The Supreme Court of the Russian Federation (SC) will decide whether the price of a transaction can be revised if tax rules have changed during its execution. The decision will be made in the case of JSC Sitronics IT (part of AFK Sistema), which requires 140 million rubles. VAT from VTB Bank “in excess of the price agreed in the contract” for the use of software. At the time of signing the contract, these services were not subject to VAT, but during its validity the tax benefit was canceled, which raised the question of who bears the burden of paying it. The practice is contradictory, and lawyers also do not have a common opinion. According to experts, the position of the Supreme Court can affect all situations where, during the execution of the contract, legislation has changed that affects the obligations of the parties.
The Supreme Court will decide whether subsequent changes in tax legislation affect the agreed terms of the contract. In December 2019, NVision Group JSC (now Sitronics IT) entered into a sublicense agreement with VTB. According to it, the bank received the right to use Microsoft software for three years (2020, 2021, 2022) at a price of RUB 706.77 million. in year. According to the terms of the agreement and the norms of the Tax Code (TC) in force at that time, these services were not subject to VAT; it was separately stipulated that “the contract price is fixed and cannot be changed.” In addition, in clause 2.4 of the agreement, NVision undertook not to make claims to the bank for additional VAT payment “in the event that the transaction is recognized as incorrectly qualified in relation to the tax norm.”
According to TAdviser, NVision Group was created in 2001, its main focus was the integration of IT and telecom solutions. Forbes named Dmitry Taraba and Anton Sushkevich among the founders of the company. By 2010, the company’s revenue amounted to 22 billion rubles. In 2011, Rostelecom considered purchasing NVision Group, but the deal did not take place. In 2015, AFK Sistema consolidated 100% of NVision Group; later the company came under the control of MTS and then Sitronics.
Sitronics IT is 100% owned by JSC Sitronics. At the end of 2022, the company’s revenue amounted to 17.9 billion rubles. with a net profit of 801 million rubles. This is one of the key assets of Sitronics Group, which supplies and develops software, devices, software and hardware systems, etc.
In July 2020, amendments to the Tax Code were adopted, which, starting from 2021, abolished the VAT benefit for the sale of rights to software and databases not included in the unified register of Russian programs. Microsoft software as foreign was not included in it, and NVision demanded to pay an additional 20% VAT on the price for 2021, namely 141.4 million rubles. VTB refused, and the dispute went to court.
The Moscow Arbitration Court rejected the company’s claim, finding that “the price established in the sublicense agreement is fixed and cannot be changed.” In addition, the court noted, the software was transferred to the defendant and the remuneration was partially paid to them even before the amendments came into force, and the risks of additional VAT being charged to the plaintiff do not entail the bank’s obligation to pay this tax “above the price agreed upon in the contract.”
The appellate instance, on the contrary, recovered 141 million rubles from the bank. tax and another 7 million rubles. percent on this amount. According to the appeal, “the change in the contract price is due to a change in tax legislation that is subject to mandatory application” and does not require amendments to the contract. But the intellectual property rights court, which considered the case as a cassation, again exempted the bank from VAT.
Sitronics IT filed a complaint with the Supreme Court, insisting that the tax base under this agreement is determined by the period of use of the software, and not by the fact of its transfer and payment. Since the bank used the programs in 2021, then the then-current article applies to the agreement. 149 of the Tax Code, requiring payment of VAT. The company also referred to a letter from the Ministry of Finance dated December 1, 2021, which refers to the accrual of VAT for periods of use of the software starting from January 1, 2021, “regardless of the date of conclusion of the contract and the procedure for payment for these services.” In this regard, Sitronics believes, it is obliged to present the buyer of services with the amount of VAT in addition to the sales price, and this tax obligation “cannot be changed by agreement of the parties.” “The receipt of economic advantages by the defendant in a controversial situation,” according to the plaintiff, “does not meet the principle of conscientious fulfillment of rights and obligations and does not comply with the procedure for assessing VAT and its economic and legal nature.” Based on these arguments, the case was transferred to the Economic College of the Supreme Court, which will consider the dispute on March 27.
Vice President for Legal Affairs of Sitronics Group Svetlana Volkova told Kommersant that NVision Group “transferred VAT to the budget in good faith, despite the fact that the parties did not make changes to the agreement due to the changed legal regulation.” As a result, “an unjustified tax advantage arose on VTB’s side in terms of the procedure for taxing VAT during the period of validity of the agreement,” she added. The company hopes that “the Supreme Court will resolve this legal conflict within the framework of existing presumptions and taking into account the interpretation of tax legislation.” VTB declined to comment.
MEF Legal Advisor Denis Khramkin notes that “commercial disputes about the distribution of the VAT burden arise constantly.” Sometimes, he says, they happen due to business mistakes, but sometimes for objective reasons – changes in tax rules. “The amendments abolished the VAT benefit without making exceptions for old ongoing contracts, which led to disputes,” explains Andrey Korelsky, managing partner of AB KIAP. According to him, the situation should have affected many: “Even if we take only Microsoft software, it is installed on the overwhelming number of computers.” For software owned by foreign copyright holders, access to the register was closed, and the VAT benefit was cancelled, explains Mr. Khramkin.
“But the public will to stimulate the development of domestic technologies and software should not violate the interests of participants in civil relations who entered into them before the tax rules were changed. Otherwise, this calls into question the stability of turnover,” Andrei Korelsky is sure. Moreover, Denis Khramkin adds, not even all Russian software suppliers managed to be included in the register by January 1, 2021, which resulted in tax adjustments for them as well.
Judicial practice in such cases is contradictory, so lawyers hope for clear clarifications from the Supreme Court. “The position of the Supreme Court will undoubtedly set the tone for all disputes about the price of the contract in the event of changes in the taxation of ongoing transactions,” emphasizes Ekaterina Boldinova, partner at Five Stones Consulting. “The essence of the dispute is whether contractual relations should change when taxation changes and, if so, how,” clarifies Andrei Korelsky.
First of all, the decision of the Supreme Court will be significant for distributors and buyers of software not included in the register, especially for those buyers who are not VAT payers in general or for individual transactions, points out Denis Khramkin. These include, in particular, financial sector organizations, including banks – for them, charging VAT on the purchase price of software increases costs by 20%, since they cannot reimburse it later from the budget.
There is no consensus among lawyers about how to solve the problem. Tax advisor at AB EPAM Igor Shikov believes that the agreed terms of the transaction take priority, and the company “itself made a mistake by stipulating in the contract a refusal to revise the price” if the situation with VAT changes. “When the benefit was cancelled, the licensee, “forgetting” about the contractual condition, increased the price of the VAT license and is now trying to obtain protection in court. But it is difficult to imagine how the court will be able to justify its decision if it allows the applicant to violate the provisions of the agreement he himself concluded,” explains Mr. Shikov.
Andrey Korelsky takes a different point of view, pointing out that VAT as an indirect tax levied on an economic source (the buyer of goods and services) “cannot be economically transferred to the seller, otherwise he will suffer unreasonable losses.” Ekaterina Boldinova agrees with him: “If you follow the logic of the courts, which decided the dispute in favor of the bank, it turns out that any negative consequences from changes in taxation should fall exclusively on the party obligated to pay VAT, which is unfair.” To avoid controversial situations, Denis Khramkin recommends stipulating in the terms of contracts a clear distribution of the burden of paying VAT in case tax rules are adjusted in the future.