Director of KIS confirms that it can but only after a few years of trial.
The question of whether a contractual penalty payment is admissible for the cost of obtaining income despite the many decisions published in this topic in recent years still raises doubts in practice. Issued January 2024 the interpretation confirms that contractual penalties for delays in delivery and assembly can be recognised as the cost of obtaining revenue.
However, such a position of the tax authority required considerable determination and willingness of the applicant to fight because it involved the ongoing above 3.5 of the year by judicial and administrative dispute. Initially, the Director of KIS gave an interpretation which was unfavourable to the taxpayer and did not go down to the stage when the NSA ordered the change of position originally adopted.
The case began with a date issued on 1 July 2020 by the Director of National Tax Information individual interpretation (No 0111-KDIB1-2.4010.191.2020.1.MZA). The applicant asked the authority whether the costs of obtaining revenues for the company were contractual penalties for delays in delivery and assembly of goods.
At the same time, he pointed out his own position with an affirmative answer to the above question, in the context of the statement of reasons, indicating that the contractual penalty would be based on the maintenance of trade contacts which generate certain revenues, and therefore the general conditions for recognising the expenditure as a cost of obtaining revenue in the light of Article 15(1) CIT Act.
Article 16(1) provides for the exclusion of certain categories of expenditure from the cost of obtaining revenue despite meeting the general conditions of Article 15(1).
According to Article 16(1)(22) The CIT Act does not include contractual penalties and compensation for defects in goods delivered, works and services and the delay in the delivery of goods free of defects or delay in the removal of defects in goods or services rendered.
The applicant indicated that this closed catalogue does not contain a contractual penalty for the temporary supply of goods to the recipients and that this provision will therefore not apply in this particular factual situation and the payment of the contractual penalty can be considered as a cost of obtaining revenue.
The Director of National Tax Information stated that the above position was incorrect, indicating that in order to fulfil a positive premise from Article 15(1) The CIT Act, it is necessary to have a causal link between the cost incurred and the revenue generated or the real chance of tax revenues being generated, or to preserve or secure the source of their receipt.
The existence of this relationship should be investigated in a specific case.
Furthermore, according to the Authority, Article 16(1)(22) The CIT Act did not specify that the contractual damages and penalties resulting from the breach of the obligation by the obliged person due to his lack of due diligence, so it should be assumed that any damages and contractual penalties from the titles mentioned in that provision cannot be included in the cost of obtaining revenue.
It does not matter whether they are related to an act or omission or whether the damage was caused by circumstances which the obliged person had no influence on.
The Director of KIS also noted that the delay in the performance of the service, not even the debtor's fault, is a defect in the performance of the works/services performed and, in accordance with the principle of tax autonomy, a broader understanding of the concept of "failure of works and services performed", which could be applied to any liability relationship with the tax effects referred to in Article 16(1)(22) CIT Act.
Therefore, in the factual situation presented, the tax authority considered that the in-term execution of the services/works provided for in the contract constituted a defect in the works and services referred to in Article 16(1) The CIT Act, regardless of whether the delays indicated in the proposal were due to the fault of the Applicant or to circumstances independent of the Company - in the risk of activity In fact, the applicant is responsible for the timely implementation of the contracts.
Therefore, the Contractual penalties incurred by the Applicant for the delay in the delivery and assembly of goods cannot be classified as revenue costs by the Company.
The individual interpretation was contested at the Provincial Administrative Court, which repealed the interpretation. Consequently, the Director of KIS brought a cassation action before the Chief Administrative Court, which was dismissed by judgment of 25 July 2023, syg. act II FSK 137/21.
The NSA concluded that costs in the form of contractual penalties for delays in delivery and assembly of goods are not excluded from the cost of obtaining revenue under Article 16(1)(22) CIT Act. Consequently, it was considered that the above costs could be taxed at the expense of the general principles, i.e.
if the condition of Article 15(1) CIT – their bearing is related to the preservation or safeguarding of the source of income.
In implementing the judgment of the Supreme Administrative Court, the Director of National Tax Information reconsidered the request for an individual interpretation, this time stating that the position presented in the application was correct (individual interpretation No. 0111-KDIB1-2.4010.191.2020.10.END).