On declaring illegal and canceling the notification of the results of consideration of the taxpayer's (tax agent's) complaint against the notification of the audit results

No.6001-23-00-6ap/1283 dated 6.11.2023

Plaintiff: LLP "M"

Respondent: Russian State Institution "Department of State Revenue"

The subject of the dispute: on the recognition as illegal and cancellation of the notification of the results of consideration of the taxpayer's (tax agent's) complaint about the notification of the audit results and (or) the decision of a higher state revenue authority issued based on the results of consideration of the complaint against notification No. 285/1 dated August 5, 2022.

Review of the cassation appeal of the plaintiff and the defendant

PLOT: Based on the order, the Department conducted a comprehensive tax audit against M LLP on the issue of the correctness of calculating the timeliness of taxes and other mandatory payments to the budget.

On March 17, 2022, M LLP was served with preliminary act No. 285, to which an objection was filed on April 12, 2022. On April 15, 2022, Department 18 returned the Partnership's objection to the preliminary act due to missing the deadline for its submission.

On April 12, 2022, the Department handed over to "M" LLP act No. 285 of the documentary tax audit, according to which the Department added additional CPI amounts for the 3rd and 4th quarters of 2019 in the amount of KZT 25,957,1944 and KZT 108,104,702, respectively, the loss was reduced by KZT 3,256,689,658. LLP "M" appealed the results of the audit, by the decision of the Appeal Commission of the State Institution "Ministry of Finance of the Republic of Kazakhstan" dated August 5, 2022, Notification 1 was canceled in terms of calculating the CIT at the source of payment for the income paid on invoice No. TR dated October 23, 2018, the rest was left unchanged. After that, on August 5, 2022, the Department issued Notification No. 285/1, according to which LLP "M" was charged additional CPN in the amount of 133,951,239 tenge, a fine in the amount of 26,212,328 tenge (hereinafter referred to as Notification 2). When issuing Notification 2, the Department excluded from the tax base the amount of 737,714.25 tenge, for which invoice No. TR dated October 23, 2018 was issued, and therefore the accrued CPI amount decreased by 110,657 tenge (737,714.25*15%).

Judicial acts:

1st instance: the claim was partially satisfied. It was decided to declare illegal and cancel the notification of the results of consideration of the taxpayer's (tax agent's) complaint about the notification of the audit results and (or) the decision of the higher state revenue authority issued based on the results of consideration of the complaint against notification No. 285/1 dated August 5, 2022 regarding the accrued amounts of corporate income tax in the amount of 50,810,308 tenge and the corresponding penalty amounts.

Appeal: the decision remains unchanged.

Cassation: judicial acts are annulled with the referral of the case for a new hearing to the court of appeal in a different composition of the court.

Conclusions: based on the results of the audit conducted in respect of LLP "M", the latter received additional CPI amounts as a result of the recognition of income paid to LLP "M" in favor of a non-resident income in the form of royalties.

According to the invoices and payment data on them, "M" LLP made payments in favor of MAG under four contracts:

- Sublicense agreement for the use of the trademark of the METKO Group dated July 15, 2016;

- The Framework Agreement on IT Services, which entered into force on October 1, 2015;

- Service Center Service Agreement dated October 1, 2015;

- Framework Agreement on Business Services dated October 1, 2015.

Based on the terms of the Framework Agreement on IT Services and its technical specifications, it follows that MAG provided services to M LLP for the provision of non-exclusive rights to the software, for the development and transfer of non-exclusive rights to the software being developed, as well as other IT services, including the adaptation and modification of IT products being developed and transferred under this Agreement.

Under the Single Service Center Services Agreement dated October 1, 2015 (hereinafter referred to as the ESC Agreement), concluded between M LLP and MAG, the latter provides M LLP with the services described in Appendix 1 to the Agreement (standard services, as well as rights to use software and software components, described in paragraph 1.2 below, they are individually referred to as "The Service" and collectively as "the Services").

It follows from the terms of this ESC Agreement that the provision of services under it implies granting the Partnership the right to use this software and software components for the entire term of this Agreement. The services are provided through a single service center.

According to the specified ESC Agreement, the services provided by MAG are related to the provision of non-exclusive and non-transferable rights to use the software and software components to the Partnership, without the right to use these rights in the interests of a third party, in connection with which Metro AG provides services for entering data into the corresponding software /software components and processing them. in it.

The courts of the first and appellate instances concluded that the payments of the Partnership under the specified ESC Agreement are also income of MAG in the form of royalties. The courts also concluded that the Department committed the following violations when returning the Partnership's objection to the preliminary act submitted within the time limits established by law.

In accordance with paragraph 2 of Article 14 of the Law of the Republic of Kazakhstan "On Legal Acts", the period calculated in days (days) begins on the day after the calendar date or from the day (day) of the occurrence of the event that determines its beginning, with the exception of constitutional periods that begin on the day of the occurrence of the event specified in the Constitution. Of the Republic of Kazakhstan, and expires on the last day (last day) of the established period.

Accordingly, the Department had to consider the objections of M LLP, submitted on the fifteenth business day from the date of delivery of the preliminary act. As a result of the unjustified return of objections, the Department did not evaluate all transactions for which "M" LLP made payments qualified by the Department with non-resident income in the form of royalties.

In this case, the amounts of payments on invoices issued under the specified Business Services Agreement are subject to exclusion from the income of the non-resident, from which, according to the Act, the CPN was subject to deduction.

In this case, the courts, recognizing that it was a violation of the law not to consider the plaintiff's objection to the preliminary act as a whole, partially satisfied the claim, which indicates that the courts did not properly assess the fact of violation of the law.

The courts did not check and did not properly assess the fact of the above-mentioned violation of the law committed by the Department, to what extent they affect the legality of the tax audit as a whole, and not in part. The courts also found the arguments of LLP "M" justified that the CPN rate to be applied to the specified amounts should be 10%, and not 15%, as indicated in the Act.

The MAG company's certificate of residence was submitted to the Department for verification, and the income of the specified non-resident was recognized by the Department as income in the form of royalties.

Accordingly, the above conditions were met, and therefore, "M" KPN LLP was subject to deduction from these incomes at a rate of 10%, as stipulated by the CID. The arguments of the Department that since the LLP "M" KPN was not retained, the norms of the CID are not applicable, the courts also did not give a proper legal assessment. In addition, it follows from the circumstances of the dispute that "M" LLP has concluded several agreements and contracts with "MAG" Company. According to paragraph 1.7.

The preamble to the IT Services Agreement should be consolidated into a single agreement, including, but not limited to, software licensing, software development, software and hardware support and maintenance, and data center operations.

Paragraphs 2.6. and 2.8. of the IT Services Agreement define the following: "IT services" - provision of software and databases, software development services and other IT services; "Other IT services" - means tasks related to information technology and telecommunications that must be performed or provided to MAG for the MCC in accordance with the IT Services Framework Agreement, they may include such elements as analytical services, technical service, data transformation service, consulting service, training, knowledge transfer, support service, operation service system deployment service, system hardware or software maintenance, patch delivery, system update service, or quality assurance, software licenses, software as a service, infrastructure services, and hosting services that are not part of software and database services and software development services. The above indicates that, when considering the dispute, the courts did not verify the arguments of the parties that "IT services" were provided by M LLP as a result of passive activities, and "other IT services" were provided as a result of MAG's active activities. The amount of additional royalties payable depends on determining the scope of these types of IT services, but the courts have not investigated this issue and have not determined the scope of the types of IT services (from passive activities or active activities of MAG).

The Judicial Board believes that clarifying these circumstances will affect the proper resolution of the dispute. Thus, the arguments of the parties deserve attention and require additional verification, therefore judicial acts are subject to cancellation with the referral of the case for a new judicial review to the court of appeal in a different composition.

In the case of a new trial, the court must, in order to fully clarify the circumstances relevant to the case, eliminate contradictions, carefully examine the arguments of the parties, evaluate the evidence presented and make a legitimate and reasoned decision on the case.

Attention!   

       Law and Law Law Law draws your attention to the fact that this document is basic and does not always meet the requirements of a particular situation. Our lawyers are ready to assist you in legal advice, drawing up any legal document suitable for your situation.  

 For more information, please contact a Lawyer / Attorney by phone: +7 (708) 971-78-58; +7 (700) 978 5755, +7 (700) 978 5085. 

Attorney at Law Almaty Lawyer Legal Services Legal Advice Civil Criminal Administrative Cases Disputes Protection Arbitration Law Firm Kazakhstan Law Office  Court Cases