An Objection Decision Cannot Issue a New VAT Assessment: The Ram Pal Ruling

The VAT Director may not issue a new input tax assessment within a decision on an objection to an output tax (transactions tax) assessment. So ruled the Tel Aviv-Jaffa District Court on October 10, 2024, accepting the appeal of Ram Pal Cellular Stockmarket Ltd. on a preliminary basis, without addressing the merits. A director who wishes to impose input tax liability must issue a separate input tax assessment, against which an objection may be filed. The company was represented by Adv. Shlomi Vaknin and Adv. Ariel Epstein.

• Tel Aviv-Jaffa District Court, the Honorable Judge Yardena Seroussi.

• Proceeding: Appeal against a decision on an objection to a transactions tax assessment under Section 77 of the Value Added Tax Law.

• Outcome: The appeal was accepted on a preliminary basis, and the Director was ordered to pay costs of NIS 12,000.

• Full Judgment (PDF)

The company reported its transactions as zero-rated transactions under Section 30(a)(5) of the Value Added Tax Law, 5736-1975. The Director of VAT Gush Dan issued a best-judgment transactions tax assessment against the company pursuant to Section 77 of the Law. According to the assessment, the company provides services in Israel to companies that are Israeli residents under the Income Tax Ordinance, and therefore the transactions are subject to tax at the full rate.

In the decision on the objection, the Director reversed his position. He determined that the company is not liable for output tax (transactions tax), because its transactions are carried out abroad and are not subject to VAT under Section 2 of the Law. From this he concluded that the company has no right to deduct the input tax attributable to those transactions, and imposed input tax liability in place of the transactions tax assessment. The company appealed and requested that the appeal be accepted on a preliminary basis.

The question was whether the VAT Director may, in a decision on an objection to a transactions tax assessment, impose input tax liability on the dealer when no input tax assessment was issued at the assessment stage. The ruling rests on Section 77(a) of the Law, which defines "assessment," and on Section 82(b), which prescribes what the Director may decide in an objection.

The court held that the Director acted unlawfully on both the procedural and substantive levels, and granted the application.

• The statutory language. Section 77(a) authorizes the Director to assess the tax due "or" the input tax, meaning two assessments with separate bases. Section 82(b) authorizes him to uphold the "assessment," increase it, or reduce it, and the definite article indicates that this refers only to the assessment that was actually issued. In the court's words: "The Respondent issued a new assessment rather than increasing an existing one."

• The distinction from the Loren case. In the Loren Mivnei Ta'asiya case (TA 31352-12-13, August 17, 2016), both assessments were issued from the outset, so the objection decision merely increased an existing assessment. Otherwise, according to the court, the assessment stage would lose its significance.

• The Amdocs District Court judgment. The court relied on paragraphs 51 and 52 of the Amdocs judgment (TA 22467-09-17), where the situation was reversed: the Director imposed output tax within an objection to an input tax assessment, and the court struck down that approach. The Director's appeal to the Supreme Court in that case was dismissed.

• An alternative assessment that was never issued. The Director argued that even before the assessment he had notified the company of his intention to issue alternative assessments, including an input tax assessment. In practice, only a single transactions tax assessment was issued. A claim raised during discussions does not substitute for an assessment, nor does it constitute a good-faith error.

• No room for relative voidability. The defect is substantive. The court also noted that the Director switched between two contradictory factual versions regarding the related companies.

The assessment stage defines the boundaries of the dispute. In the objection, the Director reviews the assessment that was issued: he may uphold it, increase it, or reduce it. If at the objection stage he concludes that the liability belongs on the input tax side, he must issue a separate input tax assessment, and the dealer retains the right to object to it in a two-stage process.

This is a District Court judgment, not a Supreme Court precedent. It continues the Amdocs District Court ruling and is closely aligned with the principle established in the AMGDS case, in which assessments were voided because the Director changed the basis of the assessment in the objection decision.

1. Compare the objection decision to the original assessment: does the liability remain under the same type of tax and on the same factual basis.

2. Verify whether alternative assessments were actually issued at the assessment stage. A statement during discussions that the Director is considering an alternative assessment does not constitute an assessment.

3. Does the decision include a new type of tax liability? Consider filing a motion to accept the appeal on a preliminary basis. Where the facts are undisputed and the question is legal, the court can decide it at the outset of the proceedings.

4. File the appeal on time even when you have a preliminary argument. The deadlines and procedural stages are detailed on the Representation in VAT Assessment and Objection Proceedings page.