By its order of 22 July, 2009, the Federal Arbitration Court for the Moscow Circuit affirmed the ruling of the Arbitration Court of Moscow of 3 February, 2009, and the order of the Ninth Arbitration Court of Appeal of 16 April, 2009, where the decision

On the field tax inspection results regarding OOO “Ernst & Young” over a period 2003 to 2004 the Tax Office No. 5 of the Federal Tax Service of Russia for Moscow city issued a decision to hold the taxpayer liable to tax for tax offence.

OOO “Ernst & Young” applied to the Arbitration Court of Moscow to find the decision issued by the tax office invalid.

The claims stated by the company were satisfied in their entirety by the decision issued by the Arbitration Court of Moscow of 3 February, 2009.

The ruling made by the court of the first instance remained unchanged by the order issued by the Ninth Arbitration Court of Appeal of 16 April, 2007.

Based on the investigation and assessment of evidence filed with the case, the courts made a conclusion that expenses to pay services to provide qualified personnel in 2003 to 2004 were referred to entrepreneurial activities (provision of audit and audit-related services) aimed at obtaining revenue and these were document supported, i.e. met the criteria defined by article 252 of the Tax Code of the Russian Federation. Under such circumstances the courts came to a conclusion that it was rightful for OOO “Ernst & Young” to incorporate costs and expenses in profits tax calculation and wrongful for the tax office to make a decision thus contested.

In terms of the value-added tax the court instances came to a conclusion that OOO “Ernst & Young” had met the procedure for using tax benefits, specified in Articles 171 and 172 of the Tax Code of the Russian Federation, and because of this the tax authority had not had legal basis for charging extra VAT amounts, penalties and fines.

It was found during the case proceedings by the court instances that while the tax office issued the decision contested they failed to meet the requirements of clause 8, Article 101 of the Tax Code of the Russian Federation (the tax office failed to incorporate in their decision the facts of the wrongdoing committed by the applicant, which wrongdoing, in the tax office’s opinion, was an unlawful reflection of VAT amount as part of tax benefits for 2004, and, also, the documents, and other evidence were not mentioned to support such facts); the said wrongdoing was found material by the courts of the first instance and appeals instance, inasmuch such wrongdoing resulted in the wrong decision to hold the applicant liable for the violation of the taxation and revenue legislation.

Besides, the court of the first instance and the court of the appeals instance agreed with the arguments of the limited liability company that the tax authority unlawfully levied a fine on the company pursuant to Article 122 of the Tax Code of the Russian Federation, because a three years’ period of limitation to amerce, specified in clause 1, Article 113 of the Tax Code of the Russian Federation, had expired by the time of issuing the decision contested.

The available judicial acts remained unchanged by the order issued by the Federal Arbitration Court for the Moscow Circuit on 22 July, 2009, and the cassation appeal by the Tax Office No. 5 of the Federal Tax Service of Russia for Moscow city was dismissed by the same order.

Mr. Alexey Popov and Mr. Maxim Rovinsky, Attorneys at the Law Firm “YUST”, jointly with representatives of OOO “Ernst & Young” represented the company’s interests in the arbitral proceedings on the litigation with the tax authority.