CAAD 398/2014-T: VAT Deduction Rights Under Article 21 CIVA and Sixth Directive

ARBITRAL DECISION

CAAD: Tax Arbitration

Case No. 398/2014 - T

Subject: VAT – Right to Deduction – Article 21 CIVA – Sixth Directive

I - REPORT

A) The Parties and the Constitution of the Arbitral Tribunal

A, SA, with registered office …, legal entity no. …, hereinafter referred to as the "Claimant", filed a request for the constitution of a singular Arbitral Tribunal, under the provisions of Articles 2, no. 1, paragraph a) and no. 1, paragraph a) and no. 2 of Article 10 of the Legal Regime for Tax Arbitration, approved by Decree-Law no. 10/2011, of 20 January, hereinafter referred to as "LRTA" and Articles 1 and 2 of Order no. 112 – A/2011, of 22 March, to review the legality of the dismissal of the administrative appeal filed by the Tax and Customs Authority, hereinafter referred to as the "Respondent" or "TA", with a view to the partial annulment, on the grounds of illegality, of three additional VAT assessments, with numbers …, … and … and the corresponding compensatory interest assessments numbers …, … and …, identified and attached as annexes to the arbitration request as documents numbers 2 to 4 and 4 to 7, underlying the administrative appeal, which are hereby fully reproduced, in the global amount of €53,374.08.

The contested additional assessments resulted from a tax inspection conducted on the Claimant with respect to the year 2010, which resulted in the additional VAT assessment, allegedly unduly deducted, supported by the organization of promotional and advertising events, in the amount of €26,236.95 and by the acquisition of light goods vehicles with more than three seats, in the amount of €22,865.48. The Claimant combines the requests for annulment of the respective additional VAT assessments, since they result from the assessment of the same factual circumstances and appeal to the interpretation and application of the legal rules on the formal and material rules governing the exercise of the right to VAT deduction. Finally, the Claimant also raises the question of the need for a possible preliminary referral to the CJEU.

The request for constitution of the Arbitral Tribunal, submitted on 27 May 2014, was accepted by the Illustrious President of the CAAD and automatically notified to the Tax and Customs Authority on 28 May 2014. The Claimant chose not to appoint an arbitrator, whereupon, under the provisions of no. 1 of Article 6 of the LRTA, the undersigned was appointed by the Deontological Council of the Administrative Arbitration Centre as arbitrator of the singular Arbitral Tribunal. The appointment was accepted and the parties were notified of the acceptance on 15 July 2014. The parties did not challenge the appointment, in accordance with the provisions of paragraphs a) and b) of no. 1 of Article 11 of the LRTA, in conjunction with Articles 6 and 7 of the Deontological Code, whereby, in compliance with the provision of paragraph c) of no. 1 of Article 11 of Decree-Law no. 10/2011, of 20 January, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the singular Arbitral Tribunal was constituted on 30 July 2014.

On 31 July the Respondent "TA" was notified to submit a response within the legal deadline, in accordance with the provisions of nos. 1 and 2 of Article 17 of the LRTA. On 23 September 2014 the Respondent submitted its response. On 3 October 2014 an arbitral order was issued scheduling the meeting referred to in Article 18 of the LRTA, which took place on 23 October at 14:30 hours, at which the witnesses indicated by the Claimant were also heard. A deadline of 20 successive days was set for each party to submit its written submissions, and the date for issuing the arbitral decision was set for 15 January 2015, and the Claimant was warned that on the same date it should pay the subsequent arbitral fee.

The Claimant filed its submissions with the file on 14 November 2014 and the TA on 1 December 2014.

B) Procedural Prerequisites

The Arbitral Tribunal is regularly constituted and is materially competent, in accordance with Article 2, no. 1, paragraph a) of Decree-Law no. 10/2011, of 20 January.

The parties have legal personality and capacity, are legitimately interested parties and are legally represented.

As to the joinder of claims, seeking the joint review of the additional VAT assessments which are the consequence of the same inspection procedure, whereby, although they constitute autonomous acts, the requirements laid down in no. 1 of Article 3 of the LRTA and in Article 104 of the Code of Tax Procedure are met, the joinder must be admitted, given the identity of the tax and the fact that the review of the tax acts in question depends on the review of the same formal and material rules governing the exercise of the right to VAT deduction.

The proceedings do not suffer from nullities that would invalidate it and no exceptions have been raised that would prevent judgment on the merits of the case, whereby the Tribunal is in a position to issue the arbitral decision.

C) THE CLAIM FORMULATED BY THE CLAIMANT

The Claimant formulates this request for an arbitral pronouncement on the grounds that it disagrees with the dismissal of the administrative appeal, seeking the illegality and consequent annulment of the additional VAT assessments claimed, relating to the year 2010, in the global amount of €53,374.08, which resulted from a tax inspection conducted on the Claimant, which resulted in the additional VAT assessment, allegedly unduly deducted, supported by the organization of promotional and advertising events, in the amount of €26,236.95 and by the acquisition of light goods vehicles with more than three seats, in the amount of €22,865.48, plus the corresponding compensatory interest assessments as documents nos. 2 to 7 filed with the file by the Claimant as annex to the arbitration request and which are hereby reproduced.

The contested additional VAT assessments are based on the corrections made by the inspection services, as shown in the report filed with the case as document no. 8 annexed to the arbitration request, and have as their legal basis the provision of Article 21 of the CIVA. However, we must distinguish between the two situations under analysis:

a) VAT deducted by the Claimant, supported by the organization of promotional and advertising events, in the amount of €26,236.95;

b) VAT deducted by the Claimant, supported by the acquisition of light goods vehicles, in the amount of €22,865.48, acquired from B.

The legal basis of the request for an arbitral pronouncement is essentially based on the allegation of the right to deduct the VAT supported in the situations described above, on the grounds that, in the case of paragraph a), it is an acquisition of services essential to the Claimant's activity, and in the case described in paragraph b), it is light goods vehicles, with the Claimant alleging that the TA's argument based on the fact that the vehicles have more than 3 seats is not provided for in the law.

From the perspective of the Claimant, there must be a distinction between the two situations under discussion in the file:

a) Regarding the VAT relating to the organization of promotional events, the Claimant alleges that it organizes and carries out concerts at dams, these concerts, which feature public participation, have a function of institutional publicity associated with the brand "A"; being the purpose pursued by the rule to prevent tax fraud and admitting the presumption of non-allocation to taxable operations subject to proof to the contrary, it must be determined, in the concrete case, the purpose for which the services were acquired in order to assess the deductible character (or not) of the VAT incurred;

b) Regarding the VAT relating to the acquisition of vehicles, the Claimant argues that paragraph a) of no. 1 of Article 20 of the CIVA only makes the deductibility of the tax dependent on the performance of supplies of goods and services provision subject to tax and not exempt from it, which is the case of the Claimant; furthermore, the Claimant does not see how deductibility could be excluded on the basis of characterizing the vehicles as "goods vehicles with more than three seats"; thus, the Tax Inspection Services (TIS) assume that they are characterized as "light goods vehicles"; however, they resort to applying a criterion not provided for in the law in effect at the time the tax facts occurred, imposing a new limitation, not contained in the law, consisting in the fact that the vehicles have "more than 3 seats"; finally, it alleges that the vehicles in question do not imply a limitation on the right to deduction since they have a use with an agricultural, commercial or industrial character; to which is added the fact that the interpretation and application of Article 21, no. 1, paragraph a) of the CIVA carried out by the TIS in this case is revealed to be incompatible with Community law insofar as that rule was not in force on the date of the Sixth Directive.

It is within this legal framework and by reason of the possible application of Community rules that the Claimant raises the question of the possible need for a preliminary referral to the CJEU.

According to the Tax Inspection Report that served as the basis for the additional assessments in question, the right to deduction was not admitted with respect to the organization of events, on the grounds that these are expenses incurred with persons outside the company or by representatives thereof, and concluded that the expenses are classifiable under paragraph d) of no. 1 of Article 21 of the CIVA and, as such, the taxpayer could not have fully deducted the tax supported. However, the Claimant alleges that this position is controversial within the TA itself, which has rejected such understanding, recognizing the error of the Inspection Services in suppressing, albeit partially (50%), the right to VAT deduction, in circumstances entirely identical to those of the present case.

The decision dismissing the administrative appeal, in addition to reiterating the content of the Inspection Report, adds that the TA acted in obedience to its "doctrinal notes", including one relating to the specific case of "pick-ups" and a circular memorandum. The Claimant alleges in this regard that the doctrinal note invoked is from 2011 and the circular memorandum is from 2013, that is, after the facts that occurred in 2010. It further adds that taxpayers must obey tax law and not any doctrinal guidance from the TA, nor can they obviously follow understandings subsequent to the tax facts. Wherefore, the Claimant considers that the contested tax acts are systematically based on an error regarding the assumptions for the application of Article 21 of the VAT Code.

D) The Position of the Tax Authority

The Respondent entity (TA) contends for the legality of all the contested tax acts (additional VAT assessments and compensatory interest assessments) and the dismissal of the arbitration request. It alleges, in summary, that:

a) The arguments presented by the Claimant are manifestly without merit;

b) The right to deduction is an essential element of the functioning of the tax, guaranteeing its neutrality and being based on the so-called tax credit method or indirect subtractive method, whereby, in accordance with such method and in line with the provision of Article 19 of the CIVA, for the calculation of the tax due, taxpayers deduct from the tax on taxable transactions they have carried out the tax due or paid upstream by the acquisition of goods and services from other taxpayers, constituting a prerequisite of the right to VAT deduction "that the goods and services are directly related to the exercise of the activity of the taxpayers";

c) It is relevant to the resolution of the present case that under Article 20, no. 1, paragraph a) of the CIVA, only the tax that has been charged on goods or services acquired, imported or used by the taxpayer for the performance of supplies of goods and services subject to tax and not exempt from it can be deducted;

d) Notwithstanding, even if acquisitions of goods or services are in question that are connected with the exercise of the activity developed by the taxpayer, the deduction of the supported VAT is not permitted if those are excluded under Article 21 of the CIVA;

e) From the provision of Article 21, number 1, paragraph d) of the CIVA, excluded from the right to deduction is the tax contained in the following expenses: "expenses relating to accommodation, food, beverages and tobacco and reception expenses, including those relating to the accommodation of persons external to the company and expenses relating to real estate or part thereof and its equipment, intended mainly for such receptions";

f) However, no. 2 of Article 21 of the CIVA provides for a set of circumstances in which the right to deduction may not be excluded; thus, under paragraph d) of no. 2 of Article 21 of the CIVA, the right to deduction shall apply in relation to expenses mentioned in paragraphs c) and d), incurred for the direct needs of participants, relating to the organization of congresses, fairs, exhibitions, seminars, conferences and similar events, when they result from contracts concluded directly with the service provider or through entities legally authorized for that purpose and demonstrably contribute to the performance of taxable operations, whose tax is deductible in the proportion of 50%;

g) Finally, regarding the argument alleged by the Claimant regarding the violation of the Sixth Directive, since Portugal had no provision similar to Article 21 of the CIVA before this Code came into force, concludes that the interpretation and application of Article 21 of the CIVA as an exclusion of the right to deduction under the standstill clause would be entirely contrary to Union law and incompatible with it, the Respondent TA contends that, in fact, it is a fact that Portugal did not have this limitation in its legislation, since its consumption tax was not VAT, but the Transaction Tax. However, upon accession to the then European Economic Community, it was allowed to foresee this limitation, whereby there is no violation of European Union law.

h) Wherefore, it concludes that the arbitration request filed by the present Claimant is manifestly without merit.

II - QUESTIONS TO BE DECIDED

There are two essential questions to be decided which consist in knowing, with reference to expenses on "promotional events and concerts", as well as the acquisition of "pick up" vehicles described in the present file and in light of Article 21 of the CIVA, whether the VAT supported in their acquisition should be considered wholly deductible or not.

Said in another way, the question consists in assessing whether, in the concrete case, the right to deduction can be exercised, in full, of the tax supported with the expenses incurred in the hiring of certain services related to the promotional events referred to and with the acquisition of the automobile vehicles ("pick up") described in the file.

For the decision of the two questions enunciated it is also important to assess whether the interpretation of the applicable rules, carried out by the Tax Inspection Services (TIS) and ratified by the decision issued in the administrative appeal filed by the Claimant, violates or not the provision of the Sixth Directive and whether there will be a need to promote a preliminary referral to the CJEU, in the terms suggested by the Claimant.

This third question, for reasons of economy in the exposition and substantiation of this arbitral decision, the Tribunal will be treated last and not as a priority, following the same order of exposition as the Claimant in its arbitration request.

III – MATTERS OF FACT

A) Facts Established:

With relevance to the assessment of the questions raised, the following facts are considered established:

a) The Claimant A, SA is a company whose object consists, namely, in the "Production, purchase, sale, import and export of energy in the form of electricity and others, resulting from the operation of its own or third-party installations, with the obligation, in accordance with the law, to guarantee, ultimately, the sustainable development of the national electricity production system; in the promotion, management and operation, directly or indirectly, of installations and undertakings; in the preparation of studies and the development of projects, as well as the provision of any other services related to the aforementioned activities (…)" – Cf. Permanent certificate with access password … .

b) For VAT purposes, the Claimant is classified under the normal monthly periodicity regime, as a taxpayer with the right to full deduction of the tax, having as its activity the production of thermal and other electricity referred to above, with CAE ….

c) Within the scope of the activity it pursues, the Claimant makes investments associated with the implementation of infrastructure that allows the production of hydroelectric energy, namely dams, bearing the respective costs plus VAT;

d) The Claimant promotes, in the scope of pursuing its activity, the organization of events with the purpose of making known the industrial and technological heritage of hydroelectric production in Portugal and of publicizing the projects of greater importance that it intends to implement or that it has already implemented;

e) The Claimant organized and carried out, in the year 2010, the organization of a concert called "Alqueva II"; the inauguration of the start of operation of the Lares Combined Cycle Power Station; and the ceremony for the launching and start of construction of the Salamonde II Dam Project - Salamonde dam, located in the Cávado-Rabagão basin, in the municipality of Vieira do Minho;

f) The Claimant proceeded to deduct the full VAT supported in the payment of these services.

g) Also in the year 2010 the Claimant acquired four light goods vehicles from supplier B, with five seats, and proceeded to deduct the full VAT contained in the respective expenses, in the amount of €22,865.48;

h) The respective registration document classifies them as "light goods vehicles", with open body with cover and 5 seats (including the driver);

i) Their use was allocated to the inspection and supervision of work in the areas comprising the construction contracts for hydroelectric developments at Salamonde and Ribeiradio, during the period necessary for their execution;

j) After the completion of the works in these contracts, the same vehicles are reused for the same purpose in other works or undertakings of the Claimant that are in progress; (Cf. Testimony of witnesses C and D, heard in the file);

k) The Claimant does not itself take charge of the construction, resorting to sub-contractors, but is the owner of the work and accompanies and supervises its execution, for which it uses its engineers and technicians and the referred vehicles are intended for their movements between the works in progress;

l) The typology of vehicles proves appropriate to the specific context where the works take place with muddy access roads, steep and winding slopes and the need to move the teams (from A, SA itself and sometimes from external entities) for site inspection, many of them consisting of more than three elements, which are regular on the part of the Claimant to supervise compliance with the works awarded to third parties (contractors and sub-contractors) but whose responsibility and quality assurance assist to A, SA itself, which carries out a daily monitoring of the same; – cf. doc. no. 10 attached to the arbitration request and testimony of the witnesses heard.

m) Under Service Order no. …, of 24 May 2012, the Claimant was subject to an external tax inspection procedure of general scope, with reference to the year 2010, from which resulted, among others, the corrections made in the context of VAT in the amount of €115,854.76 (cf. fl. 8 of the TIR);

n) Such corrections generated the additional VAT assessments and respective compensatory interest, object of the administrative appeal no. …, namely:

Compensatory Interest Assessments

o) In the context of the administrative appeal the Claimant requested the partial annulment of the additional VAT assessments and compensatory interest assessments, relating to the year 2010 (Cf. previous Table), relating to the deduction of VAT supported with the organization of certain promotional events and with the acquisition of four vehicles acquired from supplier B, on the grounds of illegality;

p) The administrative appeal resulted in dismissal, by order of the respective Head of Division, of 24 February 2014, reasoned and attached to Information no. 31 – ADP/2014, of the Tax Management and Assistance Division (DGAT), of the Major Taxpayers Unit, attached to the File;

q) The Claimant proceeded to pay in full, on 28 June 2013, the additional assessments and compensatory interest in question, as shown by the supporting documents attached as docs. 2 to 7 filed with the arbitration request.

B) FACTUAL SUBSTANTIATION

The conviction regarding the facts established as proven was based on the documentary evidence filed with the file by the Claimant not contradicted by the other party, as well as the facts accepted mutually by the parties and also the testimony of witnesses C and D, heard in the file, both civil engineers and employees of the Claimant, with responsibilities in the supervision of construction works of the Salamonde and Ribeiradio dams, to which the "Pick up" vehicles in question in the file were allocated.

There are no unproven facts with relevance to the decision to be issued in the present file.

IV – LEGAL SUBSTANTIATION

With the factual matters established, it is important to address the questions to be decided indicated above, corresponding, in summary, to the questions of illegality raised by the Claimant in this arbitration request, due to alleged defects of error as to the factual and legal prerequisites that led to the additional tax assessments and interest, as well as to the dismissal of the administrative appeal filed by the present Claimant.

The legal framework applicable to the question to be decided, both as to the deductibility of VAT supported in expenses with promotional events and in the acquisition of the "pick up" vehicles described in the present file is based, essentially, on the provision of Articles 20 and 21 of the CIVA.

A) National Law Applicable

The right to deduction is an essential element of the functioning of the value added tax and constitutes the fundamental basis of this tax which is intended to be neutral and without any undue cumulative effect that is reflected in the final price to the consumer.

Regarding the fundamental questions at hand, it will be said that the first limit to interpretation is the wording of the law, but not the only one. The interpretative task requires something more, namely, starting from the text of the rule it is necessary to discover the underlying ratio legis, a task of interconnection and evaluation that escapes the literal domain.

Article 11, no. 3 of the General Tax Law provides: "if doubt persists about the meaning of the applicable rules of incidence to be applied, attention should be paid to the economic substance of the tax facts". In the present case, account should be taken of the economic substance of the tax facts and their proven connection with the exercise of the Claimant's activity, in order to adequately implement the rules of the CIVA, for the proper assessment of the legal matters under discussion.

Taking into account, in the first place, the wording of the law, we must consider the provision of Article 19 of the CIVA:

1- "For the calculation of the tax due, taxpayers deduct, under the following articles, from the tax on the taxable transactions they have carried out:

a) The tax due or paid by the acquisition of goods and services from other taxpayers." (…)

Article 20 of the CIVA further provides:

1- Only the tax that has been charged on goods or services acquired, imported or used by the taxpayer for the performance of the following operations can be deducted:

a) Supplies of goods and services subject to tax and not exempt from it;" (…)

And, finally, Article 21 of the CIVA provides:

Exclusions from the right to deduction

1- The tax contained in the following expenses is excluded from the right to deduction:

a) Expenses relating to the acquisition, manufacture or importation, hiring, use, conversion and repair of motor cars, pleasure boats, helicopters, aeroplanes, motor cycles and scooters. A motor car means any motor vehicle, including the trailer, which, by its type of construction and equipment, is not intended solely for the transport of goods or for use with an agricultural, commercial or industrial character or which, being of mixed use or for passenger transport, does not have more than nine seats, including the driver;

(…)

c) Expenses for the transport and business travel of the taxpayer and its staff, including tolls;

d) Expenses relating to accommodation, food, beverages and tobacco and reception expenses, including those relating to the accommodation of persons external to the company and expenses relating to real estate or part thereof and its equipment, intended mainly for such receptions.

(…)

2- However, the exclusion from the right to deduction does not apply in the following cases:

(…)

d) Expenses mentioned in paragraphs c) and d), with the exception of tobacco, both of the preceding number, incurred for the direct needs of participants, relating to the organization of congresses, fairs, exhibitions, seminars, conferences and similar events, when they result from contracts concluded directly with the service provider or through entities legally authorized for that purpose and demonstrably contribute to the performance of taxable operations, whose tax is deductible in the proportion of 50%; (…)"

The above-stated rules thus constitute the fundamental legal framework for the resolution of the questions at hand. It is important to bear in mind that, in the context of VAT, the legal rules governing the exercise of the right to deduction are aimed at and must guarantee the neutrality of the tax, based on the tax credit method or indirect subtractive method, in accordance with the principle instituted by the Sixth Directive, underlying the provision of Articles 19 and following of the CIVA.

For the calculation of the tax due, taxpayers deduct from the tax on the taxable transactions they have carried out the tax due or paid by the acquisition of goods and services from other taxpayers, constituting a prerequisite of the right to VAT deduction that the goods and services are directly related to the exercise of its activity.

It is relevant to the resolution of the present case that under Article 20, no. 1, paragraph a) of the CIVA, only the tax that has been charged on goods or services acquired, imported or used by the taxpayer for the performance of supplies of goods and services subject to tax and not exempt from it can be deducted, a prerequisite that is met in the present case, as the TA itself acknowledges in its response. Despite what has been stated above, it follows from the above-mentioned Article 21 of the CIVA that, even if acquisitions of goods or services that are connected with the exercise of the activity developed by the taxpayer are at issue, the deduction of supported VAT is not permitted if those are excluded under the provisions of this legal rule.

Without prejudice to what has been stated above, there are provided in no. 2 of Article 21 of the CIVA a set of circumstances in which the right to deduction may not be excluded. This is the case with the expenses provided in paragraph d) of no. 2 of Article 21 of the CIVA, in relation to which the right to deduction is not excluded provided it is demonstrated that those contribute to the performance of taxable operations, whose tax is deductible, when they result from contracts concluded directly with the service provider or through entities legally authorized for that purpose and demonstrably contribute to the performance of taxable operations, whose tax is deductible in the proportion of 50%.

B) Compatibility of the Rule of Article 21 of the CIVA with the Sixth Directive:

The Claimant alleges that the interpretation pursued by the Respondent regarding the application of Article 21 of the CIVA violates the Sixth Directive, and, to that extent, would be incompatible with Community law. Thus, it is important to decide this question from the outset.

In the understanding of the claimant, under Article 17, no. 6 of the Sixth Directive, Member States were authorized to maintain their legislation regarding the exclusion of the right to VAT deduction existing on the date it came into force and until such time as the Council determined the expenses that do not give rise to such right (cf. Articles 84 and following of the arbitration request), arguing that Portugal contained no provision similar to Article 21 of the CIVA before this Code came into force, terms in which it concludes that the interpretation and application of Article 21 of the CIVA as an exclusion of the right to deduction under the standstill clause would be entirely contrary to Union law and incompatible with it.

On this point, as the Respondent TA correctly states, "it is a fact that Portugal did not have this limitation in its legislation, since its consumption tax was not VAT, but the Transaction Tax. However, upon accession to the then European Economic Community, it was allowed to foresee this limitation, whereby there is no violation of European Union law."

Let us therefore examine the framework of this question raised by the parties.

Article 2 of the first Council Directive 67/227/CEE of 11 April 1967[1], concerning the harmonization of the laws of the Member States relating to turnover taxes, has the following wording:

"The principle of the common system of [VAT] consists in applying to goods and services a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions occurring in the process of production and distribution prior to the stage of taxation.

At each transaction, the [VAT], calculated on the price of the good or service at the rate applicable to that good or service, is payable, after prior deduction of the amount of [VAT] which has been directly charged to the cost of the various elements making up the price. […]"

Article 17, nos. 2, 6 and 7 of the Sixth Directive, as amended by Council Directive 95/7/CE of 10 April 1995[2], provides that:

"2. Insofar as goods and services are used for the purposes of the taxed transactions of the taxable person, the taxable person shall be entitled to deduct from the tax for which he is liable:

The [VAT] due or paid in the territory of the country in relation to goods supplied or to be supplied to him and in relation to services supplied or to be supplied to him by another taxable person;

[…]

By the end of the fourth year following the date of entry into force of this Directive, the Council, acting unanimously on a proposal from the Commission, shall determine the expenditure which does not give the right to deduction of [VAT]. The following shall in any case be excluded from the right to deduction: expenditure which does not have a strictly professional character, such as expenditure of a personal, entertaining or representational nature. (emphasis added)

Until the entry into force of the provisions referred to above, Member States may maintain all the exclusions provided for in their respective national legislation at the time of entry into force of this Directive.

Without prejudice to the consultation provided for in Article 29, Member States may, for cyclical reasons, exclude in whole or in part from the deduction arrangements some or all capital goods or other goods. In order to maintain identical conditions of competition, Member States may, instead of refusing the deduction, apply tax to the goods produced by the taxable person himself or which he has acquired in the territory of the country or which he has imported, in such a way that such taxation does not exceed the amount of the value added tax which would be chargeable on the acquisition of similar goods."

It is important, in this context, to examine from the outset the understanding of the CJEU regarding the right to deduction, as set out in Article 17 of the Sixth Directive, according to which "the taxable person shall have the right to full deduction of VAT incurred whenever there is 'a direct and immediate relationship between a given upstream operation and one or more downstream operations with the right to deduction'" (Cf., among others, the case law set out in the Midland Bank Judgment).

This orientation was replicated by the Court of Justice in the Judgment delivered on 6 September 2012, in Case C-496/11, where it is stated that "for VAT to be deductible, the upstream operations must have a direct and immediate nexus with downstream operations with the right to deduction. Thus, the right to deduct VAT charged on the acquisition of upstream goods or services presupposes that the expenses incurred with their acquisition are part of the constituent elements of the price of downstream taxed operations with the right to deduction [...]. However, it is equally admitted that the taxable person has the right to deduction, even in the absence of a direct and immediate nexus between a given upstream operation and one or more downstream operations with the right to deduction, when the costs of the services in question are part of its general expenses and are, as such, constituent elements of the price of the goods it supplies or the services it provides. These costs have, in fact, a direct and immediate relationship with the totality of the economic activity of the taxable person". (emphasis added).

Furthermore, the CJEU further clarifies that "the deduction regime provided for in Article 17, no. 5 of the Sixth Directive is intended solely for cases where goods and services are used by a taxable person to carry out simultaneously economic operations with the right to deduction and economic operations without the right to deduction, that is, goods and services whose use is mixed" and that "by contrast, goods and services which are used by a taxable person solely to carry out economic operations with the right to deduction do not fall within the scope of Article 17, no. 5 of the Sixth Directive, being covered, as regards the deduction regime, by Article 17, no. 2 of this Directive" (emphasis and bold added).

Thus, and reporting to the concrete case of the Appellant, the understanding coherent with the above-cited case law is to consider that all upstream services acquired that reveal a direct and immediate nexus with downstream economic operations with the right to deduction confer on the taxable person in question the right, under Article 17, no. 2 of the Sixth Directive, to deduct the totality of the VAT that has burdened the upstream acquisition of goods or services that reveal a direct relationship with the operations. This right to deduction cannot be limited, according to the CJEU's understanding, as long as the above-stated prerequisites are met.

Added to the principles affirmed by the cited case law, another emerges that appears very relevant to the decision to be issued in the present file, according to which, to assess the existence of the "direct and immediate relationship" to which the CJEU refers, as a condition for the application of no. 2 of Article 17 of the Sixth Directive, arguments of "purely formal nature" should not be considered, which, in the expression used by the CJEU itself appears "manifestly illegal, since it does not integrate the prerequisites on which the Sixth Directive, the VAT Code and the Court itself make the exercise of the right to deduction dependent. In this same sense, making express application of the aforementioned CJEU case law, the Supreme Administrative Court (SAC) ruled in the Judgment of 30-10-2013 (2nd Section), in the scope of Case No. 01238/13, available at www.dgsi.pt.

Such jurisprudential understanding is corroborated in various CJEU Judgments, namely, the PARAT Judgment[3], from which it is extracted, also with interest for the decision to be issued in the present file, that "the principle of the right to VAT deduction is mitigated by the derogatory provision contained in the second paragraph of Article 17, no. 6 of the Sixth Directive. Under this provision, Member States are authorized to maintain their existing legislation, regarding the exclusion of the right to VAT deduction, on the date of entry into force of the aforementioned Directive, until such time as the Council determines the expenses that do not give rise to such right." In this same Judgment, the CJEU further states that, "Article 17, no. 6, second paragraph of the Sixth Directive contains a 'standstill' clause that provides for the maintenance of national exclusions of the right to VAT deduction that were applicable before the entry into force of the Sixth Directive by the Member State in question. This provision is intended to allow Member States, while awaiting the Council to establish the Community regime for exclusions of the right to VAT deduction, to maintain any rule of national law that excludes such right to deduction actually applied by its public authorities at the time of entry into force of the Sixth Directive." It further states, further on, that "taking into account that all derogatory provisions must be subject to strict interpretation, Article 17, no. 6, second paragraph of the Sixth Directive cannot be considered to authorize a Member State to maintain a restriction of the right to VAT deduction capable of applying generically to any expense related to the acquisition of goods, regardless of its nature or purpose." (Emphasis added).

Thus, it is to be concluded, in accordance with the aforementioned European case law followed by our Supreme Administrative Court, that Article 17, no. 2 of the Sixth Directive, relating to the harmonization of the laws of the Member States regarding taxes on turnover, confers on taxable persons rights which they may invoke before the national judge to oppose a national law incompatible with this provision. This very fact was expressly and clearly recognized by the CJEU.

Being so, it appears that, in the case that the exclusion from the deduction regime was not established in accordance with the provisions of the Sixth Directive, the national tax authorities cannot oppose to a taxable person a provision derogating from the principle of the right to value added tax deduction. And, citing once more the CJEU, in the understanding set out in the PARAT Judgment, "if the taxable person has been subjected to this measure, he must be able to recalculate the VAT debt incumbent upon him, in accordance with Article 17, no. 2 of the Sixth Directive, if the goods and services have been used for the needs inherent to taxed operations."

Having said this, taking as a reference the above considerations, the Community and national legal framework applicable, these must be applied in accordance, in the decision of the question under discussion in the present file. A joint and objective analysis of the applicable legal provisions and the aforementioned case law leads to the conclusion that: the restrictions on deduction recorded in Article 21 of the VAT Code shall have as their limit "a relationship of proportionality between the purpose pursued by a certain national rule and the restriction that this entails for the right of the individual". It is within this framework that the present case should be analyzed.

Thus, in the first place it must be taken into account that the right to deduction constitutes an integral part of the VAT mechanism, is a fundamental principle inherent to the common VAT system, is intended to guarantee the sought neutrality of the tax and, therefore, cannot, in principle, be limited. The fact that Portuguese legislation did not contain this limitation at the time the Sixth Directive came into force is justified by the nature of the previously existing tax (transaction tax and not VAT-type tax).

Thus, it was up to and is up to the national legislator to regulate internally the functioning of VAT, always with scrupulous respect for the applicable Community Directives. Portugal had and has this prerogative like other acceding Member States, in which it was also necessary to regulate the tax. Thus, the Claimant's argument according to which the limitations on the right to deduction contradict the "standstill" clause contained in the Sixth Directive does not hold.

The question that is truly important to assess is whether the limitations at issue in Article 21 of the CIVA, alleged by the Claimant, are or are not compatible with the Sixth Directive, in light of the above-stated principles and jurisprudential understanding.

Now, as follows from the aforementioned jurisprudential understanding, the existence of some limitations on the right to deduction does not constitute a violation of applicable Community regulations provided they are properly justified, with respect for the fundamental principles underlying the tax and within the limits imposed by the principle of proportionality. Such limitations cannot be indiscriminately applied in such a way as to constitute an effective obstacle to the legitimate right to tax deduction, when there is the necessary causal relationship between the expenses incurred and the performance of taxable operations by the taxable person.

In accordance with the principles governing the common VAT system, this tax is applied to all production or distribution transactions, with deduction of the VAT that directly charged the upstream operations. The right to deduction is immediately exercised for all taxes that charged the upstream operations. From this it follows that any limitation of the right to VAT deduction has repercussions on the level of the tax burden and should be applied similarly in all Member States. But in this matter, as we have seen, harmonization proves to be still incomplete due to the absence of a single regime for the exercise of the right to deduction, which is clearly presupposed in the text of the Sixth Directive, but which so far has only been partially implemented (as for example, is the case with the introduction of Commission Implementing Regulation (EU) no. 281/2011, of 15.03.2011), and limitations on the right to deduction remain within the discretion of the national legislator, yet within a framework of conformity and compliance with the principles imposed by the above-mentioned Directives.

Being so, it should still be noted that Article 17, no. 2 of the Sixth Directive enunciates, in express and precise terms, the principle of deduction by the taxable person of the amounts of VAT invoiced to it for the goods supplied to it or for the services provided to it, if such goods and services are used for the needs inherent to its taxed operations.[4]

Finally, having analyzed Article 21 of the CIVA, in the version in force at the time of the tax facts described in the file, it remains to assess whether it contains a general limitation of the right to VAT deduction, which would manifestly be contrary to the Directive, or whether it contains limitations on the deduction of the tax, contained within the limits imposed by Community regulation. On this point, for all the above-stated reasons, we are led to conclude that the rule in question is, in its letter and in its ratio legis, compatible with the Sixth Directive. Problems may arise, rather, from the interpretation carried out by the TA, in each concrete case, for its application. In fact, the Claimant itself configures this in such a way when it invokes, in Article 46 of its Request that "The Claimant considers that the TA structured the assessments on the basis of an interpretation and application of the aforementioned rules in a manner incompatible with the right to VAT deduction - which underlies the fundamental characteristic of neutrality of this tax."

It is this interpretation, which must be in accordance with the letter of the law but especially with its ratio legis and, fundamentally, in accordance with the provision of the Sixth Directive, that the questions under consideration will have to be decided.[5] Having analyzed Article 21 of the CIVA, it does not result from it the establishment of indiscriminate limitations applicable in general to any and all transactions with certain characteristics, which would surely make it incompatible with applicable Community law, but rather a set of limitations, which aim to prevent abusive deductions, foreign to the scope of the company or capable of benefiting persons or entities outside the same.[6] As is known, anti-abuse rules, which include Article 21 of the CIVA, aim above all to constitute an impediment to tax evasion, fraud, as well as aggressive tax planning or tax avoidance.[7]

In these terms, the rule of Article 21, if interpreted in accordance with the principles expressed in the Court of Justice's case law, does not appear to constitute a limitation of the right to deduction not authorized by Article 17, no. 2 of the Sixth Directive. On the other hand, the principle of the right to VAT deduction is mitigated by the derogatory provision contained in the second paragraph of Article 17, no. 6 of the Sixth Directive, under which, Member States are authorized to maintain their legislation, regarding the exclusion of the right to VAT deduction, at least until such time as the Council determines the expenses that do not give rise to such right[8].

Thus, the "standstill" clause to which the Claimant refers applies to Member States that possessed a VAT-type tax at the time the Sixth Directive came into force. For the others, as happened with Portugal, it should be understood that for the acceding Member State, which by virtue thereof was obliged to introduce into the internal legal order a new value added tax, it falls to it the competence to regulate the CIVA, in accordance with the applicable Directives on this matter, introducing and respecting the respective structuring principles.

In fact, regarding the right to VAT deduction, the case law of the SAC has come to understand that it is to be admitted the deductibility of costs that reveal a direct and immediate nexus with the totality of the economic activity of the taxable person. In a recent Judgment delivered by the SAC on 3/07/2013, it was considered that "the VAT Code results from the transposition into the internal legal order of various Community Directives concerning the harmonization of the laws of the Member States regarding taxes on turnover, and the interpretation of internal law in this domain should be convergent with the principles and rules postulated in the respective Community regulation. With respect to the right to deduction, the case law of the Court of Justice of the European Communities (CJEC) has been asserting that the 'right to deduction provided for in Articles 17 to 20 of the Sixth Directive is an integral part of the VAT mechanism and cannot in principle be limited. (…) For VAT to be deductible, upstream operations must have a direct and immediate relationship with downstream operations with the right to deduction. Thus, the right to deduct VAT charged on the acquisition of upstream goods or services presupposes that the expenses incurred with their acquisition have been part of the constituent elements of the price of downstream taxed operations with the right to deduction.'"

Regarding the analysis of the Court of Justice's case law, the SAC, in the above-cited judgment, makes express reference to the understanding established in the Kretztechnik Judgment.[9].

In summary, the CJEU case law has been admitting a right to deduction by the taxable person, even in the absence of a direct and immediate nexus between a given upstream operation and one or more downstream operations with the right to deduction, when the costs of the services in question are part of its general expenses and are, as such, a constituent element of the price of the goods it supplies or the services it provides. These costs have, in effect, a direct and immediate relationship with the totality of the economic activity of the taxable person.

Having as a basis the above-stated rules and case law, its application to the present case must be made, distinguishing between the two situations under consideration: the right to deduct the VAT supported in expenses on the events described in the file and the VAT supported with the acquisition of the "pick up" vehicles.

C) Regarding Expenses on Events:

At issue in the present file is the deductibility of VAT supported in the organization of events which, according to the Claimant, are inserted in actions of disclosure and promotion of the image and heritage of the Claimant – specifically the hydroelectric dams, intrinsically connected with the pursuit of its activity.

In fact, the organization of promotional concerts carried out by the A Group had a purpose, and it is not understood that it could have been other than to promote the company's image, to inform the target public of the projects to be implemented, their strategic importance, for market interest in general, as well as for the production policy and implementation in the market of A, SA itself. Thus, it is not seen how to consider such expenses unrelated to the activity exercised. On the contrary, the promotion of projects of relevance to the national energy market, their presentation to the public and to commercially interested entities in the sector, as well as to the general public, cannot be less relevant than publicity by any other means.

Advertising expenses have a direct relationship with the realization of the scope of the company (of any company), whereby, in light of the above-stated principles and the case law of the CJEU and the SAC, no plausible argument is seen for limiting the right to VAT deduction. The Claimant alleges that "the TA has resolved this error of the inspection services in favor of the taxpayer, as can be read in the decision of the hierarchical appeal filed by the parent company of the group (with the concordant order of the Deputy General Director for the VAT tax area, and now attached as annex as document no. 11)". However, what can be extracted from the decision dismissing the administrative appeal attached to the file is that the TA may have changed its position, which determined this shift and the understanding reflected in the dismissal of the administrative appeal.

As our SAC well recognizes in the judgment already mentioned above of 3/7/2013 (Case 1148/11), accepting the CJEU case law in the Kretztechnik and Inverstrand Judgments, "it has been admitted in favor of the taxable person, even in the absence of a direct and immediate nexus, between a given upstream operation and one or more downstream operations with the right to deduction, when the costs of the services in question are part of its general expenses and are, as such, constituent elements of the price of the goods it supplies or the services it provides."

The costs at issue in the present file have a direct and immediate relationship with the totality of the economic activity of the taxable person, being intended to promote the projects in question, their disclosure to the public and awareness of their strategic importance, whereby the exclusion of the right to VAT deduction appears illegal in light of the above-stated Community case law, as well as violates the provision of Article 21 of the CIVA itself.

Advertising, the concept of which the CJEU defined, "necessarily entails the dissemination of a message intended to inform consumers of the existence and qualities of a product or service, with the objective of increasing sales; although the dissemination of this message is usually done by means of words, writings and/or images, through the press, radio and/or television, it may also be performed by the use, partial or even exclusive, of other means". And, as the claimant alleges, the A Group today faces growing competition from other operators, reinforcing the need for investment in promotional initiatives, particularly those associated with the disclosure of its most significant hydroelectric projects.

But the TA alleges that the events organized by the Claimant were attended by persons external to the taxable person, namely government members and the general public, and were in fact directed at external agents to the A group, as such, the expenses incurred in the preparation of such events are classifiable under the aforementioned paragraph d) of no. 1 of Article 21 of the CIVA and, as such, are excluded from the right to deduction. Well, on this point it is worth recalling once again the need for interpretation in accordance with Community Directive and the aforementioned Community case law. It is further added that from the provision of Article 21, no. 2, paragraph d), it results that the exclusion of the right to deduction does not apply in the case of expenses mentioned in paragraphs c) and d) of number 1, when the same result from contracts concluded directly with the service provider or through entities legally authorized for that purpose and demonstrably contribute to the performance of taxable operations, whose tax is deductible in the proportion of 50%.

Thus, if it is certain that the rule of Article 21 of the CIVA excludes the right to deduction of certain expenses which, given their nature, allow presuming that these may be used to satisfy particular needs, the truth is that the legislator also admits that the goods or services identified in no. 1 may be intended for business or, in the expression of the Court of Justice, for professional purposes. Thus, the Portuguese legislator, understanding that the control of this type of expense could be difficult to achieve, chose to exclude the possibility of deducting VAT, attempting to prevent abuses or fraud. But recognizing that the same may be justified by the direct and immediate relationship with the company's activity, it admitted their deduction in the cases provided for in paragraph d) of no. 2.

It will be said that the legislative technique was not felicitous, but the meaning of the rule is perceptible and admits the deduction of the tax supported under the terms explicitly stated above.

It is a fundamental prerequisite of the right to VAT deduction that the goods services are directly related to the exercise of the taxpayer's activity (Article 20 of the CIVA), which entails the exclusion of the right to deduction of VAT contained in the expenses referred to in Article 21, no. 1, paragraph d) of the CIVA which are those expenses that do not have a strictly professional character, such as sumptuary, recreational or representational expenses, without any nexus with the company's activity.

Any other interpretation would constitute a violation of the principles contained in the Sixth Directive, and would be totally incoherent with the system of deductions itself inherent in the CIVA. Thus, in accordance with the provision of Article 19 of the CIVA, for the calculation of the tax due, taxpayers may deduct from the tax on the taxable transactions they have carried out the tax that has been charged on the goods or services acquired, imported or used by the taxpayer for the performance of the operations referred to in Article 20 of the same CIVA, being a prerequisite of the right to deduction that the goods and services are directly related to the exercise of its activity.

Thus, by reason of the provision of no. 1 of Article 21 of the CIVA, the situations expressly excluded from the right to deduction are exceptional and relate to specific cases stated by the national legislator in taxative terms, irrespective of their use. In fact, the fact is that the legislator provides for the possibility of deduction of the supported VAT at 50%, under paragraph d) of no. 2 of Article 21 of the CIVA, concerning the expenses mentioned in paragraphs c) and d), incurred for the direct needs of participants, relating to the organization of congresses, fairs, exhibitions, seminars, conferences and similar events, when they result from contracts concluded directly with the service provider or through entities legally authorized for that purpose and, demonstrably, contribute to the performance of taxable operations.

The Respondent further alleges that "(…) as extracted from Information no. 31 – ADP/2014, of the DGAT - UGC, which substantiates the dismissal order of the administrative appeal at issue, 'in fact we are faced with an irrebuttable presumption, absolute or "jure et jure", not admitting evidence to the contrary, as follows from the provision of no. 2 of Article 350 of the Civil Code. Once the prerequisites defined by the legislator are met, the right to VAT deduction is removed, in whole or in part (depending on the cases), without it being necessary to consider any other circumstances or facts'."

Now, the Respondent's argument is not accepted. As is correctly stated in the Arbitral Decision issued in the scope of Case No. 238/2013-T, of 4 April 2014, which dealt with the same subject matter, "the rules relating to the right to VAT deduction have the effect of removing the incidence of the tax, whereby they are reduced to rules of negative delimitation of incidence and the regime of said Article 73 of the General Tax Law should be applied." In this decision was at issue, as in the present file, the interpretation of Article 21 of the VAT Code, and the arbitral tribunal decided, and rightly so, by the existence of a rebuttable presumption, also in the context of the organization of events, deciding that:

"In the case at hand, being a notorious fact that the organization of concerts at dams, especially in the case of the concert that had television coverage, have the potential to disclose and promote the image of the Claimant, the presumption that justifies the removal of the deductibility of VAT should be considered rebutted, especially since it is not credible that a company of the size of the Claimant would hold events of this kind with a view to satisfying the particular interests of those who produce and those who attend the concerts.

For this reason, the presumption inherent in paragraph d) of no. 1 of Article 21 of the CIVA is to be considered rebutted, whereby the Claimant has the right to deduct the totality of the VAT relating to the expenses referred to, whereby the failure to recognize this right in relation to €28,458.42 is illegal due to violation of that rule, combined with Article 20, no. 1 of the CIVA, and Article 73 of the General Tax Law."

By all the above considerations and without need for further considerations, this Tribunal concludes that in the present file, taking into account the evidence produced and the nature of the events organized (concert "Alqueva II", inauguration of the Lares Combined Cycle Power Station and ceremony for the launching and start of construction of the Salamonde II Dam Project), with broad public disclosure and having as reference the disclosure and promotion of the hydroelectric projects carried out or to be carried out by the Claimant, it is concluded that the same have relevant interest and a direct and immediate relationship with the company's activity, being a notorious fact that the same were not organized to satisfy interests outside the scope of the company or to favor particular interests.

It is concluded, in light of all the above, that the TA, in the assessment it made of the situation at hand, considering excluded the right to VAT deduction supported with the organization of the events in question, incurred in error as to the factual and legal prerequisites for the application of Article 21 of the VAT Code, whereby the correction made by the TA with respect to deductible VAT in the amount of €26,236.95 is revealed to be illegal due to violation of law and, consequently, should be annulled.

D) Regarding the Deduction of VAT Relating to "Pick-Up" Type Vehicles

The controversial question consists in knowing whether the Claimant could have deducted the VAT supported with the acquisition of the four "pick-up" type vehicles, or whether, on the contrary, such right is denied by force of the provision of paragraph a) of no. 1 of Article 21 of the CIVA.

In the scope of the inspection procedure, which served as the basis for the substantiation of the corrections made and for the decision dismissing the administrative appeal, the Tax Inspection Services concluded that:

"The taxable person unduly deducted the totality of the VAT, relating to a set of expenses supported with the acquisition of light goods vehicles, whose tax amounts to €51,208.35.

Under paragraph a) of no. 1 of Article 21 of the CIVA is excluded from the right to deduction the VAT supported with expenses for the acquisition, manufacture or importation, hiring, use, conversion and repair of motor cars, pleasure boats, helicopters, aeroplanes, motorcycles, whenever the sale or exploitation of these goods does not constitute the object of the activity of the taxable person".

At issue is the acquisition from B of four vehicles, classified in the respective registration document as light goods vehicles, with five seats. For the decision of this question the provision of paragraph a) of Article 21, number 1 of the CIVA is relevant, which excludes from the right to deduction the tax contained in the following expenses:

"Expenses relating to the acquisition, manufacture or importation, hiring, use, conversion and repair of motor cars, pleasure boats, helicopters, aeroplanes, motor cycles and scooters. A motor car means any motor vehicle, including the trailer, which, by its type of construction and equipment, is not intended solely for the transport of goods or for use with an agricultural, commercial or industrial character or which, being of mixed use or for passenger transport, does not have more than nine seats, including the driver"

The prerequisite for exclusion follows from the wording of the law, which is the classification of the vehicles in question as motor cars. The TA alleges on this point that the legislator's intention was to confer the right to deduction only with respect to vehicles which, by their characteristics, had as their sole purpose that of being allocated to those activities and not to others. In the case of the vehicles at issue, given the number of seats they have (five), they are not intended solely for the transport of goods or for use with an agricultural, commercial or industrial character and, in the same way, because they do not have more than nine seats, they qualify, for VAT purposes, as motor cars. That is, according to the TA, in the legislator's understanding, the VAT relating to vehicles which, although classified in the respective registration document as being for goods, have more than three seats, is not deductible, for the reason that they are not intended solely for the transport of goods or for use with an agricultural, commercial or industrial character, as reflected in paragraph a) of no. 1 of the aforementioned Article 21 of the CIVA.

It is noted that the vehicles in question are classified in the respective registration document as goods vehicles, but as the Respondent alleges, the truth is that "the legislator, in the wording of the law uses the expression solely, whereby any goods vehicle with more than 2 seats (or 3 in the case of "van" type vehicles) does not assume an exclusive nature of goods transport, and may also transport people, like any light passenger vehicle."

This latest argument is unconvincing, because it will always be said that any motor vehicle, with only 2 or 3 seats can also be used for the transport of people (2 or 3) and, without a doubt, many of them are used for private purposes and unrelated to the professional activities of their corporate owners, a fact which the legislator will never be able to control no matter what restrictions it introduces in this matter, unless it excludes absolutely any possibility of deduction. The basis for the restrictions on the right to VAT deduction in the case of motor vehicles rests solely on the attempt to prevent deduction in those cases where there is the remote possibility that the vehicle could be used, also, for purposes unrelated to the company. That is, the rule intends to prohibit abuses using the goods for purposes unrelated and/or allowing undue tax planning.

As to the TA's argument when it invokes negligence on the part of the Claimant due to ignorance of the "doctrinal notes" and a circular memorandum of 2013 concerning the deduction of VAT only with respect to "3-seat" vehicles, the same cannot at all proceed. Naturally the taxpayer must obey the law and only the law, not falling within that category the "doctrinal notes" or even the circular memoranda, and it is certain that the TA invokes instructions issued in 2013, with the tax facts having occurred in 2010, whereby it was not at all required of the taxpayer to have knowledge of them.

The question must be decided in light of the legal devices in force at the time of the tax facts. The Claimant alleges that the VAT supported with such vehicles could always be deducted insofar as they have use with an agricultural, commercial or industrial character, under Article 21, no. 1, paragraph a), in fine, of the CIVA, given their allocation to the performance of the company's activity. Now, such argument does not proceed, because it is manifest that the vehicles do not have solely that possible utility. They are intended for the movement of engineers and technicians operating in site inspection teams, but may serve for other purposes unrelated to that activity.

Having said this, account must be taken of the facts established in the file, among which it was established that the "pick up" vehicles in question were intended, exclusively, for the inspection and supervision of work in the areas comprising the construction contracts for hydroelectric developments at Salamonde and Ribeiradio, and once these works were completed, the vehicles are re-allocated to others where necessary, given that the company always has works or undertakings in progress. It was also established that the choice for this type of vehicle takes into account the characteristics thereof, appropriate for winding routes, with mud and difficult accesses, in which a three-seat vehicle cannot circulate.

In addition to this is the fact that the vehicles were intended for use by the site inspection teams, normally made up of various technicians who regularly travel between the dams under construction, that is, they have as their purpose the transport of people.

Having said this, it is an incontrovertible fact that these are five-seat vehicles, which in light of the wording of the law are "motor cars, pleasure boats, helicopters, aeroplanes, motorcycles, whenever the sale or exploitation of these goods does not constitute the object of the activity of the taxable person".

Having said this, the question that still remains open is whether, in light of the wording of the law, and the clear intention of the legislator to restrict the possibility of deducting VAT supported with the acquisition of motor vehicles, we are not faced with a violation of Community regulations already abundantly explained. Said in another way, is the rule of Article 21 of the CIVA a rule manifestly and indiscriminately restrictive in the terms in which it regulates the limitation on the right to VAT deduction supported in the acquisition of motor vehicles?

The answer to this question will have to be assessed, once again, in light of the Sixth Directive and the Community case law on the question. It is important to assess whether the allocation of the vehicles to the performance of the company's economic activity is or is not relevant, as the Claimant contends, for removing the exclusion of the right to deduction provided for in Article 21 of the CIVA. Now, the confrontation of the provision of Article 21, 1, a) with that of no. 2, a) of the same Article allows us to conclude that in the case of the present file the right to exclusion does not cease, because the goods in question are not goods whose sale or exploitation constitutes the object of activity of the taxable person.

But, faced with this conclusion and taking into account the tax deduction regime provided for, with all the limitations above-stated, there must be assessed whether Article 21 does not violate the principles contained in the Sixth Directive. Once again, it is important to assess what the jurisprudential position has been followed in this matter by the CJEU.

Precisely on the question of the exclusion of the right to VAT deduction supported in the acquisition of motor vehicles, the CJEU pronounced itself in the RYSCOT Leasing Ltd Judgment, of 5 October 1999[10], in the following terms:

"1. Article 11, no. 4 of the Second Directive 67/228 concerning the harmonization of the laws of Member States regarding taxes on turnover authorized Member States to introduce or maintain and Article 17, no. 6 of the Sixth Directive 77/388 authorizes these to maintain general exclusions from the right to deduction of value added tax paid on the purchase of motor vehicles used by the taxable person for the needs of its taxable operations, even if these vehicles are an indispensable instrument for the exercise of the activity exercised by the taxable person in question or if these vehicles cannot, in a concrete case, be used for private purposes by the respective taxable person. (emphasis added)

1. Article 17, no. 6 of the Sixth Directive 77/388 concerning the harmonization of the laws of Member States regarding taxes on turnover, which provides that, at the latest before the expiration of a period of four years from the date of entry into force of the Directive, the Council shall determine which expenses do not give the right to deduction of value added tax and that, until the entry into force of the provisions for this purpose, Member States may maintain all the exclusions provided for in their respective national legislation at the time of entry into force of this Directive, must be interpreted in the sense that Member States may maintain the exclusions from the right to deduction of value added tax, notwithstanding the Council has not determined, before the expiration of the period referred to, the expenses that do not give the right to deduction of value added tax. (…)"

In light of the aforementioned case law, the exclusions from the right to VAT deduction supported in the acquisitions of automobiles appear acceptable in light of the principles imposed by the Sixth Directive, and the rule of Article 21 of the CIVA does not appear more restrictive than the prerequisites enunciated by the CJEU itself. A country like Portugal, which newly introduced value added tax, has the prerogative to regulate it within the limits of conformity to European legislation, that is, respecting the prerequisites stated in the Sixth Directive. It happens that, as we have seen, the case law set forth in the RYSCOT Ltd case makes it clear that a broad limitation of the right to VAT deduction in these circumstances is possible.

As to the position of the Community legislator, it is clear that to date it has been complaisant with the restrictions existing in the legislation of Member States, which explains the inaction in fulfilling a basic postulate of harmonization of legislation, namely, the introduction of a unified regulation in the European space on these matters, as is in fact contemplated in the Directive itself.

The intention to combat abuse was stronger than the justifiable needs of companies or even the sought fiscal neutrality of the tax.

Finally, also the case law of our courts has pronounced itself on this question, highlighting the Judgment of the Central Administrative Court of the South, delivered on 10 July 2014, issued in the scope of Case No. 07558/14, facing a situation identical to that of the file, having issued the following decision:

"As results from the evidence (cf. no. 4 of the established facts), the vehicle in question is identified in the respective registration document as a light vehicle, goods type.

However, the rule in question (Article 21, no. 1, paragraph a) of the C.I.V.A.), "a contrario sensu", only excludes from the field of motor cars the motor vehicles which, by their type of construction and equipment, are intended solely for the transport of goods or for use with an agricultural, commercial or industrial character (...)

Not depending, in this measure, the qualification of the vehicle as a motor car, and, consequently, the right to deduction of the I.V.A. supported with its acquisition, on the verification of the purpose or use that is, concretely, given to the same - contrary to what follows from the allegation of the appellant - given that the rule under consideration, differently from what occurs with that provided for in Articles 19 and 20 of the C.I.V.A., abstracts from such use, rather making relevant the type of construction and equipment of the vehicle, for reasons of prevention that are the reason for its provision. What is at issue is the possibility or not of giving the vehicle a destination different from that referred to in the rule [...]

In fact, the Public Treasury has reason when it affirms that the number of seats of the vehicle - five seats - is indeed revelatory that the vehicle is not intended solely for those mentioned uses.

It is admitted that for the exercise of the activity of the appellant is necessary the vehicle in question. However, beyond not seeing reasons to conclude that for the exercise of the activity thereof is necessary a vehicle with 5 seats, the fact is that, with this specificity, the vehicle may not only be intended for the functions arising from its activity, but is also susceptible to be used in satisfying other purposes, of a private nature, specifically the transport of passengers (...)"

With respect to the case of the present file, in light of all that is stated above, it is concluded that taking into account the fact that the vehicles in question have five seats, it is not possible, in light of the content expressed in the rule of Article 21 of the CIVA, to conclude that these are intended solely for use with an agricultural, commercial or industrial character. Even if it is considered demonstrated that the vehicles were allocated to the construction works of the dams, the truth is that they are susceptible to satisfy other interests, namely, the transport of passengers. In this particular respect, taking into account the wording of the law and the case law of the CJEU, it is not sufficient to demonstrate that the vehicles are allocated to the company's activity, it is necessary that they meet the other legal prerequisites contained in the limiting rule, which is not the case in the present file.

It is further added that, from paragraph a) of no. 2 of Article 21 of the CIVA, it results that the exclusion from the right to deduction will not be verified, when the expenses referred to in paragraph a) of no. 1 of the same legal provision "relate to goods whose sale or exploitation constitutes the object of the activity of the taxable person". However, the situation of the present Claimant does not fall within this legal provision, whereby the application of the rule excluding the deduction of VAT is maintained. To admit the deductibility of VAT, in the case of the acquisition of motor vehicles, it does not appear sufficient that the goods be used for the performance of the company's activity, that is, for the performance of taxable operations.

Now, taking into account the corporate purpose of the Claimant, it does not have as its activity the sale or exploitation of vehicles and does not meet any of the legal prerequisites that would allow it the deduction of the tax, in the terms already stated above, taking into account the typology of the vehicles in question. The restrictions in this matter appear acceptable in light of the Community Directive and in accordance with the case law of the CJEU.

As far as this question is concerned, the TA in deciding as it did made the correct application of the law in force, whereby the additional VAT assessments resulting from the corrections made by the TIS and confirmed by the dismissal of the administrative appeal appear legal.

And being so, even if such vehicles are used and indispensable for the pursuit of the activity developed by the taxable person, the national legislator understood to permit the right to deduction only in the terms referred to, that is, if that party has as its activity their sale or exploitation. The exclusion of the right to deduction in the case at hand in the present file appears in conformity with the law. For its part, this legal rule, in light of the case law of the CJEU set out in the RYSCOT Ltd Judgment, above mentioned, appears consistent with the principles established in the European Directive.

Thus, it is not seen that the Claimant's contention regarding the deductibility of VAT supported in the acquisitions of the vehicles under discussion in the present file can proceed.

As has been said repeatedly, the rule of Article 21 of the CIVA assumes the nature of an anti-abuse rule, and to this extent, the fiscal policy of combating abusive practices is shared by European authorities and is reflected in the jurisprudential understanding that is set out above, from which results a CJEU case law more restrictive of the possibility of exclusion of the right to deduction in cases of the type we dealt with first (that is, promotional activities, advertising and the like) and much more permissive of such limitations in the concrete case of the regulation of the right to VAT deduction supported by the acquisition of motor vehicles. This understanding can generate controversial situations, as the one presented to us in the present file, but it is what results from the law legislated at the internal level based on the understanding of European bodies as to the application of the principles contained in the Sixth Directive.

In that measure, no grounds are seen for annulling the liquidations in question in the present arbitral decision.

V – DECISION

Based on all the above findings of fact and law, this Tribunal decides:

1. The additional VAT assessments and corresponding compensatory interest assessments relating to the deduction of VAT supported with the organization of promotional events and concerts, in the amount of €26,236.95, together with the corresponding compensatory interest, are to be ANNULLED as illegal due to violation of the law.

2. The additional VAT assessments and corresponding compensatory interest assessments relating to the acquisition of four "pick-up" type light goods vehicles, in the amount of €22,865.48, together with the corresponding compensatory interest, are CONFIRMED as legal.

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