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Legal Analysis of Tax Dispute Court Practice in the Electric Power Industry Regarding Value Added Tax Calculation and Payments

Elena Rodionovna Alexandrova, Principal Adviser of the Department of the Administration of the President of the Russian Federation, Senior Lecturer of the Energy Law Department of Kutafin Moscow State Law University (MSAL), Research Worker of the Energy Law Sector of the Institute of State and Law of the Russian Academy of Sciences, Candidate of Law

In this article, the author considers current issues of court practice in resolution of tax disputes in the electric power industry regarding value added tax calculation and payments, inter alia, regarding legitimacy of a VAT deduction for electric power acquired to compensate technological losses in power grids.

This article reviews the most topical issues of court practice in tax disputes in the electric power industry regarding value added tax (hereinafter also referred to as VAT) calculation and payments, inter alia, regarding legitimacy of a VAT deduction for electric power acquired to compensate technological losses in power grids.

In particular, sale of goods (works, services) in the territory of the Russian Federation, including sale of pledged items and transfer of goods (results of performed works, provision of services) under an accord and satisfaction agreement or novation agreement, and transfer of property rights are VAT-able.

The majority of VAT-related disputes in the electric power industry is associated with exercising the right to apply tax deductions to this tax. The taxpayer is entitled to reduce the total VAT by the amount of tax deductions. Pursuant to cl. 2, Art. 171 of the Tax Code of the Russian Federation[1], tax amounts, inter alia, charged to the taxpayer upon acquisition of goods (works, services), and property rights to goods (works, services) in the territory of the Russian Federation, and property rights acquired to perform operations recognized as taxable, except goods stipulated by cl. 2, Art. 170 of the Tax Code of the Russian Federation, and goods (works, services) acquired for resale are deductible.

A lot of tax disputes are associated with tax authorities contesting the legitimacy of VAT deductions for electric power acquired to compensate technological losses in power grids. For example, the judicial assembly of the Supreme Arbitration Court of the Russian Federation (hereinafter referred to as the Supreme Arbitration Court) examined an application of Far Eastern Energy Company, Open Joint-Stock Company, and ruled on April 24, 2014[2] to refuse to refer the case to the Presidium of the Supreme Arbitration Court and to support the tax authority’s arguments. In this case, charging of additional VAT from Municipal Unitary Enterprise of Vladivostok “Vladivostok Power Grids Enterprise” (hereinafter referred to as the enterprise) was based on the inspectorate’s conclusions on overestimation of VAT deductions by the enterprise. The deductible tax amount was paid by the enterprise to Far Eastern Energy Company, Open Joint-Stock Company (hereinafter referred to as FEEC, OJSC), when paying for the amount of actually lost electric power in power grids during its transportation on a basis of electric power acceptance certificates and invoices.

Under the contract signed by the enterprise with FEEC, OJSC, the enterprise undertakes to render to the customer electric power transmission services by implementing a range of organizationally and technologically connected actions ensuring transmission of electric power through technical devices of power grids owned by the enterprise. Besides, FEEC, OJSC shall acquire electric power in the volume of actual losses, and the enterprise shall pay the cost of electric power acquired to compensate losses in the grids it owns. In this respect, under the said contract, FEEC, OJSC shall transmit to the enterprise electric power for consumers and electric power for compensation of emerging actual losses of electric power in the enterprise’s grids.

According to the tax authority’s opinion supported by the court, the enterprise is ineligible for a VAT deduction calculated in relation to lost electric power during its transmission, because electric power lost during transportation of electric power was not sold, therefore by virtue of provisions of cl. 1, Art. 39 and subcl. 1, cl. 2, Art. 146 of the Tax Code of the Russian Federation there is no taxable item. Without further sale of a part of acquired electric power in the form of its losses in value terms, there is no VAT-able item.

Similar conclusions on ineligibility for a VAT deduction in the present situation were drawn, in particular, in the Resolution of the Arbitration Court of the Far Eastern District dd. December 16, 2014 with regard to case No. A51-5267/2013[3].

However, there are judicial acts with regard to similar disputes rendered for taxpayers. For example, the judge of the Supreme Court of the Russian Federation gave its Ruling dd. December 12, 2014 No. 301-КГ14-4865[4], where it dismissed the tax authority’s claim to refer the appeal to the judicial assembly on economic disputes of the Supreme Court of the Russian Federation for examination in a court session.

According to the case files, the tax authority dismissed the claim of Sarovsk Power Grid Company, OJSC to deduct VAT charged to the taxpayer within payment under the contract with the seller of electric power and pointed out to the taxpayer’s ineligibility for tax refund from the budget, since the company did not supply electric power to consumers, but only compensated losses to the guarantee supplier.

The court found that the company (hereinafter referred to as the purchaser) concluded with Open Joint-Stock Company “Provision of Russian Federal Nuclear Center – All-Russian Research Institute of Experimental Physics” (hereinafter referred to as the seller) an electric power sale contract to compensate technological losses in power grids, whereunder the seller shall, upon the purchaser’s request, acquire electric power in the volume of actual losses and the purchaser shall accept and pay for the said volumes of electric power to the seller under contractual terms.

Satisfying the taxpayer’s claims to invalidate the tax authority’s decisions, courts assumed that the obligation of the grid operator or any other owner of power grid facilities, whereto power receivers or electric power facilities are technologically connected as appropriate, to conclude such a contract and pay the cost of losses emerging in the grids they own is stipulated by Part 4, Art. 26 of Federal Law dd. March 26, 2003 No. 35-ФЗ “On the Electric Power Industry”[5], cl. 51 of the Rules of Non-Discriminatory Access to Electric Power Transmission Services and Rendering Thereof approved by Resolution of the Government of the Russian Federation dd. December 27, 2004 No. 861[6]; cl. 2 and 120 of the Fundamental Provisions of Operation of Retail Electric Power Markets approved by Resolution of the Government of the Russian Federation dd. August 31, 2006 No. 530[7] valid during the disputable period[8].

Pursuant to cl. 3 of the Instruction on Arrangement in the Ministry of Energy of the Russian Federation of the Work on Calculation and Justification of Norms of Technological Losses of Electric Power in its Transmission through Power Grids approved by Order of the Ministry of Energy of the Russian Federation dd. December 30, 2008 No. 326[9], technological losses of electric power in its transmission through power grids of territorial grid operators, Federal Grid Company and high-voltage grid companies include technical losses in lines and equipment of power grids caused by physical processes taking place during transmission of electric power in accordance with technical specifications and operating modes of the lines and equipment, taking into account consumption of electric power for own needs of substations and losses caused by admissible errors of the electric power metering system. The volume (quantity) of technological losses of electric power for determination of the norm of technological losses of electric power in its transmission through power grids shall be calculated in accordance with the Methods of Calculation of Technological Losses of Electric Power in Its Transmission through Power Grids in the Basic Period (Annex 1 to the said Instruction).

Courts recognized that electric power in this case is not sold to consumers, but acquired by the company for own activities – rendering electric power transmission services – to compensate technological losses emerging during its transportation. Under such circumstances, the company takes possession, on a reimbursable basis, of electric power for compensation of losses, which is a necessary component of material costs meant for implementation of its own activities in transmission of electric power, which are VAT-able pursuant to Art. 146 of the Tax Code of the Russian Federation. Consequently, the taxpayer reasonably used its right to a VAT deduction.

Similar conclusions are drawn in the Resolution of the Arbitration Court of the Volga-Vyatka District dd. February 17, 2015 with regard to case № A43-26273/2013[10].

Not without interest are cases No. A15-566/2013 and No. A15-1380/2013 examined by arbitration courts of the North Caucasus District, whereon judges of the Supreme Court of the Russian Federation made Rulings dd. January 26, 2015 No. 308-КГ14-4128[11] and dd. January 28, 2014 No. 308-КГ14-3952[12] respectively to dismiss the claim of taxpayer Dagenergoset, OJSC to transfer cassation appeals for examination by the judicial assembly of the Supreme Arbitration Court of the Russian Federation in a court session.

According to the case files, the grid operator company under the contract with Dagestan Power Sale Company, OJSC (hereinafter referred to as the customer) rendered to the customer electric power transmission services to the customer’s end consumers.

The inspectorate concluded that deduction of disputable VAT amounts to compensate above-standard losses of electric power was illegitimate, because the in-house tax audit proved that the company’s actions in disputable business transactions under the said contract were aimed at reaping unjustified tax benefits.

As for these cases, courts found that activities of the company being a grid operator and providing of electric power transmission services were conducted through relationships of the company with related and affiliated entities, inter alia, as part of grid equipment lease and providing electric power transmission services, and the said activities is not associated with the company’s intention to obtain economic effects as a result of real business or any other economic activities, but aimed only at reaping tax benefits in the form of VAT refunds.

Considering the above and the facts substantiated during examination of the dispute, which point at repeated excess of above-standard losses of electric power over the volume of electric power transmitted through the company’s power grids, bearing in mind the absence of proof that above-standard losses of electric power declared by the company correspond to the actual volume of losses of electric power in relation to the total volume transmitted through the company’s power grids, which the company should have compensated to the customer pursuant to the current legislation being guided by provisions of Art. 169, 171 and 172 of the Tax Code of the Russian Federation, provisions of the Plenum of the Supreme Arbitration Court of the Russian Federation dd. October 12, 2006 No. 53 “On Assessment by Arbitration Courts of the Validity of Tax Benefits Obtained by the Taxpayer”[13], courts concluded that the company has no reason to apply disputable VAT deductions, since disputable business transactions were not recognized by the company for tax purposes in accordance with their actual economic nature.



[1] Collection of Legislative Acts of the Russian Federation, 2000, No. 32, Art. 3340 (in Russian).

[2] See judicial acts on case No. A51-26184/2012. URL: http://ras.arbitr.ru/

[3] See judicial acts on case A51-5267/0213. URL: http://ras.arbitr.ru/

[4] URL: http://kad.arbitr.ru/Kad/Card?number=%D0%9043-21356%2F2013

[5] Federal Law dd. March 26, 2003 No. 35-ФЗ “On the Electric Power Industry” // Collection of Legislative Acts of the Russian Federation, 2003, No. 13, Art. 1177 (in Russian).

[6] Resolution of the Government of the Russian Federation dd. December 27, 2004 No. 861 “On Approving the Rules of Non-Discriminatory Access to Electric Power Transmission Services and Rendering Thereof, Rules of Non-Discriminatory Access to Supervisory Control Services in the Electric Power Industry and Rendering Thereof, Rules of Non-Discriminatory Access to Services of the Wholesale Market Trade System Administrator and Rendering Thereof and Rules of Technological Connection of Power Receivers of Electric Power Consumers, Electric Power Generating Facilities and Power Grid Facilities Belonging to Grid Operators and Other Bodies to Power Grids” // Collection of Legislative Acts of the Russian Federation, 2004, No. 52 (P. II), Art. 5525 (in Russian).

[7] Resolution of the Government of the Russian Federation dd. August 31, 2006 No. 530 “On Approving the Fundamental Provisions of Operation of Retail Electric Power Markets” // Collection of Legislative Acts of the Russian Federation, 2006, No. 37, Art. 3876 (became invalid since June 12, 2012) (in Russian).

[8] Nowadays, the relevant provisions are stipulated by cl. 4, 35 and 122 of the Fundamental Provisions of Operation of Retail Electric Power Markets approved by Resolution of the Government of the Russian Federation dd. May 4, 2012 No. 442. See: Collection of Legislative Acts of the Russian Federation, 2012, No. 23, Art. 3008 (in Russian).

[9] Order of the Ministry of Energy of the Russian Federation dd. December 30, 2008 No. 326 “On Arrangement in the Ministry of Energy of the Russian Federation of the Work on Approval of Norms of Technological Losses of Electric Power in its Transmission through Power Grids” // Bulletin of Regulatory Instruments of Federal Executive Authorities, 2009, No. 16 (in Russian).

[10] URL: http://ras.arbitr.ru/

[11] URL: http://www.supcourt.ru/vs_cases2.php?delo_type=0&iInstance=0&number=308-%CA%C314-4128&name=&pdate1=&pdate2=&rdate1=&rdate2=&search.x=24&search.y=11

[12] URL: http://www.supcourt.ru/vs_cases2.php?delo_type=0&iInstance=0&number=308-%CA%C314-3952&name=&pdate1=&pdate2=&rdate1=&rdate2=&search.x=30&search.y=12

[13] Resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation dd. October 12, 2006 No. 53 “On Assessment by Arbitration Courts of the Validity of Tax Benefits Obtained by the Taxpayer” // Bulletin of the Supreme Arbitration Court of the Russian Federation, 2006, No. 12 (in Russian).