FIRST SECTION
CASE OF AVTO ATOM DOO KOCHANI v. NORTH MACEDONIA
(Application no. 21954/16)
JUDGMENT
STRASBOURG
28 May 2020
This judgment is final but it may be subject to editorial revision.
In the case of Avto Atom Doo Kochani v. North Macedonia,
The European Court of Human Rights (First Section), sitting as a Committee composed of:
Tim Eicke, President,
Jovan Ilievski,
Raffaele Sabato, judges,
and Renata Degener, Deputy Section Registrar,
Having deliberated in private on 24 March 2020,
Delivers the following judgment, which was adopted on that date:
PROCEDURE
1. The case originated in an application (no. 21954/16) against North Macedonia lodged with the Court under Article 34 of the Convention for the Protection of Human Rights and Fundamental Freedoms (“the Convention”) by Avto Atom Doo Kochani, a company registered in Kochani (“the applicant company”), on 13 April 2016.
2. The applicant company was represented by Mr T. Nedelkov, a lawyer practising in Bitola. The Government of North Macedonia (“the Government”) were represented by their Agent, Ms D. Djonova.
3. On 21 February 2018 notice of the complaint under Article 1 of Protocol No. 1 to the Convention was given to the Government and the remainder of the application was declared inadmissible pursuant to Rule 54 § 3 of the Rules of Court.
4. The Government objected to the examination of the application by a Committee. After having considered the Government’s objection, the Court rejects it.
THE FACTS
I. THE CIRCUMSTANCES OF THE CASE
A. Background to the case
5. The applicant is a limited-liability company specialising in passenger transport in buses.
6. It was registered for the purposes of the Value-Added Tax Act (“the VAT Act”) and declared VAT on all outgoing invoices. VAT was also declared on incoming invoices, which made it possible for the applicant company to periodically make deductions from its VAT obligations to the State.
B. VAT audit and subsequent proceedings
7. In March and April of 2007 the Internal Revenue Office (Управа за jавни приходи – “the IRO”) conducted an audit of the applicant company with respect to its VAT obligations for 2004 and 2005. It was established that one of its suppliers – one of the petrol stations used by the applicant company (“the supplier”) – had not been registered for the purposes of VAT. The invoices issued by this supplier contained its tax number and had VAT declared on them, so after having paid them in full, the applicant company claimed the related VAT deduction. The applicant company had otherwise fully complied with its VAT obligations.
8. On 2 May 2007, relying on the findings of the audit, the IRO issued a payment order in respect of the applicant company, imposing an additional VAT demand in the amount of 3,266,792.00 Macedonian denars (MKD). The above amount had, according to them, unlawfully been deducted from the applicant company’s VAT obligation on the basis of invoices issued by the supplier.
9. The applicant company contested the payment order, but paid the above amount in several instalments in the course of 2007 and 2008.
10. Following two remittals, on 28 January 2015 its administrative claim was dismissed by the Administrative Court (Управен суд) which held that the applicant company had not been entitled to seek a deduction from its VAT obligation given that the supplier had not been registered for the purposes of VAT. It dismissed the argument that VAT had been declared on the incoming invoices by the supplier as irrelevant.
11. The Higher Administrative Court (Виш управен суд) dismissed the applicant company’s appeal on 20 October 2015, finding no reason to depart from the above findings.
C. Other relevant facts
12. The supplier was founded on 19 August 2003 and was struck off the list of companies on 30 June 2006. Its founder and sole owner was convicted for failing to register for the purposes of VAT (tax evasion) in a judgment of 25 December 2009 and sentenced to a suspended prison sentence. He paid the tax debt as established in that judgment in the amount of 595,470 MKD (around 9,650 euros (EUR)). The supplier itself was not prosecuted on account of its liquidation.
II. RELEVANT DOMESTIC LAW
13. The relevant parts of sections 33 and 34 of the Value-Added Tax Act (Закон за данок на додадена вредност), as applicable at the time, are summarised in the case of Euromak Metal Doo v. the former Yugoslav Republic of Macedonia, (no. 68039/14, §§ 25, 26, 14 June 2018).
14. Pursuant to section 55 of the Value-Added Tax Act, an entity which declared VAT on an invoice in spite of failing to register for the purposes of VAT, was obliged to pay the VAT owed (Ако некое лице во фактурата го искаже одделно данокот на додадена вредност иако за тоа не е овластено, тогаш го должи искажаниот износ).
THE LAW
III. ALLEGED VIOLATION OF ARTICLE 1 OF PROTOCOL No. 1 TO THE CONVENTION
15. The applicant company complained under Article 1 of Protocol No. 1 that the domestic authorities had deprived it of the right to deduct the VAT it had paid on received goods on account of an error committed by its supplier. Article 1 of Protocol No.1 reads as follows:
“Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.
The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.”
A. Admissibility
1. The parties’ submissions
16. The Government objected that the applicant company had not exhausted domestic remedies since it had failed to either initiate criminal proceedings, join the criminal proceedings against the supplier that had been ongoing at the time, or to lodge a separate civil claim against the supplier’s owner to recover the amount it had paid.
17. The applicant company submitted that it had not been aware of the criminal proceedings against the supplier’s owner until the Government had raised the issue before the Court. Furthermore, a civil claim could have been lodged only against the supplier, who had been struck off the companies register in 2006.
2. The Court’s assessment
18. The Court notes that identical objections were lodged by the Government and rejected by the Court in the case of Euromak Metal Doo (cited above, §§ 34-38). The reasons given by the Court in that judgment apply likewise in this case.
19. The Court further notes that the application is not manifestly ill‑founded within the meaning of Article 35 § 3 (a) of the Convention. It further notes that it is not inadmissible on any other grounds. It must therefore be declared admissible.
B. Merits
1. The parties’ arguments
20. According to the applicant company the State had not been sufficiently diligent when collecting VAT from the supplier. During its three-year operation the supplier had issued invoices in which VAT had been declared, unencumbered by State intervention. The applicant company had purchased fuel from numerous petrol stations, including the supplier, but had had no possibility to verify if they had been VAT compliant.
21. Making reference to section 55 of the VAT Act, the applicant company stated that the amounts in question had been owed by the supplier and should have been collected in the criminal proceedings against its owner. Charging the applicant company had constituted a second payment of the same VAT which had been owed by the supplier. The applicant company had otherwise been in full compliance with its VAT obligations, as established by the audit (see paragraph 7 above).
22. The Government submitted that the interference with the applicant company’s possessions had been lawful and in the general interest of the public, specifically aiming to maintain the stability of the VAT system of the State. They submitted that the applicant company should have been aware that the supplier had not been registered for the purposes of VAT. In that connection it could have performed a check of the supplier through the online system of the IRO. In addition, they asserted that it could also have performed an online check of the supplier at the companies register, petitioned the register to obtain a certificate regarding the status of the supplier, petitioned the central registry to obtain the suppliers’ annual tax reports or requested that the supplier itself provide a tax registration certificate. Failing to do any of the above meant that the applicant company had not been sufficiently diligent.
2. The Court’s assessment
23. The general principles relating to measures, as in the present case, aimed to secure the payment of taxes are set out in the case of Khodorkovskiy and Lebedev v. Russia (nos. 11082/06 and 13772/05, § 870, 25 July 2013).
24. Turning to the present case, the Court notes that the applicant company’s right to claim a deduction from its VAT obligation amounted at least to a “legitimate expectation” of obtaining effective enjoyment of a property right amounting to a “possession” within the meaning of the first sentence of Article 1 of Protocol No. 1 (see Euromak Metal Doo, cited above, § 43, with further references).
25. It is not disputed between the parties that VAT was declared on the invoices issued by the supplier. Furthermore, the applicant company paid all of the above invoices, was never charged with any tax-related offences and otherwise complied with all of its VAT-reporting obligations (see paragraph above).
26. What was contested between the parties was whether the applicant company had been sufficiently diligent in its business relations, in particular with the supplier (see Nazarev and others v. Bulgaria, nos. 26553/05, 25912/09, 40107/09 (dec.), 25 January 2011).
27. In this connection the Court notes that the possibility to perform an online verification of the supplier’s VAT status through the system of the IRO, as suggested by the Government, was not supported by domestic legislation or relevant practice. More specifically, the Government failed to show how the information that the applicant company may have obtained through an online verification of the supplier could have led to a conclusion that the latter had not been registered for the purposes of VAT. They failed to submit any examples in this regard. The same applies with regard to the remaining avenues proposed by them (see paragraph 22 above).
28. The applicant company relied on the supplier’s invoices, which contained all the necessary data including the supplier’s tax number, and which had VAT declared on them (contrast Nazarev, cited above, and compare Formela v. Poland, no. 31651/08 (dec.), § 99). Moreover, the applicant company put forward that it had learned of the criminal acts committed by the supplier and the subsequent proceedings against its owner only in the course of the proceedings before the Court (see paragraph 16 above), which was not contested by the Government. Furthermore, the Court observes that the Government have also failed to show that the applicant company had known, or should have known at the relevant time, that the supplier had committed tax evasion. The applicant company therefore had no reason at any relevant time to suspect the supplier of any unlawful actions. On the basis of the above, the Court concludes that in the particular circumstances of the case, the applicant company had no reasonably available means to monitor, control or secure the compliance of its supplier with its VAT obligations (see “Bulves” AD v. Bulgaria, no. 3991/03, § 69, 22 January 2009).
29. Separately, the Court notes that the criminal proceedings against the supplier’s owner ended in his conviction and he paid part of the VAT debt in the amount of EUR 9,650 as established in those proceedings (see paragraph 12 above). Considering that the supplier’s owner was convicted for tax fraud for the same circumstances and the same time period in relation to which the applicant company was served with the IRO payment order, it is unclear why the State failed to seek from the supplier’s owner the full amount of VAT as sought from the applicant company.
30. Moreover, the Court notes that domestic law explicitly provides that an entity which declared VAT in spite of not being registered for the purposes of VAT is nonetheless responsible for paying the VAT (see paragraph 14 above, and compare Formela, cited above, § 97). The fact that some of the VAT debt was collected from the supplier’s owner suggests that such a possibility clearly existed in practice. Accordingly, the refusal to allow the applicant company to deduct the input VAT does not seem, in itself, to be justified by the need to secure payment of the taxes.
31. Lastly, in so far as the possibility for the applicant company to lodge a civil claim against its supplier as suggested by the Government might be relevant, the Court notes that this would not have been possible, given that the supplier had been struck off the companies register (see Euromak Metal Doo, cited above, § 48, and contrast Atev v. Bulgaria (dec.), no. 39689/05, § 34, 18 March 2014).
32. This is sufficient for the Court to conclude that there has been a violation of Article 1 of Protocol No. 1.
IV. APPLICATION OF ARTICLE 41 OF THE CONVENTION
33. Article 41 of the Convention provides:
“If the Court finds that there has been a violation of the Convention or the Protocols thereto, and if the internal law of the High Contracting Party concerned allows only partial reparation to be made, the Court shall, if necessary, afford just satisfaction to the injured party.”
A. Damage
34. The applicant company claimed 52,468 euros (EUR) in respect of pecuniary damage as the amount that it had paid to the State pursuant to the payment order. In addition, it claimed EUR 89,603 as interest on that amount.
35. The Government contested the above claims as unsubstantiated and excessive.
36. In view of the violation found of Article 1 of Protocol No. 1, the Court considers that, as regards pecuniary damage, the most suitable form of reparation would be to award the value of the VAT (EUR 52,468) that the applicant company was made to bear as a consequence of the payment order, plus any tax thereon that may be chargeable to the applicant company.
37. As to the claim concerning interest on that amount, the Court observes that the applicant company did not submit any evidence as to how it reached that amount. This claim should therefore be rejected.
B. Costs and expenses
38. The applicant company also claimed EUR 3,592 for the costs and expenses incurred before the Court.
39. The Government contested the above claim as excessive and submitted that the applicant company had failed to produce an itemised list.
40. According to the Court’s case-law, an applicant is entitled to the reimbursement of costs and expenses only in so far as it has been shown that these have been actually and necessarily incurred and are reasonable as to quantum (see Editions Plon v. France, no. 58148/00, § 64, ECHR 2004‑IV). In the present case, regard being had to the documents in its possession and the above criteria, the Court considers it reasonable to award the sum of EUR 600 covering costs under all heads, plus any tax that may be chargeable to the applicant company.
C. Default interest
41. The Court considers it appropriate that the default interest rate should be based on the marginal lending rate of the European Central Bank, to which should be added three percentage points.
FOR THESE REASONS, THE COURT, UNANIMOUSLY,
1. Declares the complaint concerning Article 1 of Protocol No. 1 admissible;
2. Holds that there has been a violation of Article 1 of Protocol No. 1 to the Convention;
(a) that the respondent State is to pay the applicant company, within three months, the following amounts, to be converted into the currency of the respondent State at the rate applicable at the date of settlement:
(i) EUR 52,468 (fifty-two thousand four hundred and sixty-eight euros), plus any tax that may be chargeable, in respect of pecuniary damage;
(ii) EUR 600 (six hundred euros), plus any tax that may be chargeable to the applicant company, in respect of costs and expenses;
(b) that from the expiry of the above-mentioned three months until settlement simple interest shall be payable on the above amounts at a rate equal to the marginal lending rate of the European Central Bank during the default period plus three percentage points;
3. Dismisses the remainder of the applicant company’s claim for just satisfaction.
Renata Degener Tim Eicke
Deputy RegistrarPresident
Full & Egal Universal Law Academy