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[2016] ZASCA 160
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XO Africa Safaris v CSARS (395/15) [2016] ZASCA 160; 79 SATC 1 (3 October 2016)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case
No: 395/15
Reportable/Not reportable
In
the matter between:
XO
AFRICA SAFARIS
CC
APPELLANT
and
THE COMMISSIONER FOR
THE SOUTH AFRICAN
REVENUE
SERVICE RESPONDENT
Neutral
Citation:
XO Africa Safaris v CSARS
(395/15)
[2016] ZASCA 160
(3 October 2016)
Coram:
Navsa, Wallis, Saldulker and Mathopo JJA and
Dlodlo AJA
Heard:
5 September 2016
Delivered:
3 October 2016
Summary:
Value Added Tax (VAT) – local
company assembling package tours for foreign tour operators and
individuals – whether
supply of services attracting VAT at
standard rate or whether zero rated in terms of s 11(2)
(l)
of Value Added Tax Act 89 of 1991 – services supplied to person
not a resident of the Republic but supplied directly to other
persons
who were in the Republic at the time the services were rendered –
VAT payable at standard rate.
ORDER
On appeal from the Tax
Court, Johannesburg (Le Grange J) sitting as court of first
instance):
The appeal is dismissed
with costs including the costs of two counsel.
JUDGMENT
Mathopo
JA (Navsa, Wallis and Saldulker JJA and Dlodlo AJA concurring):
[1]
The appellant, XO Africa Safaris CC (XO), assembled tour packages for
foreign tour operators (FTO’s) arranging for group
and
individual foreign tours to this country. These packages included
accommodation, travel, restaurant bookings and recreational
activities, such as golf, safaris, whale watching and the like (local
services). Some of the tour groups were in South Africa partly
for
business and partly for social purposes, in which event the packages
included arranging meeting facilities and the like. XO
accepted that
this involved a supply of services to the FTO, but claimed that it
was a supply that was zero rated in terms of s 11(2)
(l)
of the Value Added Tax Act 89 of 1991 (the Act). The Commissioner:
South African Revenue Services (SARS) contended that these services
did not fall within s 11(2)
(l)
, but were subject to the
standard rate of VAT of 14% in terms of s 7(1) of the Act.
[2]
On 22 November 2010, after an audit, SARS gave a letter of audit
findings to XO, indicating its intention to raise VAT at the
standard
rate on the supply of ‘tour packages and services’ to
FTO’s during the tax periods to February 2008
and 2009 and
April 2010. XO’s attorneys responded indicating that XO would
object to any assessment raised on that basis.
A letter of assessment
to VAT, together with penalties and interest, was issued on 4 March
2011 and the promised letter of objection
came on 25 March 2011. The
objection was upheld in regard to penalties and, interest, but
disallowed in relation to the assessment
to VAT. Aggrieved by this
decision, XO took the decision of SARS on appeal to the Western Cape
Tax Court (Le Grange J), which dismissed
XO’s case and held
that XO directly supplied the local services to the FTO’s
and/or their customers on their behalves
and accordingly VAT was
payable at the standard rate. This appeal is with the leave of that
court.
[3] At this stage it is
necessary to set out in brief, in the paragraphs that follow, the
relevant factual background. In doing
so I borrow largely from the
court a quo’s judgment.
Background facts
[4]
XO is a registered VAT vendor in terms of the Act. It operates a
business involving the supply of services to FTO’s which
are
non-resident in the Republic of South Africa. The accommodation would
be used, the meals eaten and the other activities enjoyed,
by the
members of the tour groups assembled by the FTO’s. They or, in
some cases involving commercial groups, their employers
would pay the
FTO for the right to enjoy these services and activities. These
individuals had no direct contractual connection
with XO, which
contracted with the FTO.
[5]
According to SARS, XO contracted local suppliers to provide local
services to itself and thereafter XO supplied the local services
to
the FTO or the FTO’s customers when they were in the Republic.
It did this, according to SARS, by concluding contracts
for the
supply of the local services with the hotels, restaurants and other
providers of such services and contracting separately
with the FTO’s
to provide those services to the members of the tour parties when
they were in South Africa. When the agreements
were concluded with
the FTO’s, neither the FTO’s nor their customers were in
the Republic. Once an agreement between
XO and an FTO was concluded,
XO arranged the local services with the local supplier if, it had not
already done so, as was often
the case. If prior arrangements had
been made these would be confirmed. XO then invoiced the FTO for a
lump sum which included
the local service provider’s costs and
its own mark-up. The FTO’s were not advised and had no
knowledge of the prices
charged by the local suppliers.
[6]
It is apparent that the mark-up set by XO was not fixed nor disclosed
to the FTO’s. The FTO’s and their customers
could not
demand that the local supplier disclose the price it had charged. XO
did not account to the FTO for the amounts which
it received from
them. The amounts charged by XO to the FTO were determined by
reference to what the FTO was willing to pay for
the local services.
In its books of account, XO included the amounts invoiced to the FTO
as sales and treated the costs invoiced
to it by the local suppliers
as expenses. In its annual financial statements the value of the
services supplied by it to the FTO’s
was reflected in its gross
revenue. XO’s position in its books of account was therefore
that it was acquiring services from
the local service providers,
which constituted its cost of sales, and included in its income
amounts which it charged to the FTO’s.
[7] In terms of the
agreements with the FTO’s it was the responsibility of XO to
ensure that the local services were properly
provided during the
tours. XO employed consultants to make sure that the hotels and
conference facilities were properly booked
and set up. In the event
of a problem with the local supplier it was incumbent upon XO to
rectify the problem. The FTO and its
customers played no role in this
regard. This was because XO had a contract with the local supplier
and FTO and its customers had
no contract with them.
The evidence
[8]
XO called three witnesses, Mr Charrieras, Ms Kimmich and Ms Mignot.
Their evidence related to five group and individual leisure
tours
selected as typical.
[9]
The documents in relation to these tours indicated that XO contracted
with local suppliers to provide local services to XO.
XO arranged for
the local services to be made available to the FTO’s customers.
It is common cause that not all agreements
between XO and the FTO’s
were reduced to writing. The case was dealt with on the basis of
these five inbound tours because
they were accepted to be
representative of XO’s business operations and could be applied
to all its dealings with FTO’s.
[10]
Mr Charrieras testified that although written contracts were not
always concluded with an FTO, the contractual relationship
between XO
and an FTO was that XO would provide the local services listed in the
itinerary, budget or programme provided to it,
and that the FTO would
purchase such services. It was his evidence that the local services
were provided in the Republic. He further
testified that XO’s
consultants were normally posted at the hotels to deal with any
problems raised by the FTO’s or
their customers. In
cross-examination he conceded that the consultants were necessary
because ‘that’s what [XO] are
paid for’, to ensure
that the local services were provided during the tours. It was his
evidence that amongst the duties
of the consultants would be to make
sure that the conference facilities were correctly set up. At no
stage were the complaints
of the customers attended to by the hotel
personnel. In relation to corporate tours the staff of XO were, on
occasion, involved
in checking that local suppliers were properly
prepared to provide certain of the services. He said that XO had
purchased the local
services from the local supplier. Based on that
he stated that XO was entitled to deduct input VAT charged by the
local suppliers.
Furthermore, his evidence continued, that in
addition to the profit comprising its mark-up, XO made a further
profit equivalent
to 14% of the charges, because XO would claim an
input VAT deduction in circumstances where XO did not pay output VAT.
This, in
other words, meant that if XO was not liable for output VAT
charged at 14%, it was making profit at the expense of the fiscus.
[11]
In cross-examination he conceded that the services were provided to
the customers of the FTO when they were in the Republic,
but denied
that they were provided by XO.
[12]
Ms Kimmich gave evidence about how XO entered into agreements with
local suppliers for the services to be supplied to XO. According
to
her no other entity or party was involved in the agreement. The
unchallenged evidence of Ms Mignot centred mainly around her
role
with regard to the preparation of the documents and emails in respect
of the tours arranged for an FTO called Preference Events.
[13]
The emails reveal that XO was approached by Preference Events, and
FTO’s, to formulate a tour programme for a commercial
entity,
Total Lubrifiants. The programme included both business meetings and
social events. It appears that Preference Events had
to tender for
the project because an email dated 11 November 2009 addressed to Ms
Mingot by the FTO said that ‘we have been
selected for the
Total tour’ and she replied: ‘I am delighted that we have
won this great project together.’
There was a good deal of
correspondence thereafter concerning the different elements of the
tour. Ms Mingot, on behalf of XO, contacted
various local suppliers
to arrange accommodation, restaurants and entertainment for the tour.
As one might expect the programme
was adjusted from time to time as
the date of the tour drew near and more details emerged of the people
in the tour party.
[14]
On 11 November 2009 XO sent to Preference Events a detailed proposed
itinerary for the tour, which was to take place from 28
March 2010 to
1 April 2010. It specified in great detail the entire programme for
each day and the cost of each element of the
package. On arrival in
Cape Town XO would assist at the airport and greet the tour party.
The first item for which a charge would
be levied was porterage at
the airport. Provision was then made for a French speaking guide and
transport in a coach to the hotel.
The extent of the detail is
apparent from the inclusion of an optional item of a bottle of water
for each passenger on the bus
to the hotel. The itinerary went on to
detail gifts on arrival at the hotel, porterage, and transport in the
coach to the Waterfront
in Cape Town. This was to be followed by a
Sundowner Cruise and dinner at a restaurant in the Waterfront
complex. Various options
were offered under that head. Each item was
separately charged for, some, such as the dinner, at a per person
rate and some, such
as the cruise, on a group basis. Finally, for
that day, provision was made for the accommodation of the members of
the touring
party on a sharing basis (with the possibility of paying
a single room supplement) in a hotel.
[15]
The itinerary continued on that basis for each day of the proposed
tour. Its closing entries are relevant. After dealing with
the return
of the party to Europe and what are described as ‘Global
services throughout the program’, the notation
‘End of
our services’ appears. The final portion deals with the cost
and records that the ‘Total for services
quoted in ZAR’
is R792 669. If the reader wanted more information about XO’s
general terms and conditions they were
referred to XO’s
website.
[16]
The itinerary was updated from time to time during the preparation of
the tour with the final version being dated 5 May 2010,
after the
tour was over. It was always in the same form. Also forming part of
the trial bundle before the Tax Court were the supporting
invoices
from the local suppliers, that is, the hotel, the restaurants and the
providers of entertainment. They were all addressed
to XO and were
payable by XO, not the FTO. An examination of the invoices shows no
consistent relationship between the prices set
out in the itinerary,
that is, the prices XO was charging Preference Events and the prices
charged to XO by the local suppliers.
[17] In the case of the
Total Lubrifiants tour a written contract was concluded on XO’s
standard general terms and conditions.
It was accepted in argument
that all the contracts giving rise to the appeal were on the same
terms. They are revealing. The Letter
of Agreement commences by
saying that and Preference Events:
‘
Have
agreed that XO Africa will provide and PREFERENCE EVENTS will
purchase materials and services for the Programme or referred
to
therein …’
The group’s name is
given as Total Lubrifiants and the Programme is identified as being
annexed to the letter of agreement
as ‘annex 1 – Budget
B’ That is the document already described. Under the heading
‘Budget’ it was
said that:
‘
The
fully itemised Budget specifying all fares, prices and fees for all
materials and services purchased in relation with the Programme
has
been attached to the present Letter of Agreement. See annex 1 –
Budget B.’
Lastly,
in the letter of agreement, a payment schedule was set out under
which 30 percent of the initial budget was payable upon
signature
of the letter of agreement; a second deposit of 40
percent was payable three months before the group’s departure;
a deposit
of 95 percent of the estimated land arrangements and air
travel and charter arrangements would be paid at the latest thirty
days
before departure, and the final billing would be eight days
after completion of the programme, that is, by 9 April 2010.
[18] Under the heading,
‘General Terms and Conditions’ the following appears:
‘
XO
Africa and PREFERENCE EVENTS have agreed that for the consideration
described herein, XO Africa will provide and PREFERENCE EVENTS
will
purchase materials and services described in the attachments for the
Programme described or referred to therein (the “Programme”)
on the following conditions:
1.
Services:
XO Africa shall perform services listed. Services will be limited to
those outlined, unless otherwise agreed to in writing.
. . .
3.
Prices:
Payment and consideration to XO Africa for services described herein
shall be in accordance with prices listed herein, subject
to terms
and conditions hereof:
a. Prices stated herein
have been quoted by XO Africa with respect to the Programme described
herein and shall not bind XO Africa
with respect to any other
Programme.
b. Prices are subject to
compliance with timelines outlined.
c. Prices have been based
on the specified number of people and travel dates shown on this
letter of agreement, and will be adjusted
accordingly if the number
of participants and/or dates change.
d. The quoted land prices
for this Programme is based on negotiated tariffs and applicable
taxes. In the event that these rates
are revised by XO Africa’s
suppliers (transportation, carriers, hotels, guides, sightseeing
contractors, etc.) or destination
government prior to the operation
of this Programme, XO Arica will notify PREFERENCE EVENTS of any
necessary price deviations.
e. XO Africa’s
services are labelled in specific currencies being the South African
Rand (ZAR), the Euro (€) or the US
Dollar ($) applicable to the
destination of travel or the type of services to be provided. The
different parts of the budgets will
be invoiced in their respective
applicable currencies and payment should be received as such. [On
Programmes to foreign destinations,
the pricing has been calculated
on a specific currency exchange rate (listed on the attached budget
spread sheet), which may change
prior to travel dates. As a result,
XO Africa will notify PREFERENCE EVENTS of any necessary price
revisions. Note that only average
exchange rates will be applied. XO
Africa can also offer PREFERENCE EVENTS the benefit of advance
purchase options on currencies.
It will however be PREFERENCE
EVENTS’s full responsibility to make use or not of this
service.]
. . .
12 XO
Africa: acts as agent or intermediary to arrange the means of
transportation, lodging and other services as described . .
.’
[19] All XO’s
dealing with FTO’s followed the pattern set out above. That was
all undisputed. It is in the light of
those facts that I turn to
consider the applicable law and the contentions of XO and SARS.
The law
[20]
The issue in this case is primarily concerned with the application of
s 11(2)
(l)
to XO’s activities. The cardinal consideration in determining
the intention of the legislature is to interpret the provision
in the
context of the Act as a whole, and its history and the explanatory
memoranda in the event of any uncertainty. See for example
Natal
Joint Municipal Pension Fund v Endumeni Municipality
[2012] ZASCA 13
593 (SCA) para 18, where this court set out the
relevant principles to be used in interpreting statutes.
Those
principles are equally applicable to taxing statutes.
Commissioner,
South African Revenue Service v Bosch and Another
2015
(2) SA 174
(SCA) para 9.
[21] Section 7(1)
(a)
of the Act imposes value added tax and applies to the whole of the
Republic. It provides as follows:
'(1) Subject to the
exemptions, exceptions, deductions and adjustments provided for in
this Act, there shall be levied and paid
for the benefit of the
National Revenue Fund a tax, to be known as the value-added tax —
(a)
on the supply by any vendor of goods or
services supplied by him on or after the commencement date in the
course or furtherance
of any enterprise carried on by him;
(b)
on the importation of any goods into
the Republic by any person on or after the commencement date; and
(c)
on the supply of any imported services
by any person on or after the commencement date,
calculated
at the rate of 14 per cent on the value of the supply concerned or
the importation, as the case may be.'
[22] It was submitted on
behalf of XO that the services rendered by XO were not subject to VAT
at the standard rate in terms of
s 7(1)
(a)
, of the Act,
but that such services should have been zero rated in terms of
s 11(2)
(l)
of the Act. Section 11(2)
(l)
provides
as follows:
‘
(2)
Where, but for this section, a supply of services . . . would be
charged with tax at the rate referred to in section 7(1), such
supply
of services shall, subject to compliance with subsection (3) of this
section, be charged with tax at the rate of zero per
cent where —
. . .
(l)
the services are supplied to a person
who is not a resident of the Republic, not being services which are
supplied directly —
(i) in connection with
land or any improvement thereto situated inside the Republic; or
(ii) in connection with
movable property (excluding debt securities, equity securities or
participatory securities) situated inside
the Republic at the time
the services are rendered, except movable property which —
(aa)
is exported to the said person
subsequent to the supply of such services; or
(bb)
forms part of a supply by the said
person to a registered vendor and such services are supplied to the
said person for purposes
of such supply to the registered vendor; or
(iii)
to the said person or any other person, other than in circumstances
contemplated in subparagraph (ii)
(bb),
if the said person or
such other person is in the Republic
at the time the services are
rendered
.’ (My emphasis).
[23]
Before us, XO contended that its services should be zero rated
because it did not supply or render the local services directly
to
the FTO or its customers. XO submitted that it entered into a
back-to-back agreement with the FTO in terms whereof the local
supplier would give XO an undertaking that it would render the local
services to the customers identified to it by XO. According
to XO the
local supplier would then supply the customer with local supplies
when the customer arrived in the Republic, thereby
discharging its
obligations to XO by performance in favour of the
adjectus
solutionis gratia
nominated by it. On this basis it was contended
that the local suppliers rendered services to XO by performing their
contracts in
favour of the tourists; that XO rendered the service of
organising the package to the FTO and the FTO had a contract with the
foreign
tourists to ensure that they would receive services while in
South Africa from the local suppliers
[24] The argument was
that there needed to be, a direct connection between the party that
supplied the services i.e. XO and the
recipient thereof, and since
there was no direct relationship or connection between XO and the FTO
or its customers in relation
to the local services, these services
were not directly supplied by XO. The nub of XO’s case was that
the local services
were rendered by the local supplier directly to
the FTO or its customers because XO had no direct relationship with
the customers.
It was XO’s case that the service which it
provided to the FTOs in terms of the back-to-back agreement was not a
local service
and attracted VAT at zero per cent, because it was a
service supplied to a person who was neither resident nor present in
South
Africa.
Discussion
[25]
It is clear that the resolution of this dispute requires
consideration of the following: (a) what services did XO supply? (b)
to whom did XO supply such services? (c) were the parties to whom
such services were supplied, residents of, or present in the
Republic
when such services were supplied? To resolve this regard should be
had to the applicable statutory provisions as well.
[26] A subsidiary issue
which can be disposed of summarily relates to the argument raised by
XO in its heads of argument that SARS
sought to widen its grounds of
assessment in para 16.4 of its statement of assessment. XO’s
objection was that SARS was bound
by its amended grounds of
assessment when it stated that the local services were rendered by
the hotel to the customers, and could
not widen its grounds by
stating that XO directly supplied the local services to the
customers. SARS contended that XO misconstrued
the context in which
the averment was made and denied that the paragraph introduced a new
ground. Paragraph 16.4 read as follows
‘
[XO]
arranged the tours, including inter alia the Local Services. [XO] did
so by entering into agreements with the local service
suppliers (the
“Local Service Suppliers”) in terms of which the Local
Service Suppliers agreed to supply the Local
Services to the
Customers when they undertook the tours in the Republic.’
[27]
In my view para 16.4 was clearly foreshadowed in the notice of
findings and the notice of assessment, as well as the responses
to
these in the letter of objection by XO’s attorneys and
described the manner in which XO performed its contractual
obligations
vis-à-vis the local service suppliers. There was
no merit in this point. At all stages the issue was whether XO
admitted
the supply of services to the FTO’s fell within
s 11(2)(l) of the Act.
[28]
Turning to the factual issues referred to in para 26 above, the
difficulty confronting XO’s argument was that it was
wholly
inconsistent with the facts as they emerged from the evidence and the
documents. It was correct insofar as it said that
XO contracted with
local suppliers to provide local services to foreign tourists, whom
XO would identify. It was wholly incorrect
when it said that the only
services XO supplied to the FTO’s were the organisational
services involved in assembling the
tour package and nothing else.
[29]
The letter of agreement, standard terms and conditions of contract
and the itinerary attached to the letter of agreement proclaimed
unequivocally that XO was providing materials and services consisting
of accommodation, meals, entertainment, gifts, transport
and the like
as specified in the itinerary. That is what XO undertook to provide
to the FTO’s; that is what it was paid to
provide and that is
what it provided. The fact that in order to perform its obligations
towards the FTO’s it in turn had
to acquire those goods and
services from local suppliers was neither here nor there. Its
contract was to provide those goods and
services. How it did so was
no concern of the FTO. And it provided those goods and services, not
directly to the FTO, but to other
persons who were in the Republic at
the time that the goods and services were provided. That served to
exclude these services from
the class of services that enjoy zero
rating under s 11(2)
(l)
. SARS was accordingly correct in
saying that the supply of the services attracted VAT at the standard
rate.
[30]
We were taken to the various amendments of this section which led to
the current version of the section around which the dispute
between
the parties revolves. That history showed that the statutory purpose
underlying s 11(2)
(l)
was to ensure that where services
were rendered to a foreigner by a person liable to pay VAT, but the
services themselves were
rendered in South Africa and the benefit of
them was enjoyed in the Republic, they would not enjoy the benefit of
zero rating.
VAT would be payable at the standard rate.
[31]
The argument of XO is unsustainable because, if is followed, it would
mean that notwithstanding the fact that the services
were consumed in
the Republic and XO would have a claim for input VAT in relation
thereto, the fiscus would forego the 14% output
tax levied on the
supply of local services by XO. This court has already held that the
purpose of this provision is to ensure that
when services are
consumed in South Africa VAT is payable at the standard rate (see
Master Currency v CSARS
2014 (6) SA 66
(SCA)).
[32] In the result the
appeal is dismissed with costs including the costs of two counsel.
________________________
R S MATHOPO
JUDGE OF APPEAL
APPEARANCES:
For
appellant:
S A Cilliers SC (and T S Emslie SC and M W Janisch SC)
Instructed
by:
Webber
Wentzel, Cape Town
Honey
Attorneys, Bloemfontein
For
respondent: P A Solomon SC (and J
Boltar)
Instructed
by:
Mothle
Jooma Sabdia, Pretoria
Symington
& De Kok, Bloemfontein