Recognition of illegal actions to issue a notification of the elimination of violations identified by the state revenue authorities based on the results of desk control and its cancellation

No.6001-23-00-6ap/1807 dated 11/23/2023

Plaintiff: N-N LLP (hereinafter referred to as the Partnership)

Respondent: Russian State Institution "State Revenue Administration" (hereinafter referred to as the Department) on

The subject of the dispute: on the recognition as illegal of the action to issue a notification of the elimination of violations identified by the state revenue authorities based on the results of desk control dated August 16, 2022 No. 5811Kt700020 and its cancellation

Review of the plaintiff's cassation complaint: during the analysis of tax reporting data, I&K LLP was classified as a high risk, since its registration was declared invalid by the final decision of the Council of Economic and Social Council of September 16, 2019.

The court's decision indicated the non-involvement of the first head of I&K LLP in the creation of this legal entity, and established the absence of the will of the person indicated in the constituent documents of the legal entity, who had nothing to do with its creation, did not carry out or carry out entrepreneurial activities.

During the reporting period, the Partnership attributed deductions of CPN/IPN in the form of 38 100.00 to mutual settlements with the counterparty of I&K LLP for a total amount of 41,853,036 tenge. On August 16, 2022, the Office verified the activities of the Partnership through desk control, as a result of which a notification was sent to the Partnership through the "Taxpayer's Office" about the state elimination of income from violations, results No. 5811QT700020 (hereinafter referred to as the Notification).

Judicial acts: identified by desk control authorities

1st instance: the administrative claim was denied.

Appeal: the court's decision is upheld.

Cassation: judicial acts are cancelled. A new decision on the satisfaction of the claim has been made in the case. The notification of the results of the tax audit No. 5811QT700020 dated August 16, 2022 was declared illegal and canceled.

Conclusions: in rejecting the claim, the courts of first instance and the courts of appeal concluded that the Management of the Partnership reasonably attributed to a high degree of risk and sent a Notification.

The documents submitted by the Partnership relate only to primary accounting documents and their existence cannot serve as proof of the actual receipt of goods from I& K LLP, since the contracts on behalf of the latter were signed by U.Y., the invoices for the release of goods were also signed by him.

However, the court's decision established that U.Y. was not involved in the creation of I&K LLP. These conclusions of the courts of first instance and appeal are unfounded, they are based on the incorrect application of substantive and procedural law.

According to article 6 of the Tax Code, taxes and payments to the budget of the Republic of Kazakhstan must be certain. Certainty of taxation means the establishment in the tax legislation of the Republic of Kazakhstan of all the grounds and procedure for the occurrence, fulfillment and termination of a taxpayer's tax obligation, the duty of a tax agent to calculate, withhold and transfer taxes.

The courts of the first and appellate instances, having failed to provide a complete and objective investigation of the circumstances of the case, came to an unjustified conclusion that the transactions between the Partnership and its counterparty, I&K LLP, were unconfirmed. Thus, in October and November 2019, the Partnership and I&K LLP concluded 20 contracts for the supply of goods, the description, quantity and price of which are indicated in the specifications (appendices) to the contract, which are an integral part of the Contract.

In accordance with the annexes to the Agreement, I&K LLP supplied the Partnership with goods in the form of spare parts, oils, tires, lubricants for cars, etc. As supporting evidence of deduction of expenses for purchased goods, the Partnership provided the relevant invoices for the release of goods, receipts, electronic invoices, reconciliation report and payment orders.

When making the decision, the courts did not take into account that all the primary documents (contracts, invoices for the release of goods, receipts, electronic invoices, reconciliation report and payment orders) were submitted to the court of first instance. The Partnership's activities are aimed at generating income, and its expenses (expenses) in connection with the implementation of this activity are documented. These circumstances indicate that, in accordance with paragraph 3 of Article 242 of the Tax Code, the Partnership has legitimately deducted expenses for settlements with the above-mentioned counterparty. Consequently, the Partnership, in accordance with Article 256 of the Tax Code, legitimately attributed the amount of VAT on turnover.

It should also be noted that the contested Notification was signed with an electronic digital signature (hereinafter - EDS) by T.I., Deputy Head of the Risk Management Department of the Department of Analysis, Statistics and Risk Management of the State Revenue Committee of the Ministry of Finance of the Republic of Kazakhstan, whereas the Notification was issued by the head of the Department, A.T.

The procedure for using the electronic document management system (hereinafter referred to as EDMS) is defined in the Rules for Documentation, Document Management and the Use of Electronic Document Management Systems in Government and Non–governmental Organizations, approved by Resolution of the Government of the Republic of Kazakhstan No. 703 dated October 31, 2018 (hereinafter referred to as the Rules).

Subitems 13), 17) of paragraph 5 of the Rules establish that electronic document management is the exchange of electronic documents between government agencies, individuals and legal entities; the original of an electronic document is a document certified (signed) with an electronic digital signature created using the private key of an electronic digital signature, formed initially in the format of an electronic document and not having a paper the original script.

By virtue of the requirements of Article 7 of the Law on Electronic Document and Electronic Digital Signature, "an electronic document that meets the requirements of this Law and is certified by an EDS of a person authorized to sign it is equivalent to a signed paper document.

The legislation allows the use of both an electronic document certified by an EDS and a copy of the document in electronic and digital form, backed by the original, made on paper with the seal of the organization and the signature of an official. The Management does not deny that the Notification submitted to the Partnership electronically is an electronic document.

By Order of the Minister of Finance No. 146 dated February 8, 2018 "On certain issues of Tax and Customs Administration", the notification form for the elimination of violations identified by the state revenue authorities based on the results of desk control was approved (Appendix No. 22 to the Order). According to the approved form, the notification shall specify, among other things, the surname, first name, patronymic (if any) of the head of the state body and his signature. According to paragraph 1 of Article 12 of the Law on Electronic Digital Signature, an electronic digital signature can be used by government officials when certifying electronic documents issued by them within their authority.

Consequently, at the time of sending and signing the disputed Notification, T.I. was not acting as the head of the Department, and therefore should not have been listed as a signatory to this notification, since at that time he did not have the right to sign such documents.

Paragraph 1) of Article 36 of the CPC establishes that the internal administrative procedures of state bodies provided for in this Code are carried out under the conditions of subordination of subordinate state bodies and officials to higher ones. Similar provisions are contained in subparagraph 10) of paragraph 1 of Article 4 of the Law of November 23, 2015 "On the Civil Service of the Republic of Kazakhstan" regulating the obligation to execute decisions taken by higher state bodies and officials within their powers for subordinate civil servants and civil servants of lower state bodies.

By virtue of part 3 of Article 40 of the CPC, the Regulation on determining the status and powers of a structural unit is approved. According to the Regulation, the Department is a territorial body of the Department authorized to perform the functions of public administration and control in the areas of tax administration. Chapter 3 of the Regulation defines the status and powers of the head of the Department in organizing his activities. According to paragraph 16 of this Chapter, the Head manages the Department and is personally responsible for the performance of the tasks assigned to the Department and the exercise of its functions, and according to subparagraph 9) of paragraph 19, signs management acts within the scope of competence.

The contested Notification was formed on behalf of the Department, where the signatory indicated an official – the head of the A.T., accordingly, in order to properly execute an administrative act entailing negative legal consequences for the plaintiff, only the EDS of the head of the authorized person for that period or the deputy of this Department had to be certified.

In the case under consideration, there is actually no properly signed Notification that meets the requirements of Article 79 of the CPC for administrative acts, since, in violation of subparagraph 5) of the first part of Article 80 of the CPC, they do not contain the signature of an official and cannot impose negative consequences on the Partnership.

               Thus, the conclusions of the local courts are erroneous in terms of the application of substantive law, which is the basis for the cancellation of the contested judicial acts with the issuance of a new decision on the satisfaction of the claim. 

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