Management Board Report on the activity of the JSW S.A. Capital Group for 2012

4.9. Disputes – material administrative, court and arbitration proceedings

This section presents a description of material proceedings in which Capital Group companies are involved. Group companies are participating in court, administrative and arbitration proceedings related to their operations. Below are described some of the proceedings pending at present or concluded in the period from 1 January 2012 to the date of this report that may materially affect the position and financial results of Group companies. This description has overlooked proceedings, which in the opinion of the Group will not have a material and adverse impact on its operating activity, financial position and profitability of the Group and whose total estimated value according to the Issuer’s knowledge will not reach 10% of the Issuer’s equity. According to the JSW S.A. Management Board, according to its best knowledge, the Group companies are not at risk of proceedings that could materially affect its financial position and profitability other than prospective tax proceedings mentioned in the description below.

4.9.1. Court Proceedings

Court Proceedings to which the Company is a party

Apart from the taxation-related litigations the Parent Company is also a party to several legal proceedings concerning its activity. Typical disputes in which the Parent Company participates include disputes related to demands to rectify mining damages, disputes concerning damages for accidents in the workplace and disputes concerning contractual liabilities. The litigations above are typical and repetitive in character. None of them has so far influenced the Group's financial standing and performance.

Court Proceedings in which subsidiaries are a party

Polimex-Mostostal S.A. and others v Koksownia Przyjaźń

On 8 July 2009, a consortium comprising Polimex-Mostostal S.A., Biuro Projektów Koksoprojekt S.A., Naftoremont sp. z o.o. and Przedsiębiorstwo Realizacji i Dostaw Budownictwa Piecexport sp. z o.o. submitted a claim demanding that the compensation due in connection with performance of the agreement to fulfill the investment task to modernize the Hydrocarbons Department by constructing a complete facility on a turn-key basis, of 22 November 2005, between Koksownia Przyjaźń and the consortium, be increased by PLN 62.5 million (ref. no. XIV GC 159/09/10). The Regional Court in Katowice, in the ruling of 7 August 2009, decided to secure the claim by establishing a compulsory mortgage on the right of perpetual usufruct of the property vesting with Koksownia Przyjaźń. After receiving an interlocutory appeal against the ruling, the Katowice Court of Appeals amended the ruling of the Regional Court on 28 September 2009, dismissing the Consortium’s motion to secure the claim. Koksownia Przyjaźń responded to the statement of claim. In the course of the proceedings, a court expert issued an opinion to which the parties submitted their comments and objections and at the hearing held on 18 August 2011, witnesses were heard.

On 17 October 2011, the Regional Court in Katowice, 14th Commercial Division closed the hearing and announced the verdict on 31 October 2011, dismissing the claim in its entirety.

On 10 January 2012, the plaintiffs' appeal was delivered to the company. On 24 January 2012, the company submitted a reply to that appeal. On 13 February 2012, the company received the plaintiffs' pleading. In the meantime, the claim amount was adjusted to PLN 58.1 million.

At the last hearing the appeal was dismissed. The case was closed with a legally valid court judgment of 22 May 2012, but the Consortium has filed a cassation complaint against this judgment. As at the date of this report, the complaint has not yet been considered. Accordingly, Koksownia Przyjaźń kept this contingent liability in its accounting ledgers.

Koksownia Przyjaźń v Polskie Koleje Państwowe S.A.

In pleadings of 18 March 2010 to the Regional Court in Katowice, PKP S.A. filed for enforcement under the judgments listed below in the total amount of PLN 9.6 million. In the course of the proceedings the Court Executive Officer at the Regional Court in Legionowo seized part of the disputed receivable in the amount of PLN 2.0 million. On 19 July 2010 Koksownia Przyjaźń filed a lawsuit against Polskie Koleje Państwowe in the Warszawa-Praga Regional Court demanding the full forfeiture of enforceability of enforcement orders comprising judgments by default by the Regional Court in Katowice, 14th Commercial Division with enforcement clauses appended as per the ruling of 30 December 2009 issued by the Regional Court in Katowice, 14th Commercial Division, and a temporary injunction by suspending the execution of the principal amount of PLN 9.6 million by a court execution officer.

The claims above are a result of the cooperation by Zakłady Koksownicze “Przyjaźń”, of which Koksownia Przyjaźń is the legal successor, and the legal predecessor of Polskie Koleje Państwowe S.A. Zakłady Koksownicze “Przyjaźń” lost liquidity in 2000 and the legal predecessor of Polskie Koleje Państwowe S.A. obtained several judgments and orders for payment against Zakłady Koksownicze “Przyjaźń”. As specified in the statement of claim, all claims that Polskie Koleje Państwowe S.A. had against Zakłady Koksownicze “Przyjaźń” were settled in the course of, among others, debt collection by “CADAC” sp. z o.o. The defendant, in reply to the lawsuit on 7 October 2010, made a motion to strike and dismiss the lawsuit in full and to award legal costs against the plaintiff.

During the court proceedings, (file ref. no. III C 968/10) pleadings were exchanged. At the last hearing on 28 January 2013, the Court fully forfeited enforceability of enforcement orders comprising judgments by default by the Regional Court in Katowice, 14th Commercial Division, file ref. nos.: XIV GCo 246/09/16, XIV GCo 222/09/12, XIV GCo 245/09/16. As at the date of this information, the judgment has not become legally effective. It is highly probable that the defendant will file an appeal in this case. Therefore, the provision of PLN 7.7 million established in 2010, equal to the difference between the value of the dispute and the amount seized by the court executive officer, is kept.

Koksownia Przyjaźń v former business partner, regarding delivery frauds in 2006

In 2007-2008 Katowice Regional Court issued five orders of payment in proceedings by writ of payment brought by Koksownia Przyjaźń, ordering a former business partner of Koksownia Przyjaźń, who is a legal person running business activity to pay a total of PLN 10.9 million plus statutory interest and legal costs due to the business partner’s failure to pay for coke delivered to him in 2006. As at 31 December 2012, none of the orders has been executed and debt enforcement is being carried out by a court execution officer for Warszawa-Mokotów District Court. By the date of this report, the enforcement was ineffective.

ThyssenKrupp MinEnergy GmbH (currently ThyssenKrupp Metallurgical Products GmbH) v Polski Koks S.A.

Since 2004 Polski Koks S.A. has been engaged in a litigation with ThyssenKrupp MinEnergy GmbH, which has been attempting to secure an order of payment against Polski Koks S.A. in the amount of EUR 4.1 million with statutory interests from 22 September 2004 as compensation for failure to fulfill a coke sale agreement of 29/30 December 2003, as per Article 76 of the United Nations Convention on Contracts for the International Sale of Goods adopted in Vienna on 11 April 1980. In a judgment of 15 June 2005, the Regional Court dismissed the claim of ThyssenKrupp MinEnergy GmbH. The judgment was appealed against in full and the appeal was dismissed by the Court of Appeals in a judgment of 18 May 2006, deeming the appeal groundless. The judgment was appealed in cassation in its entirety. The Supreme Court canceled the judgment of the Court of Appeals in a judgment of 28 February 2007 and remitted the case to judicial review.

After a judicial review by the Court of Appeals in Katowice, the Katowice Regional Court judgment of 15 June 2005 was amended in a judgment by the Court of Appeals in Katowice from 17 October 2007 (ref. no. V ACa 460/07) to require Polski Koks S.A. to pay compensation to ThyssenKrupp MinEnergy GmbH in the amount of EUR 4.0 million with statutory interest from 22 September 2004, as well as to pay legal costs in the amount of PLN 0.3 million for the costs of proceedings. The judgment was appealed in cassation by Polski Koks S.A., claiming violation of both procedural rules and the substantive law provisions. The Supreme Court canceled the judgment of the Court of Appeals in a judgment of 9 October 2008 and remitted the case to judicial review and allocation of costs for the cassation proceedings.

After a third judicial review the Court of Appeals in Katowice dismissed the appeal of ThyssenKrupp MinEnergy GmbH in the judgment of 22 October 2010 (ref. no. V ACa 19/09) and, on the basis of a motion of restitution, ordered the plaintiff to return to Polski Koks S.A. EUR 5.6 million, i.e. the original liability amount plus interest paid as per the Court of Appeals judgment of 17 October 2007, as well as the amount of PLN 0.4 million for the costs of proceedings. The court, however, dismissed the claims included in the motion of restitution to pay interest from the EUR 5.6 million from 19 October 2008 to the day of returning the amount. On 1 February 2011, Polski Koks S.A. appealed to the Supreme Court against the dismissal of the motion of restitution demanding the payment of interests in the judgment of 22 October 2010. On 7 February, ThyssenKrupp MinEnergy GmbH also filed a cassation appeal against the judgment in full, moving to cancel the judgment and remit the case to the Court of Appeals for judicial review again and to strike and dismiss the motion of restitution or to cancel this part of the judgment. On 25 November 2011, the Supreme Court accepted both cassation complaints and set the date of the cassation session for 8 February 2012. In the verdict of 8 February 2012, file ref. V CSK 91/11, the Supreme Court waived the verdict of the Court of Appeals in Katowice of 17 October 2007, file ref. no. V ACa 460/07 and returned the case for reexamination to the Court of Appeals in Katowice.

In a decision of 22 October 2012, the Court admitted evidence in the form of an opinion of a ferrous metallurgy expert, Józef Lis Eng., determining the coke price in Q2 2004 and the predictability of global coke price changes in Q2 2004. The opinion has not been submitted to the parties yet. The court has not set any date for another hearing. Therefore, it is justified to keep the provision for the liability in the amount equal to the value of the dispute.

4.9.2. Administrative proceedings

Besides the tax proceedings described below, the Group companies are not participating in administrative proceedings that could have a material and adverse impact on the Group's operating activity, financial position and profitability.

Tax proceedings

Proceedings concerning the property tax on underground mine workings

The Parent Company is a party to administrative court and tax proceedings regarding property tax. The subject of dispute is the classification of underground mine workings and the structures and plant situated in them for the purposes of possibly charging property tax. The dispute concerns the years 2003-2009 and the underground mine workings in the following townships: Jastrzębie-Zdrój, Ornontowice, Gierałtowice, Pawłowice, Mszana, Suszec and Świerklany. The proceedings are pending in connection with the decisions issued by tax authorities specifying the tax liabilities as well as in connection with the Parent Company’s requests to declare an overpayment.

After a beneficial judgment of the Constitutional Tribunal issued on 13 September 2011 (case file no. P 33/09) in which the Tribunal unambiguously precluded underground mine workings (tunnel costs) from property tax and making the tax on plant and facilities located in these underground mine workings dependent on their classification as structures within the meaning of Construction Law, the tax proceedings remain pending.

In all the cases, the Voivodship Court of Administration in Gliwice issued decisions which were favorable to the Parent Company with respect to the taxation of underground workings and their equipment and the Court generally rescinded tax decisions issued in this respect. However, the rationale for those decisions was challenged by the Local Government Appeal Court in Katowice and also the Local Government Board of Appeals in Bielsko-Biała, which filed cassation complaints with the Supreme Court of Administration against all the judgments which were favorable to JSW S.A. By submitting its answers to the cassation claims, JSW S.A. requested that they be dismissed. Additionally, the Parent Company also submitted a request to the Supreme Court of Administration to examine the cassation complaint pertaining to the Ornontownice Township for 2003 out of order of receipt and stating the reference numbers of the remaining cases in the request. In July and September 2012, the Supreme Administrative Court issued two positive decisions for the mining industry, resolving the issue of underground mine workings following the judgment of the Constitutional Tribunal. The Supreme Administrative Court, quoting in its justification the judgment of the Constitutional Tribunal, shared the view expressed in the judgment mine workings are not subject to property tax, while accepting that facilities and equipment located in the workings may be subject to taxation. The Court emphasized that the tax base cannot take into account the value of the mine working calculated based on excavation costs.

In several JSW S.A. cases, the Local Government Board of Appeals in Katowice has rescinded decisions of the Townships and referred the cases for reexamination. In the proceedings conducted by the townships, it is argued that facilities and equipment located in the workings may be subject to taxation, but at the same time the townships qualify the entire workings (excavation costs) with their infrastructure as taxable objects. As a result of the proceedings conducted by the Townships, the Parent Company received decisions determining its liability in the same amount as in the original decisions revoked by the Board of Appeals. The Parent Company has filed appeals against those tax decisions with the Local Government Board of Appeals in Katowice. The position taken by the townships is identical for all the tax proceedings initiated throughout the years. In their decisions, the townships qualify the entire workings (excavation costs) with their infrastructure as taxable objects. In the case of those tax decisions, JSW S.A. has also filed appeals with the Local Government Board of Appeals in Katowice.

The total contested amount in the proceedings pending before public administrative authorities is PLN 169.2 million. In connection with the favorable ruling of the Constitutional Tribunal and the judgments of the Voivodship Court of Administration, as at 31 December 2011 the amount of provisions and liabilities was PLN 65.2 million. As at 31 December 2012 the total provisions and liabilities are PLN 147.6 million, including a provision of PLN 83.4 million and liabilities of PLN 64.2 million.

Proceedings concerning the property tax on rail infrastructure

The Parent Company is a party to tax proceedings and an administrative court proceeding on charging property tax on land and structures related to rail infrastructure for the years 2007-2009. The subject of the dispute is the scope of the subject matter-related property tax exemption for this type of land and structures in the legal state in force since 1 January 2007. The Parent Company submitted requests for the tax authorities to declare an overpayment in the Ornontowice and Gierałtowice Townships (the Parent Company received a declaration of overpayment from the Czerwionka-Leszczyny Township). The total remaining disputed amount is PLN 1.1 million.

The same dispute in tax and administrative court proceedings pertaining to the legal status prevailing before 1 January 2007 is waged by JSK with regard to 2003-2006. JSK applied in these cases to Municipalities for acknowledgment of overpayment of the property tax. The total amount disputed in the aforementioned proceedings is PLN 1.6 million. In addition, the Mayor of Jastrzębie-Zdrój instigated, ex officio, a proceeding to issue a decision determining the mount of the tax liability for 2006. The estimated amount of the dispute is approx. PLN 0.5 million.

Proceedings pertaining to property tax on coking furnace batteries.

Koksownia Przyjaźń was a party to tax and administrative court proceedings to determine the aggregated amount of the property tax liability for the years 2003-2009. The dispute with the Mayor of Dąbrowa Górnicza acting as the tax authority of the first instance concerned the scope of taxation on coking furnace batteries. The tax authority presented a view that the coking furnace batteries constitute structures as a whole and their full initial value should be the basis for calculation of the tax on structures. The Company claimed that the basis for calculation of the tax on structures is the value of the structural parts of the coking furnace batteries, i.e. approx. 10% of the initial value. The other elements, especially the ceramic mass, constitute technical and technological parts.

The tax proceedings and the administrative and court proceedings were conducted alternately or concurrently by the following institutions: the Mayor of Dąbrowa Górnicza, the Local Government Board of Appeals in Katowice (“SKO”) and the Voivodship Administrative Court in Gliwice.

In Q3 2012, all pending proceedings (for the years 2006-2009, because proceedings for 2003-2005 were completed in earlier periods) resulted in decisions of the Local Government Board of Appeals in which the tax authority of the second instance decided that the methodology applied by Koksownia Przyjaźń of dividing the coking furnace batteries into structural and non-structural parts was correct, thus revoking the earlier decisions of the Mayor of Dąbrowa Górnicza which were unfavorable to the Company. At the same time – and this is not common practice – in its decisions the Local Government Board of Appeals specified the amount of tax liability in property tax for the years covered by the proceedings (2006-2009). Thus, the Company’s several-year long dispute against the tax authority of the first instance ended favorably for the Company.

Accordingly, in 2012, the property tax provision in the total amount of PLN 21.2 million was dissolved. Furthermore, in September 2012, the District Court in Dąbrowa Górnicza deleted from the Company’s land and mortgage registers the compulsory mortgage established in favor of Dąbrowa Górnicza Township in the amount of PLN 0.5 million in order to secure the disputed property tax liability for 2006.

Property tax proceeding on newly-built buildings and structures during the second stage of modernizing the Radlin Coking Plant

The mayor of Radlin, in his letter of 29 May 2012 summoned KK Zabrze to present a correction of its property tax declaration for 2010 incorporating newly-built buildings and structures during the second stage of modernizing the Radlin Coking Plant, by taking the position that the time when the tax obligation arises is the completion of construction confirmed by a notification to the competent authority on completion of construction, which at KK Zabrze took place in November 2009 (this position was also presented by the Mayor in an individual tax ruling dated 12 August 2010). Accordingly, the tax declaration for 2010 should include the newly-built buildings and structures. However, KK Zabrze failed to include them in its 2010 declaration taking the position that the time when the tax obligation arises is the date when the Decision made by the State Inspector of Construction Oversight became legally binding, i.e. January 2010.

In connection with these divergent positions, KK Zabrze established a provision and additionally procured an analysis to research the factual state of affairs in terms of property tax in connection with the modernization of the Radlin Coking Plant. The authors of this analysis do not see much hope for defending the position taken by KK Zabrze.

Accordingly, in June 2012 KK Zabrze filed a correction to its declaration and remitted the overdue tax (PLN 3.9 million) plus interest (PLN 1.0 million), which led to the utilization of the provision.

Proceedings on treating payments to employees as tax deductible expenses

The Parent Company was a party to an administrative court proceeding related to the negative individual tax ruling on corporate income tax. The subject of the dispute was the ability to treat as tax deductible expenses the gross disbursements awarded when distributing the net financial result on the date of making them or making the funds available to an employee along with the part of the social insurance contributions financed by the payer of these contributions. The Parent Company received a partially unfavorable individual tax ruling subsequently amended ex officio by the Finance Minister whereby it became totally unfavorable. The Parent Company submitted a complaint against the amended ruling with the Voivodship Administrative Court in Warsaw, which in its judgment of 6 December 2010 (case file III SA/Wa 160/10) deemed the Finance Minister’s position to be correct. On 5 January 2011 the Parent Company submitted a cassation complaint with the Supreme Administrative Court. On 3 October 2012, the Supreme Administrative Court in Warsaw issued a judgment dismissing the cassation complaint filed by JSW S.A.

Also, on 15 June 2012, the Parent Company submitted a request for an individual tax ruling in this respect, presenting the new factual status (recording accounting events and preparing financial statements in accordance with IFRS). On 18 September 2012, the Parent Company received a negative individual tax interpretation, which on 4 December 2012 it challenged before the Voivodship Court of Administration in Gliwice.

If the dispute is resolved in its favor, the Parent Company will be able to classify the higher costs as tax-deductible expenses; as a result the effective tax rate will decrease.

In the identical legal situation, on 5 November 2012, a Group company received a positive interpretation of the Finance Minister, ref. no. IBPBI/2/423-958/12/AP (regarding profit distribution) after a re-examination in connection with the judgment of the Supreme Court of Administration in Warsaw issued on 29 May 2012, file ref no. II FSK 2275/10 dismissing the cassation complaint filed by the Tax Authority.

4.9.3. Arbitration proceedings

Arbitration proceeding Zarmen Sp. z o.o. and others vs KK Zabrze

KK Zabrze was a party to the court proceeding conducted in connection with the unrecognized claim for payment for the performance of a construction contract of 17 October 2006 raised by the leader of the “Concorde-Radlin II” – ZARMEN Sp. z o.o. (GRI) Consortium.

In its judgment of 27 September 2012, the Court of Arbitration at the Polish Chamber of Commerce in Warsaw settled the dispute between KK Zabrze and GRI in respect of that agreement, ruling as follows:

1. Awarding from KK Zabrze to GRI the amount of PLN 30.9 million with statutory interest in payment of remuneration for the performance of the subject matter of the agreement.
2. Awarding from KK Zabrze to GRI the amount of PLN 8.7 million with statutory interest from 21 March 2009 to the date of payment in reimbursement of expenses incurred by GRI for the preparation of the missing technical documentation.
3. Awarding from KK Zabrze to GRI the amount of PLN 7.0 million with statutory interest from 6 August 2009 to the date of payment in liquidated damages for the delay in the delivery of the missing documentation to GRI.
4. Dismissing the remainder of GRI’s claim, i.e. for the amount of PLN 34.5 million with statutory interest.
5. Awarding from GRI to KK Zabrze the amount of PLN 0.5 million with statutory interest from 23 July 2010 to the date of payment for the costs of performance of the replacement work.
6. Dismissing the remainder of KK Zabrze’s claim according to the value of non-interest liabilities described in the Justification in the amount of PLN 63.4 million.

Moreover, as a result of a pleading filed by Zarmen Sp. z o.o. to append an enforcement clause to the above judgment and the possible motions requesting security, KK Zabrze paid PLN 23.5 million to the Court's deposit account as security.

On 26 October 2012, KK Zabrze filed a complaint with the Regional Court in Gliwice to set aside the Court of Arbitration's Award and then a supplement to the complaint was filed on 3 January 2013. As at 31 December 2012, the amount of the claim is PLN 46.6 million. The proceeding is pending with the file ref no. X GC 328/12.

The analysis of the Ruling and the Justification for the Award of the Court of Arbitration conducted to date allows for applying the following accounting treatment:

• out of the amount of PLN 30.9 million, PLN 28.0 million was posted to property, plant and equipment , while the remaining PLN 2.9 million was posted to other costs (this amount, at the time of the event, i.e. in the previous reporting periods, had the nature of other income),
• PLN 8.7 million was posted to property, plant and equipment,
• PLN 7.0 million in liquidated damages was posted to other costs,
• the awarded statutory interest accrued as at 31 December 2012 in the total amount of PLN 21.9 million was posted to other costs.

Regarding the tax consequences of the award, KK Zabrze recognized a deferred income tax asset of PLN 6.0 million, updated the deferred income tax provision for the valuation of property, plant and equipment by PLN 2.2 million and established a provision for the possible property tax effects, covering the principal amount and interest, which was PLN 0.9 million as at 31 December 2012.

As at 31 December 2012, a court proceeding was completed before the Corporate Court in Dnepropetrovsk for PrivatBank for the payment of the guarantee amount securing the performance of the construction contract of 17 October 2006 no. DN/NR/RI-35 In the Court’s judgment, the claim was rejected on the grounds that the signature of the authorized person appearing on the guarantee was not affixed by that person and the stamp of the bank did not match the original. Based on the Court’s judgment, KK Zabrze filed a notification of a criminal offense with the Regional Prosecutor’s Office in Zabrze. In the letter of 7 November 2012, the Prosecutor's Office stated that the investigation in the matter of a criminal offense from Article 270 § 1 of the Criminal Code has been launched.

The remaining Group entities do not participate in any arbitration proceedings.

Criminal proceedings

No criminal proceedings are pending that could have a material and adverse impact on the Group’s operations, financial position and profitability.