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[2017] ZASCA 153
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Commissioner for the South African Revenue Service v Reunert Ltd (971/2016) [2017] ZASCA 153; 80 SATC 113 (22 November 2017)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case
No: 971/2016
In
the matter between:
THE
COMMISSIONER FOR THE SOUTH AFRICAN
APPELLANT
REVENUE
SERVICE
and
REUNERT
LTD
RESPONDENT
Neutral
citation:
The
Commissioner for SARS v Reunert Ltd
(971/2016)
[2017] ZASCA 153
(22 November 2017)
Coram:
Cachalia,
Tshiqi, Seriti, Willis JJA and Ploos van Amstel AJA
Heard:
14
November 2017
Delivered:
22
November 2017
Summary:
Liability
for income tax: Whether commission earned in terms of agreement
accrued to taxpayer: proper interpretation of agreement:
language,
context, purpose, background: whether interpretation of agreement
commercially sensible: whether the manner in which
parties gave
effect to the agreement accorded with proper interpretation.
ORDER
On
appeal from:
Tax
Court (Mali J sitting as the President):
The
appeal is dismissed with costs, including the costs of two counsel
where so employed.
JUDGMENT
Cachalia
JA (
Tshiqi,
Seriti, Willis JJA and Ploos van Amstel AJA
concurring)
[1]
The South African Revenue Service (SARS) appeals against a tax court
order upholding Reunert’s appeal against its additional
assessments for the years 2008 and 2009 amounting to R26 856 859
and R53 143 142 respectively. SARS included
these in
Reunert’s gross income on the ground that they were part of the
gross commission that accrued to Reunert under a
Sales Promoter
Agreement (SPA). Reunert disputes that it acquired an unconditional
right to the gross commission and thus incurred
a tax liability for
the tax years in question.
[2]
The facts and the relevant contractual provisions in issue in this
appeal are set out in detail and considered later in this
judgment.
By way of introduction, Reunert held 40 per cent of the shares in
Nokia Siemens Networks South Africa (Pty) Ltd (NSN-SA).
The remaining
60 per cent of the shares were held by companies in the Nokia Siemens
Networks Group (NSN Group). In November 2007
Reunert and the NSN
entities (NSN) concluded the SPA in terms of which NSN appointed
Reunert as their sales promoter. In terms
of clause 4 Reunert would
earn a commission as consideration for its services.
[3]
Shorn of its verbiage its material provisions were the following: NSN
undertook, in clause 4.3, to pay Reunert commission twice
a year from
1 January 2008. For the period January to June, commission was
payable on 31 July and, for the period from July to
December, it was
payable on 31 January the following year. Clause 4.1 provided for the
commission to be calculated as a percentage
of NSN’s turnover
in Southern Africa. The calculation was based on a sliding scale
percentage of sales revenue. Importantly,
it was made ‘subject
to’ clause 4.9, which in effect said that Reunert’s
actual commission as calculated would
be reduced by the ‘grossed-up’
value: that is, the pre-tax value of any dividend Reunert received
from NSN-SA. Clause
4.10 enabled the sales revenue for each period to
be converted from Euros into Rands based on the average exchange rate
for each
month for the purpose of calculating the commission.
[4]
The appeal turns on the correct interpretation of clauses 4.1 and
4.9. Read together, they provide for Reunert’s commission
to be
calculated in two steps. The first is to calculate the gross
commission in terms of clause 4.1. The second is to calculate
the net
commission in terms of clause 4.9 by deducting the ‘grossed-up’
value of any dividend Reunert received from
NSA-SA at any time up to
the date of the calculation. Read thus, submits Reunert, it had no
unconditional right to the gross commission
because this was always
subject to deduction of the grossed-up value of any further dividends
received until the final date of
payment. Only then did Reunert
acquire an unconditional right to the net commission. It follows that
only the net commission, determined
after the deduction of the
further dividends, accrued to Reunert for tax purposes.
[5]
Reunert submits that its evidence demonstrated that NSA-SA
supplemented the dividends it paid to Reunert when they fell below
the levels preceding the agreement, which accords with the purpose of
clause 4 and the manner in which they implemented the agreement.
[6]
SARS contends, on the other hand, that the gross commission accrued
to Reunert in terms of clause 4.1 because it was possible
to
calculate the amount from month to month in accordance with clause
4.10, the right to receive it having vested when the sale
of products
were made. It was thus immaterial whether or not Reunert received the
dividends. The dividends Reunert in fact received
from NSN-SA in
terms of clause 4.9 thus constituted payments of the gross commission
by NSN-SA to it in terms of clause 4.1 and
accrued to it for tax
purposes.
[7]
SARS also relies on the notes in Reunert’s 2009 and 2010 annual
financial statements, which say that ‘NSN may pay
a dividend to
Reunert as a method of settlement of commission income’. These
notes, contends SARS, accord with its interpretation
of clause 4.9,
namely that the clause concerns the method by which Reunert was paid
its commission earnings and had no bearing
on the date of its
accrual.
[8]
The tax court upheld Reunert’s interpretation of the relevant
clauses. SARS maintains that it erred in doing so.
[9]
A proper interpretation of the relevant provisions of clause 4
requires a consideration of their language, the context within
which
they appear, their purpose and the background giving rise to them. In
addition, as the clause is apparently aimed at achieving
a legitimate
commercial purpose, an interpretation that sensibly advances this
purpose rather than one inimical to it should be
chosen.
[1]
[10]
While the starting point in this exercise is usually the text itself,
it is convenient to commence with the undisputed background
facts.
[11]
Mr David Rawlinson was Reunert’s financial director when the
SPA was concluded and retired as CEO. He explained the circumstances
that led to its conclusion. In 2007, the Nokia Group acquired the
global telecommunications division of the Siemens Group and
established the NSN Group. It succeeded the Siemens Group as the
majority shareholder in Siemens SA and changed the latter’s
name to NSN-SA.
[12]
Reunert held 40 per cent and the NSN Group held 60 per cent of the
shares in NSN-SA, a South African company through which
the Siemens
Group – which consists of NSN-SA and NSN Group – sold its
telecommunications products throughout Africa.
Their shareholders’
agreement obliged the Siemens Group to channel all its Southern
African business through NSN-SA, which
it did. Siemens Group in fact
channelled all its African business through NSN-SA. NSN-SA was
consequently ‘extremely profitable’
and paid ‘extremely
good’ dividends to its shareholders, including Reunert.
[13]
The NSN Group thereafter changed its business model. It decided to
stop conducting its African business through NSN-SA. Reunert
was
concerned that this would diminish NSN-SA’s profitability and
particularly the dividend stream it received from NSN-SA.
It thus
suggested to NSN Group that they buy out Reunert’s share in
NSN-SA. NSN Group was however keen to maintain Reunert
as a partner
in NSN-SA because of its close relationships with their biggest South
African customers. NSN Group therefore persuaded
Reunert to stay by
offering to top-up the dividends it received from NSN-SA if they fell
below historical levels. These were the
circumstances that led to the
adoption of the disputed clauses in the SPA and the background to
which we must have regard in their
proper interpretation.
[14]
The parties gave effect to this arrangement by two agreements in
November 2007. The first was a new Shareholders’ Agreement
in
terms of which Reunert agreed to stay on as a 40 per cent shareholder
in NSN-SA. The second was the SPA in terms of which NSN
undertook to
pay Reunert commission and to top-up the dividends it received from
NSN-SA as and when necessary if they fell below
historical levels.
[15]
On this understanding, which was given effect to in the SPA, NSN
appointed Reunert as its sales promoter in Southern Africa.
It
undertook, in clause 4, to pay commission to Reunert as follows.
Clause 4.3 said that, with effect from 1 January 2008, NSN
would pay
commission to Reunert for the period from January to June on 31 July,
and for the full year to December, on 31 January
the following year.
Clause 4.1 provided for the commission to be calculated on the
basis of a percentage of NSN Group’s
sales revenue in Southern
Africa. This formula was devised to maintain the dividend stream
Reunert had received, historically,
from NSN-SA expressed as a
percentage of NSN’s Southern African turnover. Clause 4.1
however expressly provided that its
calculation was ‘subject to
clause 4.9’.
[16]
Clause 4.9 provided that, if Reunert received a dividend
(‘shareholder payment’) from NSN-SA, the commission
payable
to Reunert had to be calculated by taking into account the
‘grossed-up’ dividend:
‘
If
Reunert receives a Shareholder Payment [a dividend] from NSN-SA after
1 January 2008, the amount of the Commission payable
to Reunert
for any period after 1 January 2008, shall be calculated by taking
into account any Grossed Up Shareholder Payments
received by Reunert.
If a Shareholder Payment is received by Reunert from NSN-SA on any
date other than the date of payment of
Commission in terms of this
Agreement, the next amount of the Commission payment due to Reunert
shall be determined by taking into
account the Grossed Up Shareholder
Payment. NSN-SA shall be entitled to determine which member of the
NSN Group shall be entitled
to adjust the Commission payable by it to
Reunert as a result of the provisions of this clause 4.9.’
The
clause went on to prescribe a formula for calculating the grossed-up
dividend. It was, in effect, the calculation of the pre-tax
value of
the (tax free) dividend. It meant that the commission payable to
Reunert on any payment date (the net commission) was
an amount equal
to the prescribed percentage of NSN’s sales revenue, calculated
in terms of clause 4.1 (the gross commission)
less the grossed-up
value of any dividend Reunert had received. If the grossed-up value
of the dividend exceeded the gross commission,
no commission was
payable and the excess of the grossed-up dividend was carried forward
to the calculation of the commission payable
on the next payment
date. If the grossed-up value of the dividend fell short of the gross
commission, NSN was obliged to pay the
shortfall only.
[17]
Simply put, these clauses had the following commercial implications:
First, Reunert was entitled to commission only if the
grossed-up
value of the dividends it received from NSN-SA fell short of the
gross commission calculated in terms of clause 4.1.
If the grossed-up
value of the dividends matched or exceeded the gross commission,
Reunert would not receive a commission. Secondly,
if the grossed-up
value of the dividends fell short of the gross commission calculated
in terms of this clause, Reunert was entitled
only to so much as
would compensate it for the shortfall. Thirdly, Reunert’s
commission was calculated twice a year, on 31
July (the interim
payment), and on 31 January the following year (the final payment).
Until the calculation was done, it was impossible
to ascertain
whether Reunert would be entitled to any commission at all, and, if
so, what the amount would be.
[18]
On this basis, Reunert contended successfully before the tax court
that it was liable to pay income tax only on the net commissions
calculated in terms of clause 4.9 and not on the gross
commission calculated in terms of clause 4.1, as SARS insisted it
was. The reason was that Reunert never became unconditionally
entitled to the gross commission calculated in terms of clause 4.1
because this calculation was always subject to reduction in terms of
clause 4.9. It was not possible to determine, until the last
day,
whether Reunert would be entitled to any commission at all and, if
so, how much. Reunert thus never became unconditionally
entitled to
the gross commission calculated in terms of clause 4.1 because its
claim was contingent upon the further dividends
it might receive at
any time until the last day. Only then did it become possible to
determine the net commission in terms of clause
4.9. This was the
only commission to which Reunert became unconditionally entitled. In
other words, it was the only commission
that accrued to Reunert for
tax purposes.
[19]
SARS contended in the tax court, as it does before us, that Reunert
became unconditionally entitled to commission in terms
of clause 4.1
for the tax years in question. This was because it was possible for
Reunert to ascertain in terms of clause 4.10
the commission due to
it, monthly. I do not think there is any merit in this submission.
Clause 4.10 enabled the sales revenue
for each period to be converted
from Euros into Rands based on the average exchange rate for each
month for the purpose of calculating
the commission; it has no
bearing on Reunert’s entitlement to receive commission, as the
tax court correctly found.
[20]
But the more fundamental problem with SARS’ contention that
clause 4.1 vested Reunert with an unconditional right to
gross
commission based on a sliding scale percentage of sales revenue is
that this calculation was expressly made ‘subject
to clause
4.9’. The words ‘subject to’ are usually used in
statutes as subordinating language to denote that
the first clause
(clause 4.1) is subordinate to the second (clause 4.9).
[2]
In other words Reunert’s entitlement to receive a commission in
clause 4.1 is subordinated by clause 4.9, which provides
for a
further reduction if Reunert receives a dividend from NSN-SA at any
time before the final payment date.
[21]
SARS contends however that clause 4.9 does not have this effect. Read
contextually, so the argument goes, it is a material
term of the SPA,
which deals with the amount of commission payable and the method by
which Reunert is paid its commission earnings;
it does not concern
the determination of the amount to which Reunert has become entitled.
[22]
I consider SARS’ reading of these clauses to be at odds with
their language. Clause 4.1 says expressly that the ‘amount
determined’ to be paid to Reunert as commission is ‘subject
to’ clause 4.9. Clause 4.9 is thus as integral to
the
calculation of Reunert’s commission as is clause 4.1. This is
because it emphatically says that if Reunert receives a
dividend from
NSN-SA, the commission payable to it ‘shall be calculated’
and ‘shall be determined’ by deducting
the grossed-up
value of the dividend. Furthermore, clause 4.9 says in terms that the
NSN-SA is entitled to ‘adjust the commission
payable by it to
Reunert as a result of the provisions of this clause.’ This can
only mean that Reunert is entitled to receive
whatever the adjusted
amount is determined to be due to it, not the commission determined
under clause 4.1.
[23]
It follows that Reunert’s claim to commission could only be
determined by subjecting the calculation in 4.1 to any possible
reduction by the grossed-up value, that is, the pre-tax value, of any
dividend Reunert received from NSN-SA in terms of clause
4.9 until
the payment date. So, SARS’ contention that Reunert became
entitled to commission in terms of clause 4.1 must fail
as it flies
in the face of the express language of the clause. It is also at odds
with Rawlinson’s evidence regarding the
background and purpose
of the SPA, which was devised to protect the dividend stream that
Reunert received historically from NSN-SA.
This was done, he said, by
ensuring that there was a top-up mechanism should Reunert’s
dividend stream fall below a prescribed
level. This purpose found
expression in clause 4.9.
[24]
In addition, Reunert’s interpretation yields a sensible
commercial result. It serves its purpose of topping-up the dividends
Reunert receives from NSA-SA, whenever they fall below historical
levels. On the other hand, SARS’ contention that NSN-SA’s
dividend payments to Reunert also constituted commission payments has
no apparent commercial rationale. It carries the unavoidable
implication that a dividend paid by a company to its shareholder, is
at the same time being treated as a payment of a debt owed
to the
shareholder. As Reunert correctly submits, it can only be the one or
the other, but never both.
[25]
What remains is to determine the dispute regarding the manner in
which the SPA was implemented. Reunert contends that its unchallenged
evidence demonstrates conclusively that the parties implemented the
SPA in a manner consistent with its interpretation of clause
4. SARS,
on the other hand, points to the notes in Reunert’s 2008 and
2009 annual financial statements which treat the dividend
as payment
of a commission due to it as provided for in clause 4.9. It contends
that the manner in which the payments were dealt
with in the
statements supports its interpretation of the clause, which is that
the dividend declared was used as a method of paying
the commission
that had already accrued to Reunert for the sale of products.
[26]
It is unnecessary to traverse Reunert’s evidence in any detail
as it was not seriously disputed. Reunert called four
witnesses.
Rawlinson was the first. He was followed by Mr Shane Francois
Prinsloo, who is an accountant and NSN’s tax adviser;
Ms
Annemarie Schroeder, Reunert’s tax adviser, and Ms Manuela
Krog, a chartered accountant who was responsible for Reunert’s
audit whilst she was a partner at the audit company, Deloittes. In a
nutshell the effect of their evidence was that Reunert never
became
entitled to or received any gross commission. The only commission to
which it became entitled and in fact received was the
amount
determined after the deduction of dividends. Their evidence,
supported by telling documentary proof, showed that Reunert
never
invoiced NSN-SA for gross commission – the only commission for
which NSN-SA was invoiced, and made payment, was the
net commission
as envisaged in clause 4.9.
[27]
SARS has another difficulty: Not only did the parties implement the
agreement as testified by their witnesses, but SARS itself
issued a
receipt for a payment of R20 million from NSN-SA in February 2009.
The payment was for income tax on the dividend paid
to Reunert in the
tax year in question. In other words, SARS acknowledged the payment
to Reunert as a dividend and not commission.
I reiterate what I said
earlier, it could only be one or the other, not both.
[28]
It is therefore clear that the parties to the SPA – including
SARS – did not treat the gross commission calculation
in terms
of clause 4.1 as a debt NSN-SA owed Reunert, or deal with dividends
paid to Reunert as the payment of such a debt. It
is also clear from
their evidence that the commission did not accrue monthly as and when
sales were made but accrued only at the
end of the six month period
after the gross commission was reduced by the dividends paid out.
They were emphatic that the dividend
declared was not used as a
method of paying the commission that had already accrued to Reunert.
[29]
Of course, on this last aspect – that the dividend declared was
a method of settlement of commission income – the
notes to the
annual financial statements are admittedly inconsistent with their
evidence. Rawlinson testified that this was an
error but there was no
explanation for how the error had occurred. He had in fact signed
them off. Schroeder also could not explain
the error. It also weighs
against Reunert that it did not call the person or persons who were
responsible for preparing the statements
for the relevant period to
explain the error.
[30]
However, it was not contended that any of the evidence of Reunert’s
witnesses, in particular Rawlinson’s, was untruthful.
And,
given the weight of the undisputed evidence regarding the manner in
which the parties implemented the SPA, which is at odds
with how it
is described in the notes to the annual financial statements, I
consider that Reunert discharged the onus of proving
that SARS’
decision to disallow its objection to the assessments was wrong. I
come to this conclusion despite what the notes
in the annual
financial statements say because, in addition to the evidence of how
the parties implemented the agreement, the background
facts leading
to its conclusion and a proper interpretation of clauses 4.1 read
with 4.9, which includes a consideration of their
purpose, permit no
other finding.
[3]
[31]
In the result the appeal is dismissed with costs, including the costs
of two counsel where so employed.
_______________
A
Cachalia
Judge
of Appeal
Appearances:
For
Appellant:
P Ginsburg SC
(with him G Goldman)
Instructed
by:
RW Attorneys, Pretoria
Phatshoane Henney
Attorneys, Bloemfontein
For
Respondent:
W Trengove SC
Instructed by:
Cliff Dekker Hofmeyr Inc,
Sandown
Honey Attorneys,
Bloemfontein
[1]
Natal Joint Municipal Pension Fund
v Endumeni Municipality
2012
(4) SA 593
(SCA) para 18.
[2]
University of the Free State v
Afriforum & another
2017
(4) SA 283
(SCA) para 35.
[3]
Compare
Anglo
Platinum Management Services (Pty) Ltd v Commissioner, South African
Revenue Service
2016 (3)
SA 406
SCA para 34.