IABA Tax on Alcohol Losses: Arbitral Decision on Warehouse Storage and Filtering Losses (646/2015-T)

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Maria Cristina Aragão Seia and António Manuel Melo Gonçalves, appointed by the Deontological Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal, hereby agree:

I – REPORT

On 22 October 2015, A…, LDA., legal person no.…, with registered office in…, in the municipality of Tondela, filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the act of assessment of Tax on Alcohol and Alcoholic Beverages and respective compensatory interest, which is the subject of the assessment registration no.…, with deadline for voluntary payment until 17 September 2014, in the amount of €199,369.13.

To support its request, the Claimant alleges, in summary, that:

i. the witnesses called in the course of the gracious claim procedure and in the course of the tax inspection procedure were not heard;

ii. as regards the shortfalls in semi-sweet wine found in the bonded warehouse of B…, there would have been an oversight of the official who had accompanied the physical inspection, and the existence of a tank containing approximately 30,000 litres of semi-sweet wine had not been indicated to the officials of the Northern Operational Division; the detected losses should be entirely accepted under the provisions of the first part of article 48, no. 2 of the CIEC, combined with no. 1 of article 41 of the same Code, in view of the circumstances of the specific case;

iii. with regard to the spirit kept in storage in amphorae 22 and 23 and in flask 163 of the bonded warehouse of E…, and which, after unsealing of the container, had to be subjected to several filtration operations, there occurred a loss in production of 10% of the product, which, although much higher than that resulting from the yield rate for filtration operations approved for this warehouse, could not be subject to taxation, since the said spirit had been in storage for approximately 10 years and the filtration had followed various processes from those normally used, being extraordinary circumstances and abnormal losses.

On 26-10-2015, the request for constitution of the arbitral tribunal was accepted and automatically notified to AT.

The Claimant did not proceed to appoint an arbitrator, wherefore, pursuant to the provisions of article 6, no. 2, subparagraph a) and article 11, no. 1, subparagraph a) of the RJAT, the Chairman of the Deontological Council of CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the assignment within the applicable period.

On 16-12-2015, the parties were notified of these appointments and did not manifest any intention to refuse any of them.

In accordance with the provisions of article 11, no. 1, subparagraph c) of the RJAT, the collective Arbitral Tribunal was constituted on 04-01-2016.

On 04-02-2015, the Respondent, duly notified for this purpose, submitted its response defending itself solely by way of objection.

On 02-03-2015, the meeting referred to in article 18 of the RJAT took place, where the witnesses presented by the Claimant were heard on the spot and oral submissions were made by the parties, pronouncing themselves on the evidence produced and reiterating and developing their respective legal positions.

A period of 30 days was fixed for the pronouncement of the final decision.

The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with articles 2, no. 1, subparagraph a), 5 and 6, no. 1, of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, in accordance with articles 4 and 10 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

The proceedings do not suffer from nullities.

Thus, there is no obstacle to the examination of the merits of the case.

All things considered, it is necessary to pronounce

II. DECISION

A. MATTERS OF FACT

A.1. Facts Established as Proved

1. On 26-10-2014, the Northern Operational Division (DON) of the Directorate of Anti-Fraud Customs Services initiated an Inspection Action (Administrative Procedure no. C: …-14; Authorization No.; 14…), against the Claimant, with the scope of controlling the transactions of products subject to Tax on Alcohol and Alcoholic Beverages (IABA) in the periods from 2011 to 2014.

2. The Claimant was an authorized depositary and holder of several bonded warehouses:

a. Bonded warehouse PT…, in B…, Tondela;

b. Bonded warehouse PT…, in C…, Gafanha da Nazaré;

c. Bonded warehouse PT…, in D…, Bombarral;

d. Bonded warehouse PT…, in E…;

e. Bonded warehouse PT…, F…, Bombarral.

1. Physical inspections were carried out in the course of the said inspection action in these several bonded warehouses as well as the respective inventory accounting was analyzed.

2. Records of the physical inspections were drawn up for all physical inspections carried out in the bonded warehouses in question, all signed by customs officials and a company representative:

a. Physical inspections of the Bombarral bonded warehouses, carried out on 28/02/2014, and the respective records signed by G…, in the capacity of warehouse employee;

b. Physical inspection of the bonded warehouse in B…, carried out on 28/02/2014, accompanied and the respective record signed by H…, in the capacity of administrator;

c. Physical inspection of the bonded warehouse in Gafanha da Nazaré, carried out on 28/02/2014, accompanied and the respective record signed by H... in the capacity of administrator;

d. Physical inspection of the bonded warehouse of E…, carried out on 26/02/2014, accompanied and the respective record signed by I…, in the capacity of warehouse manager.

1. The results established were as follows:

a. Bonded warehouse PT…, in B…, Tondela, the quantity of products in the bonded warehouse was established as:

i. Still wine: 4,475.00 litres;

ii. Semi-sweet wine: 21,000 litres;

iii. Spirit: there was in the bonded warehouse a sealed vessel (B27) with indication of containing spirit, and a seizure record of that product was presented, drawn up by the GNR - Fiscal Group of … of the Fiscal Brigade.

From the comparison between the accounting records (current account balances) and the physical count, the following differences were established:

i. Still wine: at the date of the physical inspection, there were in the bonded warehouse 2,667.659 litres less than the quantities recorded in the inventory accounting;

ii. Semi-sweet wine: the quantity in the bonded warehouse was lower than that recorded in the respective current account by 9,834 litres.

From the analysis of the current accounts in this bonded warehouse of B… relating to products subject to IABA at positive rate, inconsistencies were also detected, which are relevant for the present proceedings, and relating to semi-sweet wine (intermediate product), the current account balance having been corrected based on a physical inspection previously carried out by the Customs House of … on 19/05/2011.

After this correction, the balance as shown by the inventory accounting of semi-sweet wine in this bonded warehouse of B… became 50,356 litres.

Whereas, in the physical inspection carried out on 26/02/2014, inventory in the bonded warehouse of only 21,000 litres was established in tank B26, there being a difference of 29,356 litres, a value higher than the limit provided for non-taxable losses in storage, arising from article 48, no. 1, subparagraph a) of the CIEC (1.5%).

b. Bonded warehouse PT…, in C…, Gafanha da Nazaré:

i. still wine: there were in the bonded warehouse 719,199 litres less than the value recorded in the inventory accounting.

c. Bonded warehouse PT…, in D…, Bombarral:

i. The merchandise containers were sealed: sealing records issued by the Fiscal Action Detachment of … of the GNR and ASAE (Authority for Economic and Food Safety).

ii. Only one unsealed container existed, containing 7,500 litres of white wine.

d. Bonded warehouse PT…, in E…:

i. Still wine in bonded warehouse: 1,102.098 litres:

ii. Wine spirit: stainless steel tank sealed by IVOP (Tank no. 4), whose "Record of Sealing and Unsealing in operations accompanying the Departure of Certified Wine Spirit" indicated that it contained approximately 144,594 litres of wine spirit.

From the comparison of the quantities established in the physical inspection with the inventory accounting of the bonded warehouse, the following differences resulted:

1. Still wine: there were in the bonded warehouse 236,481 litres less than the value recorded in the accounting;

2. Wine spirit: the quantity appearing in the IVDP unsealing record was lower than that recorded in the respective current account by 7,201 litres.

The yield rate for wine spirit filtration operations in that bonded warehouse, approved in accordance with article 26 of the CIEC, was 98% in 2011 and 2012, having increased to 98.5% in 2013.

From the analysis of the wine spirit current accounts in this bonded warehouse of E…, it was verified during the inspection procedure that in August 2011 the herein Claimant had proceeded to open 3 containers that had been sealed since July 2007 and the transfer/filtration of the product contained in them: Amphorae 22 and 23 (stainless steel containers) and flask 153 (cement container with storage capacity exceeding 2,000hl).

Upon opening the sealed containers, in 2011, the company recorded in its inventory accounting product losses corresponding to 7.2% of the total stored in the 3 containers (total loss of 11,192.18 litres) and corrected the alcoholic strength of the spirit (reduction of alcoholic content). The loss was higher than provided for in article 48 of the CIEC, which limited losses in storage to 1.5% for non-bottled alcoholic beverages.

Four days after opening the containers, the Claimant proceeded to transfer and filter the product stored in the 3 containers to flask …, having recorded losses, as regards the product that was in flask 153, of 10%, when the yield rate approved for filtration operations in the bonded warehouse (article 26 of the CIEC) was 98%, that is, allowing non-taxable losses of only 2%.

With regard to these situations, AT established a debt of IABA of €161,914.71.

e. Bonded warehouse PT… - F…, Bombarral:

i. Empty containers: merchandise had been transferred to the Bombarral bonded warehouse, such transfer having been accompanied by the GNR and ASAE, as it was merchandise seized by those entities;

ii. The EDA documents (Accompanying Documents) issued for circulation between bonded warehouses were reconciled with the records of those entities.

1. Notified for prior hearing in the course of the inspection procedure, the herein Claimant submitted the request appearing on pages 42 et seq. of the administrative file relating to that procedure, having invoked, essentially, the same circumstances of fact that it invokes in the present arbitral action, and, with that same request, attached documents and indicated 3 witnesses.

2. The said witnesses, who were not heard, were intended to prove that there was no shortage of semi-sweet wine at the time of the physical inspection of 26/02/2014, in the bonded warehouse of B….

3. In the assessment of the exercise of prior hearing by the Claimant, it appears, among other things, that:

"All the merchandise presented by the said officials was quantified, appearing in the record of physical inspection drawn up on the same day.

In establishing the differences between the balances of the inventory accounting and the quantities quantified, only the quantities presented by the company at the time of drawing up the physical inspection can be considered, as otherwise, the possibility of the Tax and Customs Authority validating the correct quantity and nature of the products in question would not be assured".

1. Based on the conclusions of the inspection procedure, the Customs House of … proceeded to assess the IABA (Process CF/CP/…/2014; Assessment registration no.... of 29/08/2014), in the total amount of €199,369.13.

2. On 2 September 2014, the Claimant was notified to pay the amount of €199,369.13, relating to the aforesaid assessment, with deadline for voluntary payment until 17 September 2014.

3. Dissatisfied, the Claimant filed a gracious claim against the assessment act, which would be dismissed by order of 15/07/2015 by the Director of Services for Special Consumption Taxes and Tax on Vehicles.

4. In the gracious claim, the Claimant again called witnesses, intended to prove that there was no shortage of semi-sweet wine at the time of the physical inspection of 26/02/2014, in the bonded warehouse of B…, who were not heard.

5. On this point, the following can be read in the decision on the gracious claim:

"On this point, the inspectors responsible for the action pronounced themselves to the effect that a physical inspection record cannot be amended, six months later, on the basis of testimony.

Still on this point, it should be noted that the conclusions set forth in the final report are based on elements collected on the ground during the carrying out of the action, in the specific case, on the inventory collected in the physical inspection, and the signature of the physical inspection record by those who participated in it binds all of them.

Thus, the alleged error in the accounting of semi-sweet wine is refuted.

The allegation of violation of article 58 of the LGT is refuted, as unfounded, because as has been demonstrated above, testimonial evidence is not admissible, neither in the inspection procedure nor in the context of a gracious claim."

1. On 29 March 2001, and by virtue of a precautionary measure ordered by the court in process …/01…TABBR of the Judicial Court of Bombarral, amphorae 5 and 11 of the bonded warehouse of E… of the Claimant were seized and sealed, containing wine spirit, each with «±44,040 litres».

2. Similarly, on 27 March 2001, the … Nucleus of the Wine-growing Inspection Division proceeded to seal and collect samples from all containers existing in the facilities of the Bombarral bonded warehouse of the Claimant, including container no.…, containing wine spirit in a total of 113,675 litres.

3. The spirit sealed and stored in the aforementioned amphorae 5 and 11 of the bonded warehouse of E… was subsequently transferred to amphorae 22 and 23 of the same bonded warehouse, on 24 August 2006, pursuant to a request by the herein Claimant, this transfer procedure having been authorized by the Court and accompanied by ASAE.

4. For different reasons, the herein Claimant requested, on 31 August 2006, the transfer of the spirit sealed and stored in container no. … of Bombarral to flask no. … of the bonded warehouse of E….

5. A transfer that was authorized by the Court and carried out on 26 April 2007, with ASAE supervision.

6. During these two transfer operations, ASAE did not carry out physical measurement of the spirit in question.

7. Taking advantage of the transfer operation, the herein Claimant requested, at that time, that samples of the seized spirit be extracted for analysis by the Institute … ("…"), to ascertain whether, six years after the seizure and sealing of this spirit stored in, now, amphorae 22 and 23 of E… and, now, in flask no. … also of the bonded warehouse of E…, the same still met the conditions for its addition to Port wine.

8. Sample collection that was carried out on 7 May 2007 and that was the subject of the competent organoleptic analysis carried out by….

9. During the sample collection by the …, this Institute did not carry out any physical measurement of the spirit in question, having merely transcribed, in the sealing and sample collection record, the quantities that were recorded in the inventory accounting of the bonded warehouse of E… relating to the amphorae and flask here in question.

10. The spirit stored in amphorae 22 and 23 and in flask … of the bonded warehouse of E… remained sealed and seized by court order until the year 2011, when its judicial release occurred and it was delivered to the Claimant.

11. At the time of seizure there were, approximately:

a. Amphora 5: +/- 44,020 litres;

b. Amphora 11: +/- 44,020 litres;

c. Flask 226: 113,675 litres.

1. By force of the transfer operations already mentioned and accompanied by the competent authorities, the following initial values were recorded in the inventory accounting of A…:

a. Amphora 22: 44,200 litres, with a strength of 76.62 %vol;

b. Amphora 23: 44,200 litres, with a strength of 76.83 %vol;

c. Flask 153: 115,034 litres, with a strength of 76.54%vol.

1. The measurement of large quantities of spirit or wine that are in containers of large dimensions (flasks are approximately six metres high and have a diameter that can exceed 4 metres) and/or with irregular shape (such as amphorae), is a task always associated with some margin of error, unless the measurement is carried out by means of a flow meter - which, relating to products that are already in storage and remain so, is not possible to do.

2. A measurement made using the scale of the containers on a warm day or period is different from the measurement made on a colder day or period.

3. With regard to flask…, instead of the quantity indicated by the company representative at the time of seizure regarding the quantity that, at that moment, was stored in the then flask … of Bombarral (113,675 l.), the value appearing in the DAA's of the transport of that wine from flask … of Bombarral to flask … of E… (115,034 l.) was considered, a value that was recorded by the Claimant in the current account of flask … of E….

4. In the case of the amphorae, despite the seizure record mentioning +/- 44,020l in each one, the value that ended up being recorded in the inventory accounting at the time of transfer of amphorae 5 and 11 to amphorae 22 and 23 was considered.

5. Under normal conditions, no Port wine spirit is kept stagnant and motionless for a period of time exceeding one year.

6. Over 10 years, a spirit with a high alcoholic content, in addition to the transformation process, suffers losses inherent to its own nature, through evaporation.

7. Containers for storing large quantities of alcohol or alcoholic beverages must, necessarily, have a vent, lest they burst when exposed to the inevitable variations in temperature.

8. The normal evaporation process that occurs in the type of product in question, when kept in storage for a period of time that is intended to be limited and short, is necessarily more pronounced when such storage is prolonged for a period of 10 years.

9. The smaller the quantity of liquid contained in a container, the more quickly it will heat and, consequently, the greater the evaporation that occurs there.

10. The distillation process is carried out through the use of heat.

11. The yield rate presented by the Claimant in the bonded warehouse of E… for filtration operations, which is approved in accordance with legal terms (98%, that is, losses of 2%), was assessed taking into account the real normal conditions of production.

12. The spirit contained in flask … was considerably altered in its organoleptic characteristics at the time of unsealing.

13. In order to make this spirit suitable for the purpose for which it was intended - wine spirit for Port wine -, it was necessary to carry out a more intensive treatment than that which, under normal conditions, is habitually carried out on spirit.

14. In addition to other treatments (with enological deodorizing charcoal or food-grade ion exchange resins), the Claimant had to carry out, in the specific case, a total of four filtrations in the production process of this wine spirit and even to use plate filters, which cause greater product losses.

15. The long period of time during which this spirit was stagnant in a cement flask with epoxy resin coating caused the spirit to acquire properties of that container in which it was stored.

16. The temperature, oxygenation and other factors to which it was exposed during those 10 years caused its characteristics to be altered over time.

17. The same occurred with the spirit retained in amphorae 22 and 23, although there, given the characteristics that the spirit presented and the lesser contamination of those specific containers, the Claimant did not need to carry out the four mentioned filtrations.

18. The analyses carried out in the year 2007 by …, concluded, in that year, by the rejection of the spirit contained in flask…, whereas the spirit retained in amphorae 22 and 23 was approved.

A.2. Facts Established as Not Proved

1. There was no shortage of semi-sweet wine at the time of the physical inspection of 26/02/2014, in the bonded warehouse of B….

2. The Inspection services only saw approximately 21,000 l. of semi-sweet wine on that date, because the official in charge of overseeing the inspection was unaware that, by express indication of the manager of the Claimant, approximately 30,000 litres of semi-sweet wine had been stored in a tank, as it was, in principle, to be transferred to the warehouse of E….

3. The amount exceeding the 21,000 l. referred to never left the warehouse of B…, where it still remains today.

4. Only by mere oversight of the Claimant, which had not informed the official in charge of overseeing the inspection of the transfer of semi-sweet wine from one tank to a tank, a tank of approximately 30,000 litres of semi-sweet wine that was in the facilities was not displayed.

5. At the time of unsealing of Amphorae 22 and 23, and flask…, ten years after seizure, the quantities of spirit contained in the aforementioned vessels were as follows:

a. Amphora 22: 39,780 litres, with a strength of 74.40 % vol;

b. Amphora 23: 39,780 litres, with an average strength of 74.77 % vol;

c. Flask 153: 113,884 litres, with a strength of 75.10% vol.

1. The amphorae, smaller containers which contained approximately 44,200 litres, registered losses through evaporation higher than the losses through evaporation of the flask, which contained approximately 115,034 litres, with a reduction in the degree of alcohol of 2.22º in amphora 22, 2.53º in amphora 23 and 1.44º in flask….

2. The fact that this reduction in the degree of alcohol of the spirit occurred reinforces and proves that evaporation occurred in the specific case, in significant amounts.

3. The storage loss verified at the time of unsealing in the year 2011 is inherent to the nature of the product in question (wine spirit at 76º).

4. The losses verified during the process of obtaining the finished product from the spirit contained in the amphorae and flask referred to - in the amount of 11,388 litres - are justified in view of that abnormal alteration of characteristics.

A.3. Reasoning on the Matters of Fact Proved and Not Proved

With regard to the matters of fact, the Tribunal does not have to pronounce on everything that was alleged by the parties, it being its duty, instead, to select the facts that matter for the decision and to distinguish the proved facts from the unproved ones (see article 123, no. 2, of the CPPT and article 607, no. 3 of the CPC, applicable pursuant to article 29, no. 1, subparagraphs a) and e), of the RJAT).

In this way, the facts relevant to the judgment of the case are chosen and determined according to their legal relevance, which is established with attention to the various plausible solutions of the question(s) of Law (see previous article 511, no. 1, of the CPC, corresponding to the current article 596, applicable pursuant to article 29, no. 1, subparagraph e), of the RJAT).

Thus, taking into account the positions assumed by the parties, in light of article 110/7 of the CPPT, the documentary evidence and the administrative file joined to the proceedings, as well as the testimonial evidence produced, the facts listed above were considered proved, with relevance for the decision.

In particular, the facts established as proved in points 26 to 42 result from the testimony of the witnesses presented by the Claimant, and correspond to facts not subject to procedural or procedural controversy, some of them being a consequence of notorious facts or common knowledge.

The facts established as not proved derive from the absence or insufficiency of evidence regarding them.

Effectively, with regard to points 1 to 4, the Tribunal was not, minimally, convinced of their occurrence. The circumstances described by the witnesses themselves, according to which the partner-manager of the Claimant, H…, who received and closed, signing the respective record, the physical inspection carried out in E…, and who, according to those, controlled everything that happened there and had been the one who would have determined the alleged storage in the tank of the missing product, are not coherent with the non-indication – immediately, of the existence of the missing product, nor, much less, with the communication of the occurrence to the Customs House, in the following days, the witnesses heard not having been attempted any explanation for such incoherencies.

As for the quantification of the extraordinary losses verified in the bonded warehouse of B…, with the witnesses credibly corroborating what was alleged by the Claimant as to the verification of abnormal circumstances, justifying the occurrence of losses higher than normal, none of them testified in sufficiently concrete terms so that, doing so with the necessary credibility, it would be possible to establish as proved that, in fact, the losses resulting from those extraordinary circumstances were, effectively, those corresponding to the missing quantities, it being certain that no further evidence was presented in that regard and that the Claimant's internal records, unaccompanied by any element of external order that would confirm them with the necessary precision, or, at least, by contemporaneous communications to entities with competence for supervision, are deemed insufficient for the evidentiary purposes intended.

B. ON THE LAW

In the present proceedings, the Claimant directs its disagreement with regard to the conduct of AT, relating to two types of situations, namely:

• the part of the assessment relating to shortfalls in the physical inspection of semi-sweet wine in the bonded warehouse of B…; and

• the part of the assessment relating to taxable losses in the spirit of the bonded warehouse of E….

Let us examine each of them.

i.

The first of the aforesaid questions that arise to be decided in the proceedings, following the order presented by the Claimant, concerns the procedural defect argued, arising from the failure to hear the witnesses presented by the Claimant during the inspection procedure and the gracious claim procedure.

The Claimant thus alleges that "AT did not justify, minimally, the failure to carry out the hearing of the witnesses requested by A…, upon the exercise of its right of prior hearing, which clearly violates the provisions of articles 58, 60 and 77 of the LGT.".

The Claimant further alleges, in this regard, that "AT should have heard the witnesses presented, whereby it incurred in an instructional deficit and did not fulfill the duty of carrying out all necessary steps to discover the truth, thereby violating the provisions of articles 50 and 69, subparagraph e), of the CPPT, and 58 of the LGT.", as well as article 6 of the Complementary Regime of the Tax and Customs Inspection Procedure (RCPIT).

Before anything else, and as regards the assessment of this matter, it is necessary to bear in mind that we are in the field of ascertaining the occurrence of defects of a formal nature. Thus, in assessing their verification, the correctness or lack thereof of the positions taken on the substantive questions that arise in the situation sub iudice will not be relevant. That is, for example, in assessing compliance with the duty of reasoning, it will not matter whether the position of AT is correct or not, but solely whether the same is transmitted in a coherent and comprehensible manner, contemporaneously with the externalization of the tax act. Also, in the case of the need to weigh the right of participation of taxpayers in the procedure, it is not necessary to assess whether such weighing is correct or incorrect, but solely whether it was actually carried out.

Given this, it is certain that, both in the exercise of its right of prior hearing with regard to the assessment, and during the gracious claim, the Claimant indicated testimonial evidence, in order to demonstrate, in summary, that – as it also alleges in the arbitral proceedings - "There was no shortage of semi-sweet wine at the time of the physical inspection of 26/02/2014, in the bonded warehouse of B….".

When assessing the exercise of the Claimant's right of prior hearing, AT wrote as follows:

"All the merchandise presented by the said officials was quantified, appearing in the record of physical inspection drawn up on the same day.

In establishing the differences between the balances of the inventory accounting and the quantities quantified, only the quantities presented by the company at the time of drawing up the physical inspection can be considered, as otherwise, the possibility of the Tax and Customs Authority validating the correct quantity and nature of the products in question would not be assured".

In the decision on the gracious claim, it reads that:

"On this point, the inspectors responsible for the action pronounced themselves to the effect that a physical inspection record cannot be amended, six months later, on the basis of testimony.

Still on this point, it should be noted that the conclusions set forth in the final report are based on elements collected on the ground during the carrying out of the action, in the specific case, on the inventory collected in the physical inspection, and the signature of the physical inspection record by those who participated in it binds all of them.

Thus, the alleged error in the accounting of semi-sweet wine is refuted.

The allegation of violation of article 58 of the LGT is refuted, as unfounded, because as has been demonstrated above, testimonial evidence is not admissible, neither in the inspection procedure nor in the context of a gracious claim."

As can be seen, it follows in a comprehensible manner from the statement of AT regarding the exercise of the Claimant's right of prior hearing, that this one analyzed and appreciated the statement of that one and that it took a position – correct or incorrect, as mentioned, this does not matter in this context – based on such statement.

Thus, rightly or wrongly, AT understood that the verification, by means of the physical inspection, of the quantities of semi-sweet wine, was incapable of being called into question by means of testimonial evidence, an understanding that was maintained when deciding on the gracious claim.

In this light, it is clear, from the outset, that AT's refusal to proceed to the production of the testimonial evidence called for does not constitute any manifestation of arbitrariness, on one hand, nor was it unfounded, being even in accordance with the existing case law[1]. Rather, it is perceptible to an average recipient that AT did not proceed to the production of the evidence requested because it understood that the same would constitute a useless act, insofar as, even if such evidence led to the result sought by the Claimant, the content of the act to be taken would be the same, insofar as the said AT considered (it does not matter, for these purposes, whether rightly or wrongly), that the result of the physical inspection was incapable of being called into question by means of subsequent testimonial evidence.

Thus, there will be no violation of the inquisitorial principle, since, obviously and for reasons not only of practicability but, above all, of proportionality, this requires that AT proceed to carry out the necessary steps to ascertain the truth of the facts which, in the perspective of the decision being formed, are relevant to the same or are, in some way, susceptible to altering it. Now, being, in the perspective of the act taken (and, remember, it does not matter here, whether rightly or wrongly), the basis for the same the formal result of the physical inspection – and not the underlying materiality – and being this incapable of being altered by subsequent testimonial evidence, there was nothing more, in this regard (in the perspective of the body directing the procedure, it is emphasized), to ascertain, whereby no failure either to the inquisitorial [principle] or to the generic duty to search for material truth (underlying article 69/e) of the CPPT), can be pointed out.

Equally, there is no violation of the right of participation of the Claimant, insofar as such participation was afforded to it and was duly weighed, and there is also no failure to the duty of reasoning that was incumbent upon the Administration, insofar as, as has also been seen, it was duly and comprehensibly stated what the reason was why the requested evidence step was not proceeded with.

Thus, and having regard to all that has been expounded, none of the alleged violations of articles 58, 60 and 77 of the LGT, and 6 of the RCPIT are verified.

Finally, and for the same reasons, no violation of the provisions of articles 50 and 69, subparagraph e), of the CPPT is detected, it being borne in mind that the issue is not one of prohibition, but rather of what is considered inutility of the production of the requested evidence. In other words, properly understood, AT's position was not that testimonial evidence was prohibited, but that, in the case, it was useless, a judgment that, given the specific decision-making act formed, is incapable of being censured.

It should be noted that this does not, in any way, ratify or validate the understanding underlying the tax acts in question, according to which the assessment derives strictly from the formal result of the physical inspection, indifferently to the material reality that underlies it. However, the consideration of this reality, in this contentious context, must be assessed in the examination of the substantive defects of the tax acts, and not under the prism of compliance with the formal duties incumbent upon AT which must, as such, be assessed in that same plane.

On this point, it should further be noted that the Claimant, notwithstanding having indicated facts that could be susceptible of sustaining allegations in that regard, ends up not expressly alleging any substantive defect with regard to this part of the assessment sub iudice. In any case, even if it is considered that, tacitly, it does so, the fact is that such facts, moreover, ended up not being proved, whereby it is of no utility to raise the question of knowing whether – if the same were proved – the part of the assessment in question would be to be maintained, as AT understood, or not.

Thus, this part of the arbitral request should not proceed.

With regard to the part of the assessment relating to taxable losses in the spirit of the bonded warehouse of E…, the Claimant alleges, essentially, that the same will be illegal, for two orders of reason, which concern the legal regimes applicable to storage losses and production losses.

On the first aspect, the Claimant alleges that "despite exceeding the rate of 1.5% provided for in subparagraph a) of no. 1 of article 48 of the CIEC, they must be accepted under the provisions of the first part of no. 2 of the same article 48 of the CIEC, combined with no. 1 of article 47 of the same Code, in view of the circumstances of the specific case.".

As for the second line of argument, the Claimant alleges that "The real conditions under which this operation was effected - already described - require that this operation not be subject to the normal loss rate (of 2%), but to an extraordinary loss rate, because the treatment process of the spirit in flask… was also extraordinary", "It being certain that no. 3 of article 26 of the CIEC expressly permits that «Whenever divergences are verified between the quantities produced and the quantities resulting from the yield rate [as is the case in the proceedings], the revision of the approved yield rate must be proceeded with, by initiative of the authorized depositary or the competent customs authority.»".

Article 48 of the CIEC provides that:

"1 – For the purposes of the provision in no. 4 of article 9, the losses inherent in the nature of the products corresponding to the differences, for less, between the accounting balance and the inventory in the bonded warehouse, calculated on the sum of the quantities of product existing in the bonded warehouse with the quantities entered therein, after the last physical inspection, are not taxable, with the following limits:

a) up to 1.5%, in the case of alcohol and non-bottled alcoholic beverages;

b) up to 0.4%, in the case of petroleum products and energy products.

2 – The limit provided for in subparagraph a) of the preceding number may be adjusted in specific cases, in the distillation of wines and in the aging of alcoholic beverages in wooden vessels.".

Article 47 of the CIEC provides:

"1 – The irreparable loss or total destruction of products in a suspension of duties regime is not taxable, provided it occurs due to a cause inherent to the very nature of the products, due to fortuitous event or force majeure, or as a result of authorization from the competent customs authority.

2 – The irreparable loss of products may occur due to a cause inherent to the nature, in the terms and within the limits fixed in the following article and in article 49, or due to fortuitous event or force majeure, in the terms of article 50.".

Article 48 of the CIEC provides that:

"1 – For the purposes of the provision in no. 4 of article 9, the losses inherent in the nature of the products corresponding to the differences, for less, between the accounting balance and the inventory in the bonded warehouse, calculated on the sum of the quantities of product existing in the bonded warehouse with the quantities entered therein, after the last physical inspection, are not taxable, with the following limits:

a) up to 1.5%, in the case of alcohol and non-bottled alcoholic beverages;

b) up to 0.4%, in the case of petroleum products and energy products.

2 – The limit provided for in subparagraph a) of the preceding number may be adjusted in specific cases, in the distillation of wines and in the aging of alcoholic beverages in wooden vessels.".

Article 50 of the same Code further provides:

"1 – Losses due to fortuitous event or force majeure are not taxable, provided there has been no gross negligence and they are communicated to the customs authority, for purposes of confirmation and verification, up to the 2nd business day following the day of their occurrence.

2 – For the purposes of the preceding number, sufficient proof of the irreparable loss of products must be made to the customs authority in whose jurisdiction the loss occurred or, if it is not possible to determine this, to the customs authority in whose jurisdiction the loss was established."

Finally, article 26 of the CIEC provides:

"1 – For the purposes of subparagraph b) of no. 2 of article 24, the authorized depositary, holder of a bonded warehouse of a production facility, must present to the competent customs authority the respective yield rates, corresponding to the quantities of raw materials necessary for the manufacture of products subject to excise duties.

2 – The director of the customs house approves the yield rates presented, based on the analysis of the relevant information available.

3 – Whenever divergences are verified between the quantities produced and the quantities resulting from the yield rate, the revision of the approved yield rate must be proceeded with, by initiative of the authorized depositary or the competent customs authority.".

As appears from the matters of fact established, the losses that occurred in the bonded warehouse of E…, which form the basis for the corrections, relating to that bonded warehouse, contested by the Claimant in the present arbitral proceedings, occurred in a context that assumes manifest specificity.

Effectively, and in summary, the losses in question relate to wine spirit, of high alcoholic content, that remained in storage for an extremely prolonged period, which not only subjected it to an evaporation period much longer than normal, but also to storage conditions (including various transfers) inducing increased evaporation.

On the other hand, and as a consequence, also, of those exceptional circumstances, there is also verification of the occurrence of alteration of the product's characteristics, in terms of entailing supplementary treatments and processing, generating additional losses, in order to make it adequate for the use that was proper to it.

It was not possible, however, to ascertain the specific amount of such additional losses.

Having verified these facts, it becomes necessary to assess their legal effects.

Part of the losses in question consist of losses in storage, and part in losses in production, and not, as AT states in the arbitral context, due to "a fact "unforeseeable" and "inevitable", reducible to the concept of "fortuitous event or force majeure"". Effectively, both the storage and the production process occurred in normal conditions, but which were prolonged over time. Indeed, the regime of article 50/1 of the CIEC easily shows that it is not a case that falls within its scope. Effectively, as the rule in question requires that the losses "are communicated to the customs authority, for purposes of confirmation and verification, up to the 2nd business day following the day of their occurrence", it is immediately evident that fortuitous event or force majeure is a notorious fact – which implies that its public witnessing leaves no doubts as to the beginning of the short period to be observed – and well delimited in time, not therefore identifying with the mere passing of time. Effectively, the nature of the losses in question is diluted throughout the totality of the temporal course of storage, and the production process, it being impossible, therefore, to fix the starting point of the period referred to in article 50/1 of the CIEC.

Thus, and as was written in the aforementioned Decision of the TCA-North of 15-11-2013, delivered in process 00204/07.5BEBRG:

"As Sérgio Vasques refers, the factual presupposition of the tax is, in this case, a «complex presupposition, of progressive formation, resulting from the necessary combination of two elements, the last of which has the function of perfecting the tax fattispecie. In other words: the tax obligation cannot be considered as arising unless upon the introduction into consumption» (in «The Excise Duties», 2001, p. 303).

However, no. 1 of article 7 cited deems the tax exigible, not only at the moment of its introduction into consumption, but also at the moment of the establishment of losses that should be taxed in accordance with the code. Will the establishment of losses in itself be a tax-generating fact?

We can in advance state that the establishment of losses in itself never constitutes a tax-generating fact. What occurs is that losses, in certain circumstances, imply the exit of products from a suspension of duties regime and the law makes equivalent this situation to the introduction into consumption for purposes of tax exigibility – subparagraph a) of no. 2 of the same Code. It is in these situations that, in accordance with the terminology of its no. 1, they must «be taxed in accordance with this Code».

Let us then see what are the two situations of losses that should be taxed: losses in production, storage or circulation (articles 37 to 40) and losses due to fortuitous event or force majeure (article 40).

In either case, the losses are relevant to the extent that they exceed the value of the legal exemption. The great difference between them is that, in the first case, the fact from which the loss derives is unknown, whereas in the second case, that fact is known, there only remaining to establish responsibility for its occurrence.

In the first case – in which the fact from which the loss derives is unknown – the legal presumption emerges that «the products did not simply disappear, but were irregularly introduced into consumption» (Sérgio Vasques, op. cit., p. 325). In the second case – in which the fact from which the loss derives is known – it is already known that the products were not introduced into consumption nor will be, because they are destroyed or rendered useless, but the law is satisfied here with the fact that they are no longer in suspension for a reason that is attributable to the economic operator, holding it responsible for its deterioration.

The establishment of the exemptions thus constitutes a legal presumption: the presumption that the remaining product was introduced into consumption, in the first case (see article 40, no. 2, subparagraph d), of the Code, in the wording then in force); the presumption that there was culpable non-compliance with the prescriptions relating to the transport of the merchandise in the second case (its article 41).".

In the present case, the Claimant demonstrates, as has been seen, the occurrence of specific circumstances, susceptible to giving rise to a level of losses greater than that which results from normal storage and production processes.

It is verified, however, that the Claimant failed to demonstrate the quantification of such losses, that is, that those circumstances are the cause of all the losses verified.

As has been seen, and as results both from the case law cited above, as well as from the doctrine contained therein, the rules in question, on which the part of the assessment in question was based, rest on a presumption of introduction into consumption of the missing merchandise, thus constituting rules of incidence and quantification of the tax obligation.

Now, article 100/1 of the CPPT provides that "Whenever from the evidence produced a well-founded doubt arises as to the existence and quantification of the tax fact, the challenged act should be annulled.".

The circumstances demonstrated are thus, as has been seen, apt to raise a well-founded doubt (one might even say a broad certainty), that the quantification of the tax obligation effected will not correspond to the merchandise actually introduced into consumption.

This was, moreover, the understanding subscribed in first instance, in the context of process 01915/04.2BEPRT, where it was written that:

"If the impugner never measured its product from 1997 to 2003, given the production and storage process of Port wine, with some certainty the accounting of the bonded warehouse will present errors in its physical inventory. (...)

In this conformity, although it is incumbent upon the impugner to maintain updated accounting of inventory in a permanent inventory regime and of the movements of products, it succeeded in making proof to the contrary of that presented, for the simple reason of having convinced the court that it had never carried out any measurement/count from 1997, placing the communication of product losses at the minimum. (...)

Everything indicating that the physical inventory will be different from that in the accounts, given the type of product and its storage (and production) in wooden vessels, necessarily, as was proved, the losses may reach percentages higher than those communicated, which is sufficient to generate well-founded doubt as to the existence of the tax fact and to avoid rigorous calculations in this context (for purposes of applicability of the provisions in articles 38 and 39 of the Excise Duties Code).

The impugning motion thus merits success."

The said judgment was confirmed by the Decision of the TCA-North, of 30-09-2015[2], where it can be seen that:

"The Honourable Judge determined the annulment of the assessment based on the provision of article 100 of the CPPT in accordance with which whenever from the evidence produced a well-founded doubt arises as to the existence and quantification of the tax fact, the tax act should be annulled.

As the Appellant well emphasizes, the «well-founded doubt» as to the existence and quantification of the tax act, basis for its annulment, cannot rest on the absence of inertness in the evidential burden of the parties (see Decision of the TCAS no. 04238/10 of 11-10-2011 (Rapporteur: EUGÉNIO SEQUEIRA) 4. The well-founded doubt provided for in the provision of article 100 of the CPPT, basis for annulment of the assessment act, cannot rest on the absence or inertness in the evidential burden of the parties, especially of the impugner, to whom it falls to prove the facts that call into doubt the existence and quantification of the tax fact, without prejudice to the judge, within his inquisitorial power-duty, also endeavoring to prove them).

However, we do not discern in the proceedings any evidential inertness of the Impugner, quite the contrary. Nor does the lack of exact quantification of the losses constitute grounds for setting aside the application of article 100/1 of the CPPT; if these had been exactly quantified, the non-existence - or existence - of the tax fact would be proved, and therefore this rule could not be applied. This rule should be approximated to the rule for the procedure set forth in article 74/1 of the LGT in which it is established that the burden of proof of the facts constituting the rights of the tax administration or of taxpayers falls on whoever invokes them. Therefore, doubt about the certainty of a fact is resolved against the party burdened with the burden of proof (Jorge Lopes de Sousa, CPPT II, 2011, pp. 134). It is resolved against AT because it was she who was burdened.

The allegation that the court, in upholding the thesis of the impugner, did not respect the spaces of appreciation proper to the exercise of the administrative function, in violation of the provision in article 179 of the CPTA, also does not hold. The court did not fix any yield rate, neither abstract nor concrete, but merely limited itself to deciding within the scope of judicial powers that the losses established by the Customs House were not, in the specific case, sufficient and that the quantities recorded in the accounting of the Impugner did not reflect the physical inventory.

Finally, the fact that the yield rate was established based on the communications of the Impugner does not prevent it from demonstrating that those rates were erroneously underestimated. Effectively, nothing in the law prohibits the taxpayer declarant from proving that its declaration contains errors that it only later identified. Indeed, case law has already pronounced itself positively on that question, as was the case with the decision of TCAS no. 1899/99 of 20/11/2011 identified by the Honourable Judge a quo.

And we believe that it could not be otherwise in homage to the principles of legality and material justice that inform our tax matrix (see article 5/2 of the LGT).".

In this manner and for the grounds expounded, the arbitral request must proceed, in this part, annulling, partially, the tax act which is the subject of the present arbitral proceedings.

C. DECISION

Therefore, it is decided in this Arbitral Tribunal that the arbitral request filed is partially upheld and, in consequence,

a) Partially annul the act of assessment of Tax on Alcohol and Alcoholic Beverages and respective compensatory interest, which is the subject of assessment registration no.…, insofar as it relates to the losses taxed by reference to bonded warehouse PT…, in E…, relating to which a debt of IABA of €161,914.71 was established.

b) Condemn the parties in the costs of the proceedings, in the proportion of their respective loss, fixing the amount of €2,795.00 at the expense of the Respondent, and €877.00, at the expense of the Claimant.

D. Value of the Proceedings

The value of the proceedings is fixed at €199,369.13, in accordance with article 97-A, no. 1, a), of the Code of Tax Procedure and Proceedings, applicable by virtue of subparagraphs a) and b) of no. 1 of article 29 of the RJAT and of no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The amount of the arbitration fee is fixed at €3,672.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the parties in the proportion of their respective loss, as determined above, given that the request was partially upheld, in accordance with articles 12, no. 2, and 22, no. 4, both of the RJAT, and article 4, no. 4, of the aforementioned Regulation.

Notification ordered.

Lisbon

11 April 2016

The Presiding Arbitrator

(José Pedro Carvalho - Rapporteur)

The Arbitrator Member

(Maria Cristina Aragão Seia)

The Arbitrator Member

(António Manuel Melo Gonçalves)

[1] See in that sense, Decision of TCA-South of 21-10-2003, delivered in process 00518/03, available at www.dgsi.pt, where it can be read that "Given the legal obligation for maintenance of updated inventory accounting that falls upon authorized depositaries, if, at the time of physical inspection, no accounting errors are detected that can be regularized, the depositary cannot afterwards invoke accounting errors, nor prove by means of testimonial evidence that the results then established by the inspection were not correct, in particular because the products considered as missing were in the warehouse on the date of the physical inspection in the "clean stocks"". In the opposite sense, however, reference can be made to Decisions of TCA-South of 20-11-2001, delivered in process 1899/99, where it can be read that "3. However, even for the taxpayer who was obliged to have and maintain inventory accounting as above, it is possible to make proof to the contrary of that presented, that such amounts are not the expression of their economic reality, and that this had a different dimension; 4. Such proof can be effected, in addition to documents used at the time for other purposes, also by testimonial evidence, with a view to achieving the goal of measuring that reality;"; and of TCA-North of 15-11-2013, delivered in process 00204/07.5BEBRG, where it can be read that "1. From article 40 of the C.I.E.C. the presumption arises that the losses that occur in circulation in a suspension regime, to the extent that they exceed the exemption threshold, result from irregular introduction into consumption. 2. This presumption can be rebutted by the taxpayer demonstrating, in particular, that the actual loss inherent to the nature of the merchandise is higher than that admitted by the exemption – articles 73 of the L.G.T. and 864 of the D.A.C.A.C.", both available at www.dgsi.pt.

[2] Available at www.dgsi.pt.