undisclosed income which, according to address no. x/3.07.2015 submitted by the applicant as a supporting document, would represent the difference in standard material prices valid for 2009.

In the 2011 tax year, a difference of - 920 RON was identified as over-accrued income by the company, as the annual balance of account 711 is in credit.

In application of Art. 6 para. (1) of Law no. 82/1991, the applicant's claims to be taken into account the internal note exceed the legal framework, as there is no proof of its preparation prior to the tax inspection. Although the applicant's claims were confirmed by an expert's report, the court should have set aside the expert's conclusions for the reasons set out above.

3.1.4 As regards the non-deductible expenses in the calculation of the corporate income tax on transactions with inactive suppliers, according to the ANAF database and the right to deduct the related VAT, the appellant-respondent states that the applicant recorded in its accounting records in 2009 and 2011 three invoices issued by two suppliers who were declared inactive before the transactions were carried out.

In the light of the provisions of Article 21(1)(b) of Regulation (EEC) No 4064/89, the Court of First Instance (4)(j) in conjunction with Art. 11 para. (12) of the Tax Code, the expenses mentioned are not deductible.

As regards VAT, also in application of Art. 146 para. (1) (a) and Art. 155 par. (5), (15)3 para. (8), Art. 11 par. (12) of the Fiscal Code and Art. 3 of OPANAF no. 575/2006, the right of deduction cannot be granted, as tax documents issued by taxpayers declared inactive do not produce legal effects from a fiscal point of view.

The conclusions of the court, which refute the position of the tax authority, are submitted with a misapplication of the law and cannot be upheld since the taxpayers declared inactive are no longer taxable persons from a VAT point of view, so that both the substantive and formal conditions imposed by the legislature for the grant of the right to deduct are not complied with in the case of transactions with non-taxable persons.

Expenditure recorded in the accounts based on a document issued by an inactive taxpayer whose tax registration certificate has been suspended under OPANAF is not deductible when calculating taxable profit.

The CJEU case law states that the right to deduct VAT on acquisitions depends on the cumulative fulfilment of both substantive and formal conditions, and Member States have the power to lay down rules for supervising the exercise of the right of deduction. The introduction of a penalty for non-exercise of the right of deduction on the basis of purchases from taxpayers declared inactive is in line with the principle of combating tax evasion and avoidance and is a proportionate measure in the light of that principle and the rules of Article 781 of the Code of Tax Procedure.

Taxpayers declared inactive are entered in the public register by posting them on the website of the National Tax Administration Agency, which contains all the information necessary to identify these taxpayers and the date of their publication in the register. The tax inactivation status has effects on other taxpayers, who can consult the public register from the date of publication of the information.

Therefore, the applicant was not legally entitled to benefit from the deduction of expenses and VAT entered in the invoices issued by H. S.R.L. and I. S.R.L. after their declaration as inactive companies.

3.2 By its appeal, the defendant, the Maramureș County Administration of Public Finances, seeks to have the judgment set aside and, on appeal, to have the applicant's claim dismissed as unfounded and to have the amount of costs awarded against it reviewed.

It states that it supports the appeal brought by the Regional Directorate General of Public Finance Timișoara and, as regards the claims in the application for annulment of the provisions of the measures and of the decision suspending the tax inspection, states that the court of first instance was right to dismiss the applicant's action.

The Court must have regard to the provisions of Article 453(3) of the EC Treaty. (1) of the Civil Procedure Code, according to which the losing party may be ordered to pay the costs of the proceedings if it is at fault in the proceedings or if, by its conduct during the proceedings, it caused those costs to be incurred. Neither of those conditions is satisfied.

4. Arguments in the case

4.1. In its defence, the respondent A. submits that the appellants criticise the judgment of the Court of First Instance by relying essentially on the same arguments used before the Court of First Instance, which fall within the scope of the case-law under Article 488(2) of the EC Treaty. (1)(8) of the Code of Civil Procedure, but without indicating the substantive provisions of law allegedly infringed in the decision of the court of first instance and the nature of those infringements.

The appeal is admissible under the strict conditions laid down by law and the appeal must contain the grounds of illegality and their development. However, the appellants merely claim that the court of first instance gave erroneous solutions to the issues under consideration, but they do not explain the error of the court and do not refer to the reasoning set out in the grounds of the judgment.

The defendant-appellant, Direcția Generală Regională de Finanțelor Publice Timișoara, illogically criticises the court for relying on the conclusions of the expert's report, although it did not ask the court to set aside the expert's report, and the references in the judgment to the conclusions of the expert's report are reasoned and corroborated with the conclusions reached and on the basis of the other evidence adduced in the case.

As a result, the appellants' arguments do not fall within the ground for annulment laid down in Article 488(2) of the EC Treaty. (1)(8) of the Code of Civil Procedure. nor in any other ground of appeal.

4.2. The court correctly rejected the objection of inadmissibility of the claim for annulment of the RIF, given that, according to Article 218 of the Code of Tax Procedure, decisions issued in the resolution of appeals may be appealed to the administrative court together with the tax administrative acts to which they refer, and according to Article 18 para. (2) of Law no. 554/2004, the court is also competent to rule on the legality of the administrative operations on the basis of which the contested act was issued.

4.3. The court of first instance was right to find that the adjustment of the company's production income was unlawful.

The court first examined whether the transfer pricing test method used by the applicant was a recognised one, then verified the correctness of its application, and finally examined individually all the criticisms made by the tax authorities regarding the method of establishing the market price.

The net margin method with profit level indicator Margin at operating costs is a method recognised by national law (Article 11(11)(a) of the VAT Directive). (2) final sentence, point d) of the Tax Code and point 28 of the Methodological Rules) and the OECD Guidelines.

The use of this method has not been contested by the tax authorities, but they have contested the adjustments to operating costs.

The court of first instance judiciously found that the adjustment of the margin to operating production costs by the amount of restructuring costs with compensation payments and the amount of additional depreciation expenses was justified by the extraordinary nature of these expenses.

The respondent-claimant refers to the arguments of the court of first instance, supported by the conclusions of the expert report. It states that it took restructuring measures which, during the period under consideration, involved the dismissal of 620 employees, most of them from the production division, in respect of whom compensation payments were paid. The restructuring was necessitated by the downturn in the household appliances market in Europe, including Romania, between 2008 and 2013. The costs of the severance payments do not fall into the category of extraordinary expenses from an accounting point of view, but from a tax point of view (i.e. the transfer pricing provisions) these costs are extraordinary because they are not related to the normal production process. As a result, from the perspective of intra-group commercial transactions relating to the production of cookers, A.'s operating cost margin cannot be calculated by including all the expenses incurred by the company within this division, because certain expenses are of an extraordinary and incidental operational nature. The cost of compensation payments is not a cost attributable either directly or indirectly to the production obtained by the applicant, but a general overhead cost which does not participate in the production of the good, but rather measures the efficiency/inefficiency of the production activity, which is why it should not be taken into account in the calculation of the profit indicator relating to the production activity on order.

The additional depreciation costs resulting from the revaluation of fixed assets follow the same logic as the costs of the restructuring process, they are extraordinary costs from a transfer pricing perspective and should be eliminated in the calculation of the profit level indicator to ensure comparability.

The applicant carried out a revaluation of its entire fixed asset portfolio as at 31.12.2009 and 31.12.2011, which resulted in additional impairment charges. They mainly relate to equipment. The result of the revaluation was recorded at 31.12.2009, but the impact on the depreciation amount is included in the following period.

In the case of the selected comparable companies with similar production activities, no public information was found that their operating result was influenced by extraordinary income or expense items, as was the case for the applicant, in the period 2009-2013, so that no adjustments had to be made to the profitability indicators calculated for these companies. Instead, in order to ensure comparability, an adjustment to the applicant's operating margin was necessary.

The profit indicator should reflect the results of production activities for both the applicant and the selected comparable companies. In the case of the applicant, information was available on extraordinary cost items from a production point of view and in relation to which the operating cost margin was adjusted accordingly.

It has been taken into account that for the 8 selected companies there is no information on possible restructuring or recording of additional impairment charges and, in addition, account has been taken of the rarity of such items in practice, so that it is reasonable to assume that for these companies there is no need to adjust the operating margin at cost.

The Respondent cites paragraph 2.75 of the OECD Guidelines and the conclusions of the tax expert in objectives 9 and 10 of the expert opinion.

The comparison of the net profit of A. with that of B. is inappropriate in the analysis of the prices charged by the company, given the substantial differences between the functional and risk profile and the assets held by the two companies (A. - a custom manufacturer and distributor with limited functions and risks, and B. - a contractor).

The applicant company cannot be regarded as a consistently loss-making company since, at an operational level, it made a profit in 2008 and a loss in the period 2009-2013, with a higher level of losses only in 2009 and 2010, when the household appliances market in which it operates was severely affected by the economic crisis.

The comparison of the applicant's operating margin with B.'s gross margin is inappropriate in the analysis of the prices charged by the company, since the two margins represent different calculation formulae which automatically lead to different results. The margin of 2,50 % established by the company's transfer pricing policy relates to the production of large household appliances by companies carrying out those activities in the Europe, Middle East and Africa areas, whereas the gross margin calculated for B. relates to all the activities carried out by the group at global level. The operating cost margin of 2.50% is set to remunerate production activities for producers with limited functions and risks, while the margin calculated for B. is that of an entrepreneur with full functions and risks.

For these reasons, the comparison is not relevant in determining whether the market price was respected in the transactions analysed.

The comparison made by the tax authorities between the price at which the applicant sells the products to third parties and the price at which it sells the same products to affiliated companies does not comply with the legal provisions in the field of transfer pricing either, because the activities carried out and the stages in the production chain, delivery/transport conditions, payment conditions, quantity, discounts/discounts were not taken into account.

Transactions with third parties are situated differently in the value creation chain, the functional and risk profile of the applicant in these transactions being different from that in transactions with related persons.

As regards the production activity, the applicant did not carry out similar activities for the benefit of non-affiliates that were comparable to the activities carried out in the intra-group transactions discussed, and as regards the distribution activity, the applicant did not purchase from non-affiliates comparable products on comparable terms to those in the transaction under consideration, which it subsequently sold to third party customers.

As the applicant is at different stages of the value creation chain for the two types of activities, making a comparison is fundamentally flawed.

The delivery and transport conditions also differ in the two types of transactions, with the transport costs for deliveries to third party customers being borne by the applicant, which does not bear the transport costs for deliveries to related parties.

The terms of payment differ as the applicant collects the consideration for the goods delivered to third parties within 60 days from the date of the invoice. The quantity of goods sold differs, the value of sales to related parties being higher. And finally, the impact of rebates/discounts has not been taken into account.

In conclusion, the court rightly pointed out that the price comparison method could only have been applied if the tax authority had adjusted the prices in such a way as to comply with the criteria laid down in the methodological rules implementing the Tax Code.

The adjustment of the applicant's production income to reflect the market price need not be made at the level of the median of the interquartile range. The method of adjusting the income to the median value is not consistent with either the provisions of the Tax Code or the recommendations of the OECD Transfer Pricing Guidelines. By Art. 11 para. (2), the Tax Code refers to the reflection of the market price of the goods supplied in the transaction so that Order No 222/2008 which stipulates on the adjustment of income to the median level of the interquartile range does not comply with the higher-ranking regulation.

The OECD Guidance recognises that transfer pricing is not an exact science, with different points within the range reflecting that independent enterprises involved in comparable transactions under comparable conditions may not set exactly the same price for the transaction. Both the results at the top and bottom of the range are as representative of the overall results as the median value.

Romanian tax legislation is supplemented by the OECD Guidelines as expressly provided for in point 41 of the Rules given in application of Article 11 of the Tax Code, so that the contentions of the appellant-respondent Regional Directorate General of Public Finance Timisoara that the OECD Guidelines are not a normative act accepted by Romania were not correctly upheld by the court.

4.4 As regards the differences in the storage or removal of the production, the tax authorities concluded that the applicant did not record income in the amount of RON 668,071 in 2009 and RON 35,792 in 2012. However, they did not take into account the fact that the standard cost variation was debited to expense accounts 601 and 607 with a minus sign. However, an amount recorded with a minus sign on the debit side of an expenditure account has the same impact as an amount recorded with a plus sign on the credit side of a revenue account, i.e. it acts as revenue. As a result, the court was correct in finding that there was no need to adjust the profit and loss account for 2009 and 2012, referring to the lack of impact from a tax point of view.

4.5. The findings of the tax inspection bodies regarding the non-deductibility of expenses in the calculation of corporate income tax and VAT in relation to suppliers considered inactive in the ANAF database were correctly assessed to be unlawful.

The applicant complied with the legal provisions regarding the right of deduction, holding compliant invoices and using the services purchased in the performance of taxable transactions. The reality of the transactions was not disputed, the refusal to grant deductibility being based on the status of suppliers declared inactive.

J. since the transactions are genuine and can be proved by supporting documents, on the basis of settled case-law of the CJEU, the right to deduct VAT cannot be refused on the basis of a formal defect in the invoice such as that in the present case (inactive supplier). Refusal of the right to deduct VAT invoiced by an inactive taxpayer does not comply with the European VAT Directive as it imposes formal conditions even when it can be shown that all the substantive conditions have been met. This approach violates the principle of VAT neutrality (CJEU judgment in case C 101/16 Paper Consult is cited).

II. The solution of the Court of Appeal

5.1. Dealing first with the objection of invalidity of the appeals raised in the respondent's statement of defence, the High Court finds that the objection is well founded in relation to the appeal brought by the defendant Maramureș County Administration of Public Finances and unfounded in relation to the appeal brought by the defendant Timișoara Regional Directorate of Public Finances.

Thus, as regards the appeal brought by the County Administration of Public Finances of Maramureș, it is found that the appellant confined itself to stating that it supports the appeal brought by the Regional Directorate General of Public Finances of Timișoara and to emphasising that the decision rejecting the application for interim measures and the decision suspending the tax inspection is correct. Specifically, the appellant's criticisms are limited to the order that it pay the costs and are made in the light of the application of Article 453(3) of the Rules of Procedure. (1) of the Code of Civil Procedure, arguing that the condition of procedural fault is not met.

The statement in support of the appeal lodged by another party to the proceedings does not satisfy the requirements of a request for an appeal, as the criticisms of illegality against the judgment on the merits have not been raised. As regards the order that the appellant pay the costs, no genuine criticism of illegality can be drawn from the appellant's summary submissions as regards the application by the court of the procedural provisions contained in Article 453(3) of the Rules of Procedure of the Court of First Instance. (1) of the Civil Procedure Code.

For those reasons, pursuant to Article 496 in conjunction with Article 489(2) of the Civil Procedure Code, the Court of First Instance may, on the basis of the (1), Art. 487 para. (1) and art. 488 par. (1) of the Code of Civil Procedure, the High Court will annul the appeal brought by the County Administration of Public Finances of Maramureș.

As regards the appeal brought by the defendant DGRFP Timișoara, the respondent-appellant's contentions that it did not make any specific criticism of the judgment of the court of first instance are unfounded.

In the application for annulment of the judgment under Article 488(2) of the EC Treaty, the appellant submits that (1)(8) of the Code of Civil Procedure, the appellant makes specific criticisms which fall within the scope of the plea of illegality raised. The first set of criticisms concerns the admissibility of the action for annulment of the tax inspection report. The second set of criticisms concerns the issue of corporation tax from the transfer pricing perspective (with specific and separate references, correlated with the relevant regulatory provisions, to the application of the net trading margin method, to the exclusion of the costs of compensation payments to redundant employees and of additional depreciation resulting from the revaluation of fixed assets, and to the adjustment of income from production activity). The third set of criticisms also concerns the additional corporate income tax assessed on the basis of the differences arising from the storage/disposal of the production realised, the appellant invoking a misapplication of the Accounting Act with tax implications. The final set of criticisms concerns non-deductible expenses in the calculation of corporation tax and the right to deduct the related VAT from transactions with inactive suppliers, the appellant relying on misapplication of the relevant rules of the Fiscal Code and the Code of Fiscal Procedure and misinterpretation of the relevant case-law of the CJEU.

All the issues raised in the appeal relate to the misapplication of the tax law and the appeal satisfies the procedural requirements for a statement of reasons, namely the indication of the grounds of illegality, in accordance with Article 487(1) of the EC Treaty. (1) and Art. 488 para. (1) C. proc. civ.

For all those reasons, the High Court rejects the objection of invalidity of the appeal brought by the defendant, the Regional Directorate of Public Finances of Timișoara, as unfounded.

5.2 Examining the merits of the appeal brought by the defendant Regional Directorate-General of Public Finance Timișoara, the High Court finds that it is well founded within the limits and for the reasons which will be set out below.

5.2.1 The first criticism in the appeal concerns the dismissal by the court of first instance of the objection of inadmissibility of the request for annulment of the tax inspection report.

The appellant-respondent submits that the request for annulment of the RIF is inadmissible in the light of the provisions of Articles 85-87 and 205 of O.G. No 92/2003 on the Code of Tax Procedure and Article 106 of the Methodological Norms for the application of the Code of Tax Procedure.

In accordance with the legal provisions listed above, the RIF contains the result of the tax inspection, it forms the basis for the issue of the tax assessment decision, which is the subject of the administrative appeal, as a tax administrative act by which the amounts due to the general consolidated budget are determined.

Taking into account also the provisions of Article 218(2) of the Treaty on the Functioning of the European Union (2) of the Code of Tax Procedure, the tax assessment decision, as a debt title, and the administrative appeal decision, as an act issued in the administrative appeal, are subject to legality control in administrative proceedings. The defendant-appellant submits that the tax inspection report on which the tax assessment decision is based is not a tax administrative act, but an act prior to the issue of that decision, which has no effect on the taxpayer.

Those submissions were correctly assessed by the court of first instance not to render the action for annulment of the RIF inadmissible since, according to Article 18(1)(b) of the Sixth Directive, the tax assessment report is not a decision of the tax authority. (2) of Law 554/2004, the administrative court may also annul the acts preceding the issuance of the administrative act which is the main subject of the appeal. The latter rule is not incompatible with the provisions of the Code of Tax Procedure, but supplements them, so that, in an action for annulment brought against the decision to decide on the administrative appeal and the tax assessment decision, which are administrative tax acts subject to judicial review by the administrative court, the injured party may also seek annulment of the acts and operations preceding the issue of the administrative tax acts.

Moreover, the plea of inadmissibility is devoid of any procedural merit since, irrespective of whether or not the preliminary act is also challenged, the review of the legality of the administrative act is also exercised on the acts and operations prior to the issuance of the administrative act, if the grounds of illegality invoked are related to them, and, on the other hand, a prior administrative act or operation does not produce any legal effect if the administrative act for which it was issued is annulled.

5.2.2. As regards the disputed issue of the additional corporation tax, it is clear from the documents and the file that the additional taxation has three sources: adjustment of the applicant company's income from production activity, based on an analysis of the transfer pricing file; adjustment of income on the basis of differences in the storage or disposal of production carried out; and the non-deductibility of expenditure on purchases from taxable persons declared inactive.

5.2.2.a) The adjustment of the complainant company's income from production was made on the basis of Article 11 para. (2) of Law no. 571/2003 on the Tax Code and art. 2 of Annex 1 of Order no. 222/2008, by analysing the transfer price file, at the median value of the comparison range presented in this file, but taking into account a level of the profitability indicator established, contrary to the applicant's position, without eliminating two types of expenses considered by the applicant to be of an extraordinary nature, i.e. expenses related to compensation payments for dismissed staff and additional depreciation expenses resulting from the revaluation of fixed assets.

The tax inspectorate referred to the contents of the transfer pricing file drawn up by the applicant in accordance with Article 79(2) of the EC Treaty. (2) of O.U.G. no. 92/2003 on the Tax Procedure Code in order to test whether the transactions carried out with its affiliates comply with the market value principle. The method used by the applicant to determine the market price of the transactions, namely the net transaction margin method recognised in the Transfer Pricing Guidelines issued by the Organisation for Economic Cooperation and Development (OECD), was accepted. According to this method, the financial indicator compared is the operating cost margin, calculated as the ratio of gross profit from production activity to operating costs related to the same production activity.

The tax authority analysed the financial results of the respondent-claimant and established that the financial indicator referred to was 3.34% in 2008, -9.43% in 2009, -6.59% in 2010, -1.93% in 2011, -0.45% in 2012 and -0.63% in 2013, being in the years 2009-2013 outside the comparator range (composed of the average of the operating cost margins of the 8 comparable companies identified), i.e. below the lower quartile value of 2.59% in 2008, 4.12% in 2009, 2.48% in 2010, -1.22% in 2011, 1.44% in 2012 and 0.16% in 2013. Thus, it concluded that the sales price of the products to related entities does not respect the market value principle.

It considered incorrect the Respondent-Respondent's adjustment, in the transfer pricing file, of operating costs downwards and operating profit upwards, by excluding the expenses for compensation payments in the restructuring process and additional depreciation expenses resulting from the revaluation of fixed assets, it is this adjustment which, on average over the period 2008-2013, brought the applicant's financial results within the range of comparison (the applicant's average margin over the 6-year period was set by it, after adjustments, at 1.99%, higher than the average of the lower quartile of 1.41%).

The exclusion of these expenses was considered by the tax authority to artificially increase the operating profit from the production activity sold to affiliated entities within the Electrolux group as both types of expenses are of an operational nature, i.e. they are operating expenses which are not extraordinary and must be taken into account in the calculation of the profitability indicator profit margin.

The court, also relying on the conclusions of the tax expert report carried out in the case, established (as regards transfer pricing) that the adjustments made by the applicant had to be accepted, as they were in accordance with paragraph 29 par. 2 of the Methodological Rules for the application of Article 11 para. (2) of the Tax Code, the adjustment being necessary for the comparison of the same financial indicators of the applicant and of the self-employed persons operating in the same field of activity (i.e. the 8 comparable companies - producers with limited functions and risks).

Taking the two types of expenses in turn, the High Court finds that the appellant-respondent's criticisms concerning the elimination of the expenses relating to compensation payments from the calculation of the respondent-respondent's profitability indicator are unfounded since, in the light of the OECD Transfer Pricing Guidelines, it is found that regardless of the operational nature of those costs, they do not relate to the applicant company's day-to-day business, they do not participate directly or indirectly in the production of the goods produced, they are of substantial value and there were no such exceptional expenses in the financial indicators of the comparable companies, or in their cost structure, and the adjustment is necessary to ensure the reliability of the comparison.

The exceptional nature of this type of expense, which is reflected in the financial results of the respondent-claimant from 2009 to 2013, when staff redundancies occurred and resulted in such compensation payments, must be related not only to the provisions of Order No 3055/2009 approving the accounting regulations, but also to the characteristic of this type of expense generated by an extraordinary non-recurring circumstance of being an element of difference in the cost structure of the financial indicator, by comparison with the other companies operating in similar conditions and forming part of the comparison sample. In relation to the OECD Guidelines, from a transfer pricing perspective, the expense can be classified as exceptional, as there is sufficient information that this cost element requires adjustments in order to make a reliable comparison with other companies being compared which do not have such expenses in their cost structure.

The defendant-appellant does not put forward any convincing arguments to challenge the findings of the court, which refers to the OECD Guidelines, in particular paragraph 2.80, according to which exceptional and extraordinary items which are of a non-recurring nature should generally be excluded from the calculation of the net profit indicator. In the light of this guidance, the court took into account the conclusions of the tax expert report that the expense structure should be adjusted by this type of expense in order to generate the reliability of the comparison. The expert's replies to the defendant's objections to the initial conclusions of the expert's report, which concluded that, strictly from a transfer pricing perspective, the adjustments were necessary, are enlightening in this respect, because, when analysing the evolution of the staff at the 8 companies analysed, it was found that a drastic reduction in the number of employees, as in the case of Electrolux, had not occurred at any of the comparable companies.

As regards the additional depreciation charges resulting from the revaluation of fixed assets, however, the appellant's criticisms are well founded since the court of first instance concluded that that adjustment was justified, given that the regulatory framework does not lead to the classification of those charges as extraordinary, and the tax expert's report did not conclude that such an adjustment was necessary, from a transfer pricing point of view, to ensure the reliability of the comparison. On the contrary, the expert indicated that he identified in most of the comparable companies depreciation expenses, i.e. percentage deviations (increases) of tangible fixed assets in the period 2008-2013 exceeding 20%, comparable to 28.58% in the case of the applicant. It indicated that it could not establish from the data collected from the K. database whether the expenses in the same category found in the cost structure of the comparable companies also came from revaluations or from investments in tangible fixed assets, and the final conclusion was that significant fluctuations in depreciation costs were found both in the case of Electrolux (generated by the revaluation of tangible fixed assets) and in the case of the other comparable companies (but without knowing the source of the increases in these costs).

Therefore, the conclusions of the expert on the correctness of the adjustment of operating costs with this type of expenditure remained relatively uncertain, compared to the known data on comparable companies.

In this situation, where it cannot be established whether or not the 8 comparator companies had positive revaluations of tangible fixed assets, which would have led to an increase in the input values of fixed assets and therefore an increase in depreciation expenses, as was the case in A., a logical reasoning from a tax perspective should give priority to identifying the category of depreciation expenses both in the claimant company and in the comparator companies, and take into account that these expenses are operating expenses. As a result, there are no arguments for excluding them from the calculation of the profitability indicator.

The conclusion to the contrary reached by the court of first instance is contrary to the regulatory framework and is not based on sound arguments to the effect that an adjustment is necessary.

The additional depreciation expenses resulting from the revaluation of fixed assets are not extraordinary, either under the accounting rules (according to Order No 3055/2009 on accounting regulations, expenses of the nature of depreciation are operating, operational expenses) or under international financial reporting standards.

On the other hand, the court of first instance did not put forward any arguments to the effect that the lack of adjustment would contaminate the result of the comparison.

Nor are the respondent-appellant's submissions, starting from the administrative challenge itself, capable of leading to the conclusion that such an adjustment is necessary. Thus, the applicant argued that the revaluation of assets is required under national law and that this only establishes a potential value of those assets and not a technical improvement of them and that in the case of the selected comparable companies no information was available on the methods for determining depreciation.

However, the fact that the applicant was unable to provide information on the methods for determining depreciation in the comparable companies cannot ipso facto lead to the exclusion of that type of expenditure from the calculation of its financial indicator, since no imbalance has been demonstrated which would undermine the reliability of the comparison; on the contrary, such depreciation costs have also been determined in the cost structure of those companies.

In conclusion, there is no reason to remove the profit margin in relation to operating costs from the calculation of the profitability indicator.

For all those reasons, it is held that the annulment of the decision to resolve the administrative appeal and of the tax assessment decision, in so far as they relate to the additional corporation tax charge based on the adjustment of income under Article 11(1)(b) of Regulation (EC) No 1782/2003, must be annulled. (2) of the Tax Code, has been pronounced with the wrong application of the law.

The case must be remitted for the court to determine, by means of a tax expert's report, whether, in the absence of adjustment of the latter expense, minus operating costs and plus operating profit, as the applicant did (see Annex 13 to the transfer pricing file - Detailed calculation of the adjusted operating cost margin for A. - production activities) the operating cost margin obtained by it from the controlled transactions remains within the range of comparison, even at the level of the lower quartile, so that it can be concluded that the tax authority's adjustment of income was unlawful.

If the applicant's operating cost margin, determined by adjusting operating costs and operating profit only by the amount of restructuring costs (compensation payments) and not by the amount of additional depreciation costs resulting from the revaluation of fixed assets, does not fall within the range of comparison (page 81 of the transfer pricing file), at least in part, the additional tax based on the adjustment of income is lawful, and it is still necessary to determine the additional corporation tax due by way of tax expert opinion.

The manner of comparison and the manner of income adjustment are also disputed on appeal.

The Court of First Instance held that the defendant authorities had estimated the income which the applicant should have obtained from transactions with related persons by taking into account the median value of the interquartile range, relying on the provisions of Article 2(2)(b) of the EC Treaty. (2) and (3) of Annex 1 to OPANAF No 222/2008.

These provisions, which concern both the comparison and the adjustment, stipulate, with regard to the first issue, that the maximum and minimum segments of the comparison interval are extreme results which will not be used in the comparison margin. They were held by the court to unduly restrict the range of comparison since neither Article 11 of the Tax Code, to the application of which the Order is given, nor the Methodological Norms for the application of the Tax Code provide for the exclusion of the upper and lower quartiles from the range of comparison. Citing paragraph 2.7 of Chapter II, Part I of the OECD Guidelines, which it held to be of superior legal force to FINANCE Ordinance No 222/2008, the court concluded that, in order to consider that the prices charged in transactions with related persons comply with the arm's length principle, it is sufficient that the taxpayer's net margin falls within the interquartile range of comparison, without eliminating the extremes.

The High Court finds that there is no argument to exclude from the application of the provisions of OPANAF No 222/2008 relating to the preparation of the transfer pricing file and, in particular, the provisions cited above, which exclude extreme results from the comparison margin. The Order is a regulatory act and applies in addition to the provisions of Article 11(11) of Regulation (EC) No 1073/2004. (2) of the Tax Code and Art. 79 para. (2) of O.G. no. 92/2003 on the Fiscal Procedure Code. The higher rules do not regulate the comparison method or the adjustment method, which were left within the scope of the secondary rules.

On the other hand, the provisions of the Guidelines cited by the Court of First Instance do not support the thesis that such extreme results are not excluded, since they refer to the choice of the most appropriate method for analysing transfer prices between related persons, and not to the comparability analysis referred to in Chapter III, Section A.7, which allows the use of a comparison range and the exclusion of extremes (paragraph 3.63). Moreover, the comparison interval/interquartile range is a statistical tool which, in order to ensure the best possible degree of comparability, requires the exclusion of extremes.

In comparability analysis, both according to Order No 222/2008 and the OECD Guidelines, when company results are within the comparability interval (down to the lower quartile), no adjustment is necessary.

If, however, the company's results fall outside the comparability range (excluding the extremes), according to Order No 222/2008, the adjustment is made to the median value of the comparability range, which is taken as the transfer price at market price. This regulation in the secondary standard also corresponds to the OECD Guidelines, which also refer to the adjustment to the median (when the comparison interval does not contain relatively equal and highly reliable results), precisely in order to minimise the risk of error due to imperfections in comparability which cannot be identified or quantified (paragraph 3.62).

As regards the disputed issue of the use, both in the comparison and in the adjustment, of the multi-year average (2008-2013) of the applicant's operating margins, it is noted that there is no legal basis for the use of this multi-year average. The OECD Guidelines refer to multi-year data only in paragraph 3.77 of Chapter III, section B5, which concerns the determination of comparables. This document, which is intended to guide the analysis of transfer prices, does not recommend the use of multi-year averages or the aggregation of multi-year data.

Therefore, both the comparison and the adjustment must be based on an annual analysis of financial data, both under Order No 222/2008 and under the Guidelines, which consider transaction data as a comparability factor (see paragraphs 1.55 and 3.68). In principle, the Guidelines consider information on the terms of comparable uncontrolled transactions undertaken or performed during the same time period as the controlled transaction as the most reliable information suitable for use in a comparability analysis.

All other grounds of appeal and related defenses raised in connection with the issue of adjusting the complainant company's income from production based on the analysis of the transfer pricing record are irrelevant. They concern the comparison of the applicant's profit with that of B. or the comparison of the applicant's controlled transactions (with its affiliates) with those with independent companies. However, the essence of the present case is that the applicant prepared, at the request of the tax authorities, a transfer pricing file, in which it used the net margin method for comparison of operating costs, the tax authorities accepted this method of comparison, and the adjustment was based strictly on the non-acceptance of the exclusion of the two types of costs, previously disputed, from the calculation of the profitability indicator compared with that of the eight comparable independent companies.

The High Court therefore finds that it is not necessary to analyse the parties' arguments or those of the court of first instance, which go beyond the elements relevant to the method chosen for the adjustment of income.

5.2.2.b) As regards the adjustment of income on the basis of differences in the storage or disposal of production, the decision of the court of first instance was based on the conclusions of the judicial expert's report, the objectives of which were to determine whether the failure to recognise differences in the cost of raw materials as income had the effect of reducing the taxable result and whether the adjustment of the entries would lead to a doubling of the taxable base for the years in question, 2009 and 2012.

The court established that the price differences were not recorded as income, but the applicant, by means of accounting notes, had adjusted the amounts and entered them as expenses with a minus sign, which meant that there was no reduction in the company's tax result for the years 2009 and 2012, as the recording of a minus expense was equivalent to the recording of a plus income from the point of view of determining the tax base for the purposes of calculating corporation tax.

In other words, the court of first instance held that the error in the accounting entry of the price differences, not shown as additional income, as would have been correct, but as an expense in deficit, had no tax consequences and could not lead to additional taxation, which would constitute double taxation.

The defendant-appellant criticises that solution, pointing out that the differences in the price of the materials were not shown as income and that the accounting notes drawn up by the applicant do not comply with the regulatory framework (i.e. the accounting regulations).

In order to resolve this contentious issue, the High Court considers essential the finding of the Court of First Instance on the basis of the tax expert's report, namely that the erroneous accounting entries did not lead to a reduction in the tax base and, from that point of view, had no tax relevance, since the impact on the profit and loss account was nil. The appellant does not contest those essential points, which is why the appellant's criticisms are unfounded.

5.2.2.c) The issue of the non-deductibility of expenditure on purchases from taxable persons declared inactive will be dealt with in the next paragraph, together with the issue of the non-deductibility of the right to deduct VAT on the same purchases.

5.2.3. Non-deductibility of expenditure and right to deduct VAT on purchases from H. S.R.L. and I. S.R.L. in 2009 and 2011 was based by the tax authority on the fact that the two taxable persons had been declared inactive, by order of the President of ANAF published on the ANAF website, before the transactions with the applicant were carried out.

The measures have an express and unquestionable legal basis in Article 11(11)(a) of Regulation No 17. (12) of the Tax Code, which, at the time of the transactions, stipulated (as it does today) that transactions carried out with a taxpayer declared inactive by order of the President of ANAF are not taken into account by the tax authorities, the order being made public by posting it on the ANAF website.

However, the Court of First Instance, giving priority to the application of EU VAT law and holding that it also applied to corporation tax, held that the transactions were genuine, that there was no fraud and that, pursuant to the judgment of the CJEU in Case C-101/16 Paper Consult, the applicant's right to deduct could not be denied.

The High Court finds that, as regards the harmonised field of VAT, account must be taken of the rules of EU law and their interpretation in the case-law of the CJEU. Clearly, the judgment in Case C-101/16 Paper Consult is definitive, since it concerns the interpretation of the VAT Directive in the situation of invoices issued by a taxpayer declared inactive by the tax authorities, i.e. the pending tax situation.

However, the Court of First Instance misinterpreted and misapplied the operative part of that judgment, which reads as follows: Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as precluding national legislation, such as that at issue in the main proceedings, under which a taxable person is refused the right to deduct value added tax on the ground that the operator who supplied him with a service in return for an invoice showing the price and value added tax separately has been declared inactive by the tax authorities of a Member State, that declaration of inactivity being public and accessible on the internet to any taxable person in that State, where that refusal of the right to deduct is systematic and definitive, making it impossible to prove the absence of fraud or loss of tax revenue.

Those provisions must be seen in the light of the considerations, according to which 52 On the other hand, it is not contrary to EU law to require a trader to take any measure that might reasonably be required of him to ensure that the transaction he carries out does not result in his participation in tax fraud (see to that effect Case C-409/04 Teleos and Others v EU: C:2007:548, paragraphs 65 and 68, as well as the judgment of 21 June 2012, Mahagében and Dávid, C-80/11 and C-142/11, EU:C:2012:373, paragraph 54).

53 In that regard, it must be held that the national legislation at issue in the main proceedings does not transfer to the taxable person the responsibility for control measures which are incumbent on the administration, but informs it of the outcome of an administrative enquiry from which it emerges that the taxpayer declared inactive can no longer be controlled by the competent authority either because that taxpayer has no longer fulfilled the obligations imposed on him by law to make the declaration, or because he has declared information identifying his registered office which does not enable the tax authority concerned to identify him, or because he does not carry on business at the registered office or tax domicile declared.

54 The only obligation imposed on the taxable person is therefore to consult the list of taxpayers declared inactive which is displayed at the ANAF's office and published on its internet page, such a check being, moreover, easy to carry out.

55 It thus follows that, by requiring the taxable person to carry out that check, the national legislation pursues an objective which is legitimate and even required by European Union law, namely that of ensuring the correct collection of VAT and preventing fraud, and that such a check may reasonably be required of a trader. However, it must be verified that such legislation does not go beyond what is necessary to achieve the objective pursued.

56 Although failure to submit the tax returns required by law may be regarded as an indication of fraud, it does not conclusively prove the existence of VAT fraud. Furthermore, it is clear from the evidence provided to the Court that, subject to the checks to be carried out by the referring court, even if the taxpayer had regularised his situation and had obtained his removal from the list of inactive taxpayers, the penalty provided for in Article 11(1)(b) of Directive 77/388/EEC would have been imposed on the taxpayer if he had been removed from that list. (12) of the Tax Code would be maintained, so that the person purchasing the good or service could not regain the right to deduct VAT. On the other hand, Article 11(12) of Directive 2006/112/EC would not apply to the VAT. (11) of the Tax Code provides that the "reactivated" taxpayer is authorised, after his "reactivation", to recover the VAT for which deduction was refused during the period of inactivity.

(...)

58 According to Paper Consult, L. would have paid to the public treasury the VAT collected under the contract concluded with Paper Consult. In reply to a question put by the Court, the Romanian Government confirmed that the amounts corresponding to the VAT owed by L. had actually been paid, but that it was not possible to verify whether these amounts related to the transactions concluded between the two companies because L. had not submitted its VAT returns.

59 Subject to the verifications to be carried out by the referring court, it follows that Article 11(1)(b) of the VAT Directive does not apply to the taxable person. (12) of the Tax Code, in the version applicable to the facts of the main proceedings, does not provide for an adjustment for the benefit of the taxable person situated downstream, despite proof of payment of VAT by the taxable person situated upstream, the non-recognition of the right to deduct being definitive.

60 However, the taxable person's inability to prove that the transactions concluded with the operator declared inactive satisfy the conditions laid down by Directive 2006/112 and, in particular, that the VAT has been paid to the public treasury by that operator goes beyond what is necessary to achieve the legitimate objective pursued by that directive.

Consequently, the tax situation of the applicant, who has dealt with taxable persons declared inactive, is not that of a taxpayer who cannot be penalised for the inappropriate conduct of his suppliers, as the court held. The CJEU judgment states that the national rule which forms the basis for the refusal to grant the right of deduction pursues a legitimate aim and does not impose a disproportionate burden on taxpayers. In the case of transactions with inactive suppliers, only the definitive refusal to recognise the right of deduction, which does not enable the taxable person downstream to prove that the VAT has been paid to the public treasury by the taxable person upstream, is contrary to EU law.

However, the court of first instance disregarded the tax situation and held that the failure to dispute the reality of the transactions and the failure to prove that the applicant had participated in VAT fraud were sufficient to find that the right of deduction could not be refused.

The High Court does not agree with that interpretation since, as held in the Advocate General's Opinion in Case C-101/16, a taxable person who enters into transactions subject to VAT with a trader declared inactive must in all cases be regarded as knowing or ought to have known that entering into such transactions involves a risk of tax evasion (paragraph 55).

Only the irrebuttable presumption of participation in tax evasion, which the national legislation establishes by systematically refusing to grant the right to deduct VAT to any taxable person who obtains supplies from a trader declared inactive, irrespective of the fact that any risk of tax evasion in relation to the transactions in question can legitimately be removed, in the light of the facts and evidence which that taxable person and that trader are able to produce, in particular following a tax audit, has been held to infringe Union law (paragraph 63).

Therefore, in the present case, the burden was on the applicant to prove that its transactions with inactive taxpayers complied with the substantive and formal conditions for the deduction of VAT within the meaning of Directive 2006/112 and that there had been no loss of tax revenue, so that the decision of the court of first instance could be given with the correct interpretation and application of the law. In the rehearing, these legal rulings will also be taken into account.

As regards corporation tax, this is governed by national law, which stipulates that expenses are not deductible (Article 11(11)(a) of Directive 77/388/EEC). (12) and Art. 21 para. (4) (r) of the Fiscal Code).

The High Court does not see the same reasoning as that relied on by the national court, which would make the abovementioned case-law of the CJEU applicable to the deductibility of expenses for the purposes of corporation tax, especially since that case-law reflects the principle of neutrality specific to VAT. There is no cause-and-effect relationship between the right to deduct VAT and the deductibility of acquisition expenses, but both arise from the same transactions and must be treated independently. In conclusion, as regards the deductibility of expenditure relating to purchases from inactive taxpayers, the judgment of the court of first instance was wrongly applied, since the tax assessment was lawfully made.

5.3 Legal basis of the decision on appeal

For all these reasons, pursuant to Article 496 in conjunction with Article 489(2) of the EC Treaty, the Court of First Instance (1) and (2), the High Court will uphold the plea of nullity of the appeal lodged by the defendant Maramureș County Administration of Public Finances and will annul the appeal as unfounded.

Pursuant to Article 496 in conjunction with Article 488(2) of the EC Treaty, the Court of First Instance (1)(8) and Article 20(1)(b) of the EC Treaty. (3) of Law No 554/2004, rejecting the plea of invalidity of the appeal brought by the defendant, the Regional Directorate of Public Finance Timișoara, uphold the appeal, uphold in part the judgment under appeal, namely with regard to the decision to uphold in part the action for annulment of Tax Inspection Report No. x/13.07.2015 and of the tax assessment decision No x/13.07.2015, both issued by the defendant Maramureș County Administration of Public Finances and to annul in part the decision to resolve the appeal No 1044/77/29.02.2016.

Refer the case back to the same court, within the limits of the cassation, for the completion of the evidence, in compliance with the rulings given on the questions of law in this decision.

upholds the provisions of the judgment under appeal relating to the rejection of the plea of inadmissibility of the application for annulment of the tax inspection report, in respect of which the grounds of appeal were dismissed as unfounded, and those relating to the dismissal of the action for annulment of the Order of Measures No 4300/03.07.2015, the Order of Measures No 6369/25.08.2014 and the Decision to suspend the tax inspection No x/26.08.2014, issued by the Maramureș County Administration of Public Finances, a decision which has not been appealed.

FOR THESE REASONS

IN THE NAME OF THE LAW

D E C I D E

Admit the plea of nullity of the appeal filed by the defendant Administration of Public Finances of Maramureș County, invoked by the respondent-claimant A. S.A.

Annuls, as unfounded, the appeal brought by the defendant Administration of Public Finances of Maramureș County against the civil judgment no. 384 of 21 December 2017, delivered by the Court of Appeal of Timișoara, Administrative and Fiscal Division.

Dismisses, as unfounded, the objection of invalidity of the appeal filed by the defendant Regional General Directorate of Public Finance Timișoara, invoked by the respondent-claimant A. S.A.

Admit the appeal filed by the defendant Regional General Directorate of Public Finance Timișoara against the civil judgment no. 384 of 21 December 2017, rendered by the Court of Appeal Timișoara, Administrative and Tax Division.

Sets aside, in part, the judgment under appeal, namely with regard to the decision to allow the action in part, to annul the Tax Inspection Report No x/13.07.2015 and the Tax Decision No x/13.07.2015, both issued by the defendant Maramureș County Administration of Public Finances and to annul in part the Decision to resolve the appeal No 1044/77/29.02.2016.

Refers the case back to the same court, within the limits of the appeal.

Upholds the provisions of the judgment under appeal relating to the dismissal of the plea of inadmissibility of the application for annulment of the tax inspection report and the dismissal of the action in respect of the application for annulment of the Order for measures No 4300/03.07.2015, the Order for measures No 6369/25.08.2014 and the Decision suspending the tax inspection No x/26.08.2014, issued by the Maramureș County Administration of Public Finances.

Definitive.

Delivered in public sitting, today, 17 November 2020.