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[2012] ZAGPPHC 312
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Sasol Oil (Pty) Ltd v Commissioner for the South African Revenue Service (17583/2012) [2012] ZAGPPHC 312 (30 November 2012)
NOT
REPORTABLE
NORTH
GAUTENG HIGH COURT,
PRETORIA
REPUBLIC OF SOUTH AFRICA
Case
No: 17583/2012
Date
heard:30/11/2012
In
the matter between:
SASOL
OIL (PTY)
LTD
...............................................................................
Applicant
And
COMMISSIONER
FOR THE SOUTH AFRICAN
REVENUE
SERVICE
..................................................................................
Respondent
JUDGMENT
PHATUDI
J:
[1]
The applicant, a taxpayer as defined in the Income Tax Act 58 of 1962
(the Tax Act) seeks this court to review and set aside
the decision
raised and relied on by the Commissioner for the South African
Revenue Services, (the Respondent) as the second ground
in the
statement of grounds of assessment dated 2 December 2011 (the second
ground).
1
[2]
In the alternative, the applicant seeks a declarator that the
respondent’s decision to raise the second ground is invalid
on
the basis of the constitutional principle of legality.
2
[3]
The respondent, as required in terms of the provisions set out in
section 77(1) read with section 77(3) of the Tax Act determined
the
taxable amount Levi able under the Tax Act and is chargeable
3
on
the applicant in respect of the 2005, 2006 and 2007 years of
assessment, (original assessment)
[4]
Pursuant to certain queries raised by the respondent relating to the
applicant’s tax affairs pertaining to the 2005 and
2006 years
of assessment, the parties concluded an agreement
4
to extend the three year period of prescription in respect of 2005
and 2006 years of assessment.
[5]
The queries raised by the respondent ‘include issues relating
to certain agreements entered into between the [applicant]
and
certain international parties, namely Sasol International Services
Limited (SISL)... which company is registered in the United
Kingdom
and Sasol Oil International Limited (SOIL) ... which company is
registered in the Isle of Man’.
5
The respondent request the applicant to furnish certain information
as set out in the letter dated 8 July 2009
6
Pursuant thereto the parties agreed that 1 ... in order for the
Commissioner to have sufficient time to analyse the information
provided by the Taxpayer, it is to the best advantage to both the
Taxpayer and the Commissioner that the Commissioner be afforded
an
extended time period within which to raise additional assessments in
respect of the 2005 and 2006 year of assessment.
1.2
That the Commissioner be entitled to raise the 2005 and 2006
additional tax assessment at a date post the prescription date
in
accordance with section 79(1 )(i)(bb) of the Act, subject to the
provisions of clause 2 below.
2.
TERMS OF THE AGREEMENT:
2.1
It is agreed that the Commissioner be permitted to raise additional
tax assessment in respect of each of the 2005 and 2006 years
of
assessment on or before 30 April 2010. It is further agreed that the
additional tax assessments will be restricted to issues
pertaining to
arrangements or agreements entered into between the Taxpayer and SISL
and SOIL, in terms of the letter of enquiry
issued by the
Commissioner, dated 8 July 2009, a copy of which is attached hereto.
2.2
It is agreed by both the Commissioner and the Taxpayer that, save for
the agreed change of the date pertaining to prescription,
the effect
and content of section 79 of the Act will mutatis mutandis remain
applicable between the Commissioner and the Taxpayer
with regards to
the 2005 and 2006 years of assessment.’
[6]
Subsequent thereto, the respondent raised additional assessments in
their letter dated 30 April 2010. The applicant sought additional
reasons for the said additional assessments. On receipt thereto, the
applicant objected to additional assessments which led to
the
applicant lodging an appeal with the Tax Court.
[7]
On the 2 December 2011 the respondent delivered its statement of
grounds of assessment as envisaged in terms of Rule 10 of the
Tax
Court Rules. The grounds of assessment are worded: ‘Alternatively,
the “net income" of SISL which was included
in Sasol oil’s
“income” included the Assessed Amounts...
5.2.1
For the reasons discussed in paragraphs 2.7.1 to 2.7.3 above, during
each relevant year (in terms of section 9D(2)), there
was included in
the “income” of
Sasol
Oil for that year, "an amount equal to ... the net income"
of SISL, determined for each “foreign tax year”
of SISL
which ended during the year.
5.2.2
The “net income" of SISL in respect of a “foreign
tax year” was “an amount equal to the taxable
income of
[SISL] determined in accordance with the provisions of [the Income
Tax] Act as if [SISL] had been a taxpayer, and as
if [SISL] had been
a resident for the purposes of the definition of “gross
income”...”
5.2.3
In determining its taxable income a “resident” is
entitled to deduct expenditure incurred by it which satisfies
the
requirements of section 11(a) and section 23 of the Income Tax Act.
5
2.4 Expenditure incurred for the purposes (and with the effect) of
producing “income” (as defined in the Income Tax
Act) is
incurred “in the production of income” for the purposes
of section 11(a), while expenditure incurred for some
other purpose
is not so incurred.
5
2.5 In order for expenditure to have been incurred “for
purposes of trade" as contemplated in section 23(g) of the
Income Tax Act, the expenditure must have been incurred for the
purpose of the relevant taxpayer carrying on its profit making
activities.’
7
[8]
The second ground is recorded as ‘the “net income”
of SISL which was included in Sasol Oil’s “income”
included the Assessed Amounts
3.2.1
There was included in the “income” of Sasol Oil for each
Relevant Year (in terms of section 9D(2)), “an
amount equal to
... the net income" of SISL, determined for each “foreign
tax year” of SISL which ended during
that year.
3
2.2 Had SISL been a “resident” determining its taxable
income in accordance with the provisions of the Income Tax
Act, SISL
would not have been entitled to deduct the expenditure incurred by it
in purchasing the crude oil (in terms of the Second
STI Supply
Agreement) for the following reasons:
3.2.2.1
Such expenditure was not incurred “in the production of income”
for the purposes of section 11(a) of the Income
Tax Act because it
was not incurred by SISL for the purpose of producing “income”
(as defined in the Income Tax Act)
for SISL.
3
2.2.2 Such expenditure was not incurred by SISL "for the
purposes of trade” as contemplated in section 23(g) of the
Income Tax Act because it was not incurred by SISL for the purposes
of carrying on SISL’s profit making activities 3 2.2.3
Therefore, the expenditure did not satisfy the requirements for
deduction set out in sections 11 (a) and 23(g) of the Income Tax
Act.
3.2.3
Accordingly, the “net income” of SISL which was included
in the "income” of Sasol Oil (in terms of
section
9D(2)(a)) included the Assessed Amounts.’
8
[9]
The applicant’s counsel
9
submits that the second ground is a completely new and different
ground for holding the applicant liable for tax. He submits that
the
original ground focused on SOIL as the controlled foreign company and
treated it as having a taxable income on the basis of
substance over
form doctrine. He further submits that the new basis raised for the
first time in terms of Rule 10 statement focus
is on SASOL as the
controlled foreign company and determined its taxable income not on
the substance over form but on the basis
of certain expenditure that
would not qualify as deductions.
[10]
He, on those basis, submits that the second ground is completely a
new basis for seeking to hold the applicant liable because
the
factual and legal basis of the first and third grounds are completely
different from the factual and legal basis of the new
second ground.
[11]
He lastly submits that the inclusion of the new second ground of
assessment by the respondent is an attempt to achieve what
the
respondent cannot achieve in a manner he is required to do so in
terms of section 79. This, he term “coming through the
back
door where he cannot come through the front door.”
[12]
The section relevant to assessments of taxpayers is section 77 of
Income Tax Act. It provides:
‘
(1)
All assessments required to be made under this Act shall, subject to
the provisions of section three [3], be made by the Commissioner
or
under his direction (2) ...
(3)
Upon recording or filing the particulars of any assessment the
Commissioner shall give notice of the assessment to the taxpayer...'
[13]
Additional assessment is prescribed in section 79 of the Income Tax
Act. (Tax Act). The relevant provisions provide;
(1)
If at any time the Commissioner is satisfied -
(a)
that any amount which was subject to tax and should have been
assessed to tax under this Act has not been assessed to tax; or
(b)
that any amount of tax which was chargeable and should have been
assessed under this Act has not been assessed; or
(c)
...,
He
shall raise an assessment or assessments in respect of the said
amount or amounts, notwithstanding that an assessment or assessments
may have been made upon the person concerned in respect of the year
or years of assessment in respect of which the amount or amounts
in
question is or are assessable, and notwithstanding the provisions of
section 81(5), 83(18) and 83A (12):
Provided
that the Commissioner shall not raise an assessment under this
subsection-
(i)
after the expiration of three years from the date of the assessment
(if any) amount which should have been assessed to tax under
such
assessment was not so assessed or in terms of which the amount of tax
assessed was less than the amount of such tax which
was properly
chargeable, unless- (aa) the Commissioner is satisfied that the fact
that the amount which should have been assessed
to tax was not so
assessed or the fact that the full amount of tax chargeable was not
assessed, was due to fraud or misrepresentation
or non-disclosure of
material facts; or (bb) the Commissioner and the taxpayer agree
otherwise prior to the expiry of that three
year period; or...
(Emphasis
added)'
[14]
Other relevant provisions are: Sections 81 and 83(1). They provide:
Section
81
‘
(1)
Objections to any assessment made under this Act shall be made in the
manner and under the terms and within the period prescribed
by this
Act and the
rules
promulgated in terms of section 107A by any taxpayer who is aggrieved
by any assessment in which that taxpayer has an interest.
(4)
The Commissioner may on receipt of a notice of objection to an
assessment alter the assessment or may disallow the objection
and
shall send to the taxpayer or his or her representative notice of
such alteration or disallowance made in the assessment.
(5)
Where no objections are made to any assessment or where assessments
have been allowed in full or withdrawn, such assessment
or altered
assessment, as the case may be, shall be final and conclusive.'
Section
83(1):
‘
Any
person entitled to object to an assessment of section 83A, appeal
against such assessment to the tax court established in terms
of the
provisions of this section in the manner and under the terms and
within the period prescribed by this Act and the rules
promulgated in
terms of section 107A’
[15]
The objections by the taxpayer to any assessments are prescribed by
the rules promulgated in terms of section 107A. Rule 10
provides that
the ‘[c]ommissioner (respondent) must deliver to the taxpayer a
statement of the grounds of assessment ...'
Sub rule (3) provides
that ‘the statement of the grounds of assessment must be in
writing and be signed by the Commissioner
or his or her
representative and must be divided into paragraphs
(a)
setting out a clear and concise statement of the grounds upon which
the taxpayer’s objection is disallowed; and
(b)
stating the material facts and legal grounds upon which the
Commissioner relies for such disallowance’
[16]
The applicant’s counsel
10
submits that the respondent must consider and decide the basis upon
which the taxpayer was liable for such tax. The respondent
is however
precluded from raising a revised assessment under section 79(1) after
the expiry of three years from the date of the
assessment unless the
requirements of paragraph (aa) and (bb) are satisfied. Counsel refers
me to CSARS v Brummeria Renaissance
(Pty) Ltd and Others where the
court held that ‘it would be unfair to an honest taxpayer if
the Commissioner were to be allowed
to continue to change the basis
upon which the taxpayer were assessed until the Commissioner got it
right.’
11
[17]
He further submits that section 79(1) only empowers the respondent to
issue a revised assessment outside the period specified
if the
respondent satisfy himself that the amount which should have been
assessed of tax chargeable was not assessed due
to
fraud or misrepresentation or non-disclosure of material facts by the
applicant.
[18]
He submits that the basis upon which the respondent relies on as
raised for the first time in Rule 10 statement, focuses on
Sasol as
the controlled foreign company and determining its taxable income not
on the basis of substance over form but on the basis
of certain
expenditures which the respondent alleges would not qualify as
deductions in terms of the general deduction formula.
He submits
further that this basis upon which the respondent relies, is a
completely new basis to hold the applicant liable. He
refers this
basis as the second ground.
[19]
In rebuttal thereto, the respondents counsel
12
submits that the amounts included in the assessments, to which Sasol
has objected, are the amounts described in each assessments
as
‘imputed income CFC”. He submits that first, second and
third grounds relied on for adjusting the taxable income
of Sasol as
envisaged in terms of section 9D (2A).
[20]
He further submits that the amount to which the second ground relates
‘is the same amount to which the first and the
third ground
relates and pertains to the same arrangements as agreements and to
which amount the respondent has already assessed
the applicant.’
[21]
He lastly submits that the second ground is not unrelated to the
first and the third ground as contemplated in Rule 10(3) of
the Tax
Court Rules, which resulted in the inclusion of the second ground in
the Rule 10 statement. Further, counsel submits that
Rule 10(3)
requires a statement of the grounds upon which the taxpayer’s
objection to an assessment “is disallowed”
as opposed to
“was disallowed”. It is upon those basis that the Rule 10
statement includes all grounds (including the
alleged second ground)
for disallowing Sasol’s objection, irrespective of whether or
not such ground(s) were previously relied
upon by the Commissioner.
[22]
He refers me to ITC 1843 where it was held that ‘the
Commissioner is entitled to add new grounds to its Rule 10 statement
different to that contained in the preceding correspondence' It is
for that reason the second ground has been included in the Rule
10
statement as required in terms of Rule 10(3).
[23]
In my evaluation of the submissions made based on the evidence led,
it is clear that the parties concluded an extention agreement
to
enable the respondent to raise additional assessment notwithstanding
the prescribed three year period having expired. I refer
to this
extension agreement as a sweetener. The respondent is precluded in
terms of section 79(1 )(i) to raise an additional assessment
after
three years if the respondent has satisfied himself that the amount
raised as additional assessment was not assessed in the
original
assessment due to fraud, misrepresentation or non-disclosure of
material facts by the applicant.
[24]The
respondent determined SOIL’S taxable income and attributed it
to Sasol Oil as envisage in terms of section 9D. As
the respondent is
obliged in terms of Rule 10 statement to set out grounds for
disallowing the applicant’s objections. The
ground raised by
the respondent does not relate to the position SOIL and its taxable
income. He took the view that Sasol is not
entitled to certain
deductions from its agreements.
[25]
The original ground focused on SOIL as the controlled foreign company
and substance over form doctrine was applied. This, in
my view,
creates a new basis on holding the applicant liable. The arrangement
and agreements relied on for the first and third
grounds are clearly
not relevant to the second ground. I agree with the applicant’s
counsel that certain facts may overlap
with different grounds for
taxation, but that does not essentially make them the same grounds of
taxation. In my view, that factual
and legal basis of the first and
third grounds are completely different from the factual and legal
basis of the new second ground.
[26]
The first and third ground are based on the taxable income of SOIL
while the second is based on the taxable income of Sasol
on the basis
that it does not qualify under the general deduction formula.
[27]
In CSARS v Brummeria case the respondent company obtained interest
free loans to finance the construction of units. The Commissioner’s
assessment of the companies tax contends that amounts equal to the
value of the right of the companies to use the funds advanced
to them
interest free were included in the companies gross income. The SCA
court held that ‘once the Commissioner had changed
the entire
basis of the assessment in the revised assessment pursuant to an
objection by the first respondent objection to the
revised assessment
in full as contemplated in section 81(5), It was further held that in
the absence of fraud, misdescription or
non-disclosure relied upon,
the Commissioner is precluded by the provisions of section 79(1),
read with section 81(5) of the Act
from raising the assessment
against the first respondent’
13
[28]
The respondent is, based on the said principle, precluded by the
provisions of section 79(1) from raising the second ground
against
the applicant.
[29]
The applicant relies on section 6(f) (i) and (6) (I) of Promotion of
Administrative Justice Act (PAJA) in seeking to review
and setting
aside the “decision” to raise the second ground.
[30]
An administrative action is defined in section 1 of PAJA. The term
means ‘any decision taken, or failure to take a decision
by
(a)
an organ of state when
(i)
exercising a power in terms of the Constitution or a provincial
constitution,
(ii)
exercising a public power or performing a public function in terms of
an empowering provision, which adversely affects the
rights of any
person and which has a direct, external legal effect.’
[31]
The respondent’s inclusion of the second ground in the Rule 10
statement is not an administrative action as defined in
section 1 of
PAJA. The inclusion of the second ground is not a “decision”
as defined in PAJA.
[32]
The respondent is obliged in terms of Rule 10(3) of the Tax Court
Rules to deliver to the taxpayer a statement of grounds of
assessment
setting out a clear an concise statement of the grounds upon which
the taxpayer’s objection is disallowed and
to state facts and
legal ground upon which the Commissioner relies for such disallowance
in Rule 10 statement.
[33]
In my view, the respondent’s “action" is not an
administrative action as defined but a legal requirement obligating
the respondent to do. PAJA is thus, not applicable.
[34]
The constitutional principle of legality requires the public power to
be exercised in accordance with the law. Considering
all evidence
before me herein, I am of the view that the inclusion of the second
grounds in the Rule 10 statement outside the powers
given to the
respondent in terms of the relevant statutory provisions is contrary
to the law and the principle of legality.
[35]
It is trite that costs follow the event. The applicant succeeds and
is entitled to his costs.
I,
thus make the following order.
1.
The Respondent’s second ground of assessment raised and relied
on in Rule 10 statement dated 2 December 2011 is hereby
set aside on
the basis being in conflict with the Constitutional principle of
legality.
2.
The Respondent is ordered to pay the applicant costs of this
application which includes the costs of two counsel.
A.M.L.
Phatudi
Judge
of the High Court
On
behalf of the plaintiffs: Webber Wentzel
C/O
Friedland Hart Solomon & Nicolson Suite 301, Block 4 Monument
Office Park 79 Steenbok avenue Pretoria
Adv
P.A. Solomon SC Adv J.M.A. Cane SC
On
Behalf of the Respondent: Edelstein - Bosman Inc
220
Lange Street New Muckleneuk Pretoria
Adv.D.
Fine SC Adv. J Boltar
1
Notice
of Motion page 1; Founding Affidavit page 6.
2
Notice
of Motion page 1; Founding Affidavit page 7
3
Assessment
as defined in the Tax Ac
t.
4
Annexure
A4 page 24 of record herein referred to as extension agreement
5
Extention
Agreement Annexure A4, page 25
6
Annexure A5 page 29 - 38.
7
Page
152
8
'
Page 148
9
Adv
PA Solomon SC assisted by Adv Cane
10
Adv
PA Solomon SC assisted by Adv JMA Cane SC
11
2007
(6) SA 601
(SCA)
12
Adv.
D Fine SC assisted by Adv J Boltar
13
Para
[24]