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    Action proceeding of MIID RK in SIEC of Nur-Sultan city started from breach of legislation

    AZIA AVTO” JSC declares disclaiming the lawsuit of the Ministry of Industry and Infrastructural Development of the RK “on damages recovery to state revenue” to the amount KZT 173 979 726 000. Company team expressly disagrees with the claims of the Ministry due to their illegality and inadequacy, unavailability of proper substantive arguments in support of claim and no fact of actual damage.

    As it was reported earlier, in November 2020 Ministry of Industry and Infrastructural Development of the RK filed a lawsuit to Specialized Inter-District Economic Court (SIEC) of Nur-Sultan city to recover the damages of KZT 173 979 726 000 from “AZIA AVTO” JSC to state revenue. According to the Ministry, the damages were caused by the company as a result of non-fulfilling its obligations under Industrial Assembly Agreement (improper use of granted preferences).

    According to the wording of the lawsuit, «due to non-fulfillment of the obligations under Agreement by the Defendant, imported vehicle components were improperly used, i.e. the preferences received from the state at a time of importing vehicle components and producing motor vehicles were not accumulated for the purpose of developing industrial vehicle production and use of the term “industrial assembly”.

    “AZIA AVTO” JSC deems necessary to declare inadequacy of the arguments presented by the complainant and breach of legal procedure committed by the judge M.M. Sembin when initiating proceedings in the case. The lawsuit of the Ministry is evidently intended to completely paralyze business activity of “BIPEK AVTO – AZIA AVTO” Group.

    Below there is brief description of the filed lawsuit illegality.

    1. “Damage” accrual period exceeds legal limitation

    Disputable period mentioned by the Complainant for which “return of preferences” is claimed as related to the interval from January 1st 2012 to November 20th 2017 is out of the legal limitation period, which (with respect to the date of filing lawsuit) has expired, and according to clause 3, Article 179 of the Civil Code of the RK it is “a ground for court decision on lawsuit dismissal”. Besides, referring to termination of the Agreement dated 07.04.2017 the complainant does not substantiate filed claims as related to “damage” recovery before conclusion of the Agreement.

    2. MIID and other state agencies never claimed “improper use of vehicle components”.

    According to clause 4.2 of the Agreement «In case of detection of misuse of auto components, Authorized agency or customs authority, not later than 10 calendar days, shall send a notification to the legal entity on the discovery of the fact of misuse of auto components». Only in this case legal entity is obliged to pay customs dues and only if this fact is detected and proved.

    No such notifications from the Ministry or customs bodies were delivered to the manufacturer as a member of the Agreement. No evidence of any fact of improper use of vehicle components (which is supposed to induce the consequences of sub-clause 3 clause 1 of SEES Decision dated May 29th 2014 № 72) was presented and never existed.

    Completely all declarations under which component parts were imported (with itemized description of the latter) were reflected in «Data of products use…» provided per each unit of the produced motor vehicle to the customs body following the Annex 1 of the «Rules of recognizing proper use of the conditionally produced products…», (approved by the joint Decree of the Minister of Industry and Development of the RK dated March 30th 2018 № 208 and Deputy Chair of the Government – Minister of Agriculture of the RK dated April 3rd 2018 № 143). No incompliance was detected by the customs body within disputable period.

    3. The company did not use preferences based on the Agreement. It means that their return cannot be claimed.

    Calculation of the preferences presented by the complainant is illegal as VAT and customs dues preferences were applied based not on the Agreement but “free warehouse” regime. Thus, the attempts to impute the accrued amounts are groundless.

    According to clause 3, Article 129 of the Customs Code, customs dues, and taxes shall not be paid when the products are placed under customs procedures where such payment is not applicable. By virtue of clause, 1 Article 8 of Free Warehouse Agreement customs procedure of free warehouse is included in the list of such procedures.

    4. «The Parties are not entitled to claim returning those items fulfilled by them following their obligations before termination of the agreement» (clause 4, Article 403 of the Civil Code of the RK).

    Along with this, neither the Agreement nor special laws and regulations contain the norms related to the grounds or “return” procedure of the received preferences not speaking about their monetary value.

    «Receiving of the preferences» was nowhere near with actual tranches or subsidies from the budget; these preferences could not be monetized thus there is no ground for discussing “money repayment”. Provided preferences allowed reducing the cost of ready products and make them affordable for customers.

    5. It was physically impossible to use preferences “improperly” as well as “to cause loss to the state”. In the scope of dispute circumstances the state did not bear losses: preferences were intermediated by utterly different mechanisms other than direct budgeting of investment project.

    According to clause 4, Article 9 of the Civil Code of the RK «Losses mean the expenses which are paid or must be paid by a person whose right is breached, loss or damage of its property (actual damage), and foregone earnings which this person would receive in regular revenue flow, if its right was not breached (lost profits).

    As related to the cases of damage recovery, the fact in proof includes both the fact of damage infliction, fault of inflictor and connection between the actions of the inflictor and the losses of an affected person. However, neither the Ministry nor any other state agency incurred any expenses as related to the Agreement, no money tranches were made in favor of the Company; no funds were transferred to its accounts.

    At that total amount of taxes paid by “BIPEK AVTO – AZIA AVTO” Group exceeds the equivalent of 525 M US Dollars which is evidently out of proportion with the amount of filed claims.

    6. The Ministry is not a proper complainant.

    The questions of customs declaration process and taxes are included in the competence of other authorized agencies. Moreover, the dispute related actually with additional charging of value added tax and customs dues from a taxpayer cannot be settled based on the norms of civil legislation. In order to substantiate its claims of charging taxes and dues from the taxpayer to state budget the Ministry refers in its lawsuit to clause 2, Article 284 of the Civil Code of the RK. However, according to the clause 4, Article 1 of the Civil Code of the RK, civil legislation cannot be applied to property relations based on administrative or any other authoritative subordination of the parties, including tax and other budget relations. The questions of additional charging of value added tax and customs dues can be settled only within tax and customs legislation where all grounds for establishment, fulfillment and termination of tax and customs obligations are stipulated.

    The reasoning briefly described above is reflected in detail in the comment of “AZIA AVTO” JSC sent to SIEC of Nur-Sultan on December 7th 2020. The court is provided with comprehensive materials including financial statements of the company, customs declarations and breakdown of expenditures related to construction of production facilities. We believe that the court will properly assess all case circumstances and make a well-reasoned and fair decision.

    However, unfortunately we have to point out that once again SIEC, Nur-Sultan accepted the case on claim of the Ministry with violation of the rules of jurisdiction.

    On December 8th 2020 “AZIA AVTO” Joint-Stock Company filed a corresponding application to change territorial jurisdiction of the case under consideration. Five grounds were enlisted to transfer the case from SIEC Nur-Sultan to the court in East Kazakhstan region. In particular, EKR where the construction of production facilities is in progress is the place of performing obligations under the Agreement. EKR is the location of the defendant as well.

    Notwithstanding all the provided reasoning, the judge of SIEC, Nur-Sultan, Mr. M.M. Sembin delivered the Ruling to reject satisfaction of this application, though none of our grounds undertook a substantive review. In order to substantiate his rejection the judge only referred to Court Ruling related to territorial jurisdiction of another civil case. “AZIA AVTO” JSC intends to appeal this ruling in the senior judicial authority.

    All materials of legal proceeding on the claim of MIID RK to “AZIA AVTO” are attached. Further legal enactments and other materials related to the dispute between the parties will be publicly available.

    Vladimir Shevchenko, representative of “AZIA AVTO” JSC:

    - As you know, an Agreement on industrial assembly was concluded between AZIA AVTO JSC and MIID RK. Its terms provided for the launch of new facilities until December 31, 2020. During the state of emergency, on April 11, 2020, the Ministry sent us a notice of unilateral termination of the Supplementary agreement. As a result, the industrial assembly launch date rolled back to December 1st, 2019.

    The Ministry’s claims concerned legal validity of only minor clauses of the Supplementary agreement. We emphasize that its draft was developed by the Ministry itself. In a response letter we immediately proposed to change these clauses to a version acceptable to MIID. As a result, the dispute would have been settled due to absence of subject. However, the Ministry declined this proposal.

    The events that followed have given reasons to assume that the ultimate goal of the Ministry’s actions is a complete paralysis of the enterprise leading to a state of bankruptcy; by any, as we can see, even an unjust way. An astronomical sum of the claim filed by the Ministry, as well as the absurdity of its content, confirm the causes of the claimant’s actions.

    Referring to the termination of the Agreement, MIID RK demands recovery of the amount of benefits and VAT preferences received for import and customs duties for the period of YY2012-2020. Are these actions legal?

    No, they are not. Since the issue of additional assessment of taxes and duties is within the competence of another authorized body. However, the Ministry of Industry takes on functions of a fiscal department and, in a civil order, is trying to collect additional taxes in the form of a “loss”. This is far from being the most significant “discrepancy” of the claim.

    The fact is that AZIA AVTO has never enjoyed VAT preferences and duties based on the Agreement. The company used other, more effective mechanisms provided by the customs legislation of the EEU. In particular, it is “free warehouse” mode. And therefore, the amount of similar benefits provided for by the Agreement cannot be claimed.

    Also MIID, not bothering with any explanations, imputes AZIA AVTO “misuse of auto components”. What the Ministry means by this wording is a mystery. After all, all imported auto components were used by the factory exclusively for the production of cars. For the entire period of the company’s activity, we have not received a single notification from government agencies with claims in this regard.

    We hope that a legal and a well-grounded decision will be made based on the results of consideration of the case. Although actions of the court already at the stage of preparations of the proceedings raise serious doubts about it. So, SIEC, Nur-Sultan, once again accepted the case for proceedings with violation of the rules of jurisdiction.

    The publicity of trials is one of the principles of the administration of justice in the Republic of Kazakhstan. Therefore, we call on representatives of the expert community and the media to continue to closely monitor the course of the dispute between the Ministry of Industry and AZIA AVTO.