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[2020] ZASCA 19
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Telkom SA SOC Limited v Commissioner for the South African Revenue Service (239/19) [2020] ZASCA 19; [2020] 2 All SA 763 (SCA); 2020 (4) SA 480 (SCA); 82 SATC 225 (25 March 2020)
THE SUPREME COURT OF
APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case
no: 239/19
In
the matter between
TELKOM SA SOC
LIMITED
APPELLANT
and
THE COMMISSIONER FOR THE
SOUTH
AFRICAN
REVENUE
SERVICE
RESPONDENT
Neutral
citation:
Telkom SA SOC Limited v The Commissioner for the
South African Revenue Service
(Case no 239/19)
[2020] ZASCA 19
(25 March 2020)
Coram:
CACHALIA, SWAIN, MBHA and MOKGOHLOA JJA and KOEN AJA
Heard
:
4 March 2020
Delivered
:
25 March 2020
Summary:
Income Tax Act 58 of 1962 (the Act) – s 24 I – losses
or gains caused by foreign exchange fluctuations – proviso
to s
24 I(10) – not a self-standing provision for deduction of a
commercial loss unconnected to foreign exchange currency
differences
–
Natal Joint Municipal Pension Fund v Endumeni Municipality
2012 (4) SA 593
(SCA) – unitary but not uniform exercise in
purposive interpretation of contracts and statutes –
application of
contra fiscum
rule and presumption that statute
law not unjust, inequitable or unreasonable.
ORDER
On
appeal from:
The Tax Court, Cape Town (Davis J and assessors):
1. The appellant’s
appeal in respect of the foreign exchange dispute is dismissed with
costs, such costs to include the costs
of three counsel.
2. The respondent’s
cross-appeal in respect of the cash incentive bonus dispute is upheld
with costs, such costs to include
the costs of three counsel.
3. The order of the Tax
Court is set aside and is replaced with the following order: ‘The
appellant’s appeal is upheld
in part and the understatement
penalties imposed in the appellant’s income tax assessment for
the 2012 year of assessment
are set aside’.
JUDGMENT
Swain
JA (Cachalia, Mbha and Mokgohloa JJA and Koen AJA concurring)
[1]
The origin of the present dispute lies in a disastrous
investment made by Telkom International (Pty) Ltd (Telkom
International),
a wholly-owned subsidiary of the appellant, Telkom SA
SOC Limited (Telkom), when it acquired 75 per cent of the issued
share capital
in Multi-Links Telecommunications Ltd (Multi-Links), a
company registered and tax-resident in Nigeria, during May 2007. To
make
matters worse, Telkom then acquired the remaining 25 per cent
shareholding in Multi-Links during a subsequent year of assessment
that ended in March 2009.
[2]
In addition, Telkom made a number of shareholder loans to
Multi-Links, as it required substantial capital from Telkom to become
commercially viable, all of which were denominated in US dollar. By
October 2011, a total amount of USD 877 022 900.86 had been
advanced
to Multi-Links, of which USD 346 000 000 was converted into
preference share equity, while the remainder of the loans
in the
amount of USD 531 022 900.86 were outstanding on the loan account.
[3]
From 2009 the prospects of Multi-Link repaying these loans
appeared to be remote and it was apparent there was little prospect
of
Telkom resuscitating the business of Multi-Links. Telkom however
continued advancing loans to Multi-Links until October 2011, when
Telkom and Telkom International disposed of their equity interests in
Multi-Links to HIP Oils Topco Ltd, an unrelated third party.
As part
of the sale Telkom also sold its rights in respect of its loan to
Multi-Links, to HIP Oils Topco Ltd, for USD 100. This
occurred in
Telkom’s 2012 tax year of assessment.
[4]
In its audited financial statements for the 2013 financial
year, Telkom reflected the realisation of these loans, in the
following
terms:
‘
[i]n determining
the taxable income for the Annual Financial Statements ended 31 March
2012, Telkom included a foreign exchange
[FX] gain to the value of
R247 million on the realisation of the loan.’
However,
in its income tax return for the 2012 year of assessment delivered to
the respondent, the Commissioner for the South African
Revenue
Service (the Commissioner), Telkom instead of reflecting the
realisation of the loan as a foreign exchange gain, claimed
a
deduction in the amount of R3 961 295 256 as a foreign exchange loss,
in terms of s 24 I of the Income Tax Act 58 of 1962 (the
Act). The
effect of this was that what would have been reflected as a taxable
income of R3.12 billion, with a resultant tax liability
of R875
million, was now reflected as a tax loss of R106 billion, with the
result that Telkom was due a refund of the provisional
tax paid for
that year, in the amount of R822 million. The Commissioner therefore
issued an additional assessment for the 2012
tax year, disallowing
the deduction of R3 961 295 256 and assessing Telkom for tax in the
amount of R425 188 643, as a foreign
exchange gain in terms of s 24 I
of the Act. This issue will hereafter be referred to as the foreign
exchange issue.
[5]
Telkom also claimed a deduction of R178 788 421 in respect of
cash incentive bonuses paid to Velociti (Pty) Ltd (Velociti),
pertaining
to the connection of initial subscriber contracts for a
specific tariff plan, which Velociti made on behalf of Telkom Mobile.
The
Commissioner, however, only allowed a deduction R42 256 879 and
added back R136 531 542, in terms of s 23H(1)
(b)
(ii) of the
Act. This issue will be referred to as the cash incentive bonus
issue.
[6]
In addition, the Commissioner imposed an understatement
penalty in respect of the 2012 year of assessment in an amount of R91
232
665.64, on the grounds that Telkom’s conduct constituted a
substantial understatement of its tax liability. In the view of
the
Commissioner, it was a standard case which warranted a ten per cent
penalty in terms of s 223 of the
Tax Administration Act 28 of 2011
.
This issue will be referred to as the understatement penalties issue.
[7]
Telkom
therefore appealed to the Tax Court, Cape Town (Davis J and
assessors).
[1]
Telkom’s
appeal on the foreign exchange issue was dismissed, but its appeal on
the cash incentive bonus issue as well as
the understatement
penalties issue, was upheld. Telkom, with the leave of the Tax Court,
appeals to this Court against the Tax
Court’s dismissal of its
appeal on the foreign exchange issue. The Commissioner cross-appeals
against the Tax Court’s
decision to uphold Telkom’s
appeal on the cash incentive bonus issue, but does not cross-appeal
the decision by the Tax Court,
on the understatement penalties issue,
which is accordingly not an issue in the appeal.
The foreign exchange
issue
[8]
The resolution of the dispute as to the deduction of R3 961
295 256 by Telkom, must be found in the interpretation of the
provisions
of
s 24
I of the Act, which deals with ‘gains or
losses on foreign exchange transactions’. However, before
dealing with the
detailed submissions of Telkom and the Commissioner,
as to the correct interpretation to be placed upon this section, the
submission
by Telkom that its interpretation that resulted in a
foreign exchange loss of R3 961 295 256 reflected the commercial
reality of
the transaction, whereas the interpretation advanced by
the Commissioner, that resulted in a foreign exchange gain of R267
421
739, did not, must be considered. It relied upon the following
dictum in
Natal Joint Municipal Pension Fund v Endumeni
Municipality
[2012] ZASCA 13
;
2012 (4) SA 593
(SCA) para 18:
‘
Interpretation is
the process of attributing meaning to the words used in a document,
be it legislation, some other statutory instrument,
or contract,
having regard to the context provided by reading the particular
provision or provisions in the light of the document
as a whole and
the circumstances attendant upon its coming into existence. Whatever
the nature of the document, consideration must
be given to the
language used in the light of the ordinary rules of grammar and
syntax; the context in which the provision appears;
the apparent
purpose to which it is directed and the material known to those
responsible for its production. Where more than one
meaning is
possible each possibility must be weighed in the light of all these
factors. The process is objective, not subjective.
A sensible meaning
is to be preferred to one that leads to insensible or unbusinesslike
results or undermines the apparent purpose
of the document.’
Telkom
submitted that the interpretation advanced by the Commissioner
produced a result that was removed from commercial reality
and was
not sensible or businesslike. It also undermined the purpose of s 24
I of the Act and was unjust, inequitable or unreasonable.
[9]
The parties were therefore directed to file supplementary
heads of argument dealing with the minority judgment in
Commissioner
for the South African Revenue Services v Daikin Air Conditioning
South Africa (Pty) Limited
[2018] ZASCA 66
, with specific
reference to these submissions by Telkom. The parties were also
directed to deal with the application of the
contra fiscum
rule
in the interpretation of the section and whether, apart from this
rule, any general distinction should be drawn between the
interpretation of fiscal statutes and other statutes. The
supplementary heads of argument have been of considerable assistance
to this Court.
[10]
The minority judgment in
Daikin
questioned what it
stated was the conclusion in
Endumeni,
namely, that no
distinction was to be drawn in the interpretation of contracts,
statutes and other documents.
Daikin
concerned the
classification and the correct tariff to be applied in respect of
‘window or wall types, self-contained or “split-
system”’
air conditioning machines and parts thereof, in terms of Schedule 1
of the Customs and Excise Act 91 of 1964,
for customs duty purposes.
The majority judgment at para 14, without reference to the decision
in
Endumeni
, stated the following:
‘
There is a further
consideration. It is well established that a commercially sensible
construction should be preferred . . . It
appears quite
unbusinesslike to differentiate for customs duty purposes, between
“split-system” air conditioning machines
of which the
indoor units do exactly the same work and the outdoor units are
exactly the same, simply because the indoor units
are placed on
ceilings and not on walls.’
[11]
In order to properly examine what was stated in the minority
judgment in
Daikin
, it is necessary to quote extensively from
the judgment (paras 30-35):
‘
In his judgment
Van der Merwe JA invokes this dictum when he concludes that the
inclusion of indoor units mounted on ceilings leads
to the more
sensible commercial construction. It thus becomes necessary to
examine the dictum from
Endumeni
as it might apply to this
case.
Contrary to
Endumeni
.
. . which, on the authority of
KPMG Accountants (SA) v [Securefin]
Ltd
2009 (4) SA 399
(SCA), suggests that there is no distinction
in the interpretation of contracts, statutes and other documents, we
can find nothing
in the judgment of Harms DP in
KPMG
that
prevents a drawing of the distinction that we have drawn between the
interpretation of legislation and contracts or similar
documents. All
that Harms DP said at para 39 in
KPMG
was that “the
rules about admissibility of evidence in this regard do not depend on
the nature of the document, whether statute,
contract or patent”.
Self-evidently, the legislative process which culminates in an
enactment, and the subsequent interpretation
of that enactment, are
quite different from the preceding negotiations which lead to the
conclusion of a contract and the subsequent
interpretation of the
contract. It is difficult to see how “commercial sensibility”,
alluded to by Van der Merwe JA,
can play any role in interpreting a
statute. And a statute must apply to all equally – its
interpretation cannot be dependent
on a particular contextual
setting, nor can it vary from one factual matrix to the next. Context
is fact-specific and can be applied
in the interpretation of
contracts and like documents, but not of statutes.
What is required when
seeking to ascertain the meaning of legislation is to subject the
words used to an engagement, not with speaker
meaning, but with the
principles and standards that are appropriate to [the] relevant
law-making exercise and the subsequent exercise
of legal
interpretation. In the case of fiscal legislation, an appropriate
standard is the
contra fiscum
rule which is based upon the
idea that no tax can be imposed upon a subject of the State without
words in legislation clearly evincing
an intention to lay a burden on
him or her. . .
Recourse to the meaning
of the speakers of words used in a statute is not determined in the
same fashion as that of words used in
a contract. In order to
ascertain the intention of the lawmaker, one must have regard to the
appropriate principles of law-making.
In the instance of the
contra
fiscum
rule, absent unambiguous language, the rule will be
decisive in favour of the taxpayer in cases of doubt. The words
employed in
the statute must be the primary enquiry to consider
whether they admit of any doubt or ambiguity. If not, effect must be
given
thereto, unless glaring absurdity results which the lawmaker
could not have contemplated. . . As is correctly pointed out in
Lawsa,
this approach, laid down in a number of judgments of our
courts relating to the interpretation of a legislative enactment, is
based
upon the literalist-cum- intentionalist view.
In addition there is the
compelling consideration that the Interpretation Act 33 of 1957
applies only to legislation. Section 1
reads:
“
1.
Application
of the Act.
The provisions of this
Act shall apply to the interpretation of every law (as in this Act
defined) in force, at, or after the commencement
of this Act in the
Republic or in any portion thereof, and to the interpretation of all
by-laws, rules, regulations or orders made
under the authority of any
such law, unless there is something in the language or context of the
law, by-law, rule, regulation
or order repugnant to such provisions
or unless the contrary intention appears therein.”
This distinction
reinforces the view that the interpretation of a statute cannot
simply be equated [to] that of a contract. Finally
s 39 (2) of the
Constitution mandate[s] a recourse to the spirit purport and objects
of the Bill of Rights in interpreting any
legislation.
Applied to the present
dispute, at best for the appellant the words employed may be
considered to be open to the interpretation
for which it argued. But
as we have suggested, the application of speaker meaning as
determined by the purpose of the provision,
the background and
production of the document which appellant seeks to call into aid, is
not easily applicable to legislative enactments,
including a customs
tariff.’ (Authorities omitted.)
[12]
What is meant by ‘speaker meaning’ and ‘sentence
meaning’ is described as follows in a footnote to the judgment:
‘
While the words
used in the text to be interpreted are to be classified as sentence
meaning, speaker meaning is that which can be
attributed to the
speaker from an examination of the context and the circumstances
which gave rise to the existence of the sentence
under examination
[in the] interpretative process ’
[13]
The view of the minority in
Daikin,
that
Endumeni
decided that no distinction was to be drawn in the interpretation
of contracts, statutes and other documents, was based upon what
was
stated in footnote 14 in
Endumeni
, namely:
‘
That there is
little or no difference between contracts, statutes and other
documents emerges from
KPMG Chartered Accountants (SA) v Securefin
Ltd and Another
2009 (4) SA 399
(SCA) ([2009]
2 All SA 523)
para
39.’
The
passage referred to in
KPMG Chartered Accountants (SA) v Securefin
Ltd and Another
2009 (4) SA 399
(SCA) para 39, reads as follows:
‘
Third, the rules
about admissibility of evidence in this regard do not depend on the
nature of the document, whether statute, contract
or patent.’
[14]
However, as correctly submitted by counsel for Telkom:
(a) The passage in
KPMG,
was concerned with a narrower question, namely, in
construing meaning do the evidential rules regarding admissibility
change, depending
on the instrument? The answer was that they do not.
That this is so, is clarified by an examination of the relevant
passage in
the judgment in
KPMG
para 39, in context: ‘Second,
interpretation is a matter of law and not of fact and, accordingly,
interpretation is a matter
for the court and not for witnesses. . .
Third, the rules about
admissibility of evidence
in this regard
do not depend on the
nature of the document, whether statute, contract or patent’
(Emphasis added.)
(b)
Endumeni
asserted that the interpretive technique to be utilised in
establishing the meaning of words, as between contracts, statutes and
other documents, was essentially a unitary exercise in methodology,
but did not assert that it was a uniform one. The exercise
was
unitary in that whatever the nature of the document, consideration
had to be given to the language used in the light of the
ordinary
rules of grammar and syntax; the context in which the provision
appeared; the apparent purpose to which it was directed
and the
material known to those responsible for its production. The exercise
was not uniform, because the background to the preparation
and
production of the particular document, whether contract, statute or
other document, had to be considered from the outset.
(c) Neither
KPMG
nor
Endumeni
suggested that it was irrelevant whether
particular words were to be construed as part of a contract, statute
or other document,
because context was all important, regardless of
the nature of the document.
Endumeni
para 18, emphasised this
by stating that the interpretation of words used in the document had
to take into account, ‘. . .
the circumstances attendant upon
its coming into existence’.
(d) As correctly
pointed out by the minority in
Daikin
, the process which
culminates in the conclusion of a contract, is quite different from
the legislative process which culminates
in an enactment. However,
the same fundamental interpretive technique is applied, but always
allowing for the context, which includes
the background to the
preparation and production of the particular contract, or statute, or
other document in issue. This is the
purposive approach to
interpretation and not the literalist-cum-intentionalist view
espoused by the minority in
Daikin
.
[15]
As correctly submitted by counsel for the Commissioner, it is
axiomatic that a statute must apply to all subjects equally and that
its interpretation cannot vary from one factual matrix to the next.
It is impermissible to apply a particular meaning to legislation,
depending upon the factual situation, in which it is sought to be
applied. The statement in
Endumeni
that, ‘. . . a
sensible meaning is to be preferred to one that leads to insensible
or unbusinesslike results . . .’
meant that in the process of
attributing meaning to the words used in legislation (having regard
to the words used, the context
and the purpose of the legislation)
one possible meaning will be preferred over another possible meaning,
because the one meaning
yields a commercially insensible result, for
all subjects and in the appropriate context (for example commercial
legislation).
[16]
The
reference by the minority in
Daikin
to the
provisions of the Interpretation Act 33 of 1957 and s 39(2) of the
Constitution, in support of the proposition that a distinction
must
be drawn between the interpretation of contracts and statutes, only
serves to underline the fact that
Endumeni
did not
suggest that it was irrelevant, whether particular words were to be
construed as part of a contract or statute.
[2]
[17]
It must be emphasised that in
Endumeni
para 19, it was
stated that this approach to the interpretation of documents was
consistent with the emerging trend in statutory
construction, with
Endumeni
adopting the second of the two possible approaches
mentioned by Schreiner JA in
Jaga v Dönges NO and Another;
Bhana v Dönges NO and Another
1950 (4) SA 653
(A) at
662G-663A, namely that from the outset one considers the context and
the language together, with neither predominating over
the other. It
is important to recall that in
Jaga,
the correct approach to
statutory construction was described in the following terms:
‘
Certainly no less
important than the oft repeated statement that the words and
expressions used in a statute must be interpreted
according to their
ordinary meaning is the statement that they must be interpreted in
the light of their context. But it may be
useful to stress two points
in relation to the application of this principle. The first is that
“the context”, as here
used, is not limited to the
language of the rest of the statute regarded as throwing light of a
dictionary kind on the part to
be interpreted. Often of more
importance is the matter of the statute, its apparent scope and
purpose and, within limits, its background.’
This
approach is echoed in the words of
Endumeni
para 18, namely:
‘
The “inevitable
point of departure is the language of the provision itself”,
read in context and having regard to the
purpose of the provision and
the background to the preparation and production of the document.’
[18]
I turn to consider the
contra fiscum
rule. In
NST
Ferrochrome (Pty) Ltd v Commissioner for Inland Revenue
2000 (3)
SA 1040
(SCA) para 17, the rule was described in the following terms:
‘
An alternative
argument advanced on behalf of the appellant was that subpara
(d)
(iv)
was at least reasonably capable of the construction which the
appellant sought to place upon it. Accordingly, so it was contended,
the
contra fiscum
rule required that the subparagraph be so
construed. Where there is doubt as to the meaning of a statutory
provision which imposes
a burden, it is well established that the
doubt is to be resolved by construing the provision in a way which is
more favourable
to the subject, provided of course the provision is
reasonably capable of that construction . . . But, where any
uncertainty in
a statutory provision can be resolved by an
examination of the language used in its context, there is no rule of
interpretation
which requires that effect be given to a construction
which is found not to be the correct one merely because that
construction
would be less onerous on the subject.’
[19]
C I Miller
The Application of a New Approach to
Interpreting Fiscal Statutes in South Africa
(2016) para 6.4, in
a limited-scope dissertation submitted in January 2016 as part
fulfilment of the requirements for the degree
of Master of Commerce,
at the University of Johannesburg, states the following, with which I
agree:
‘
It is submitted
that the
contra fiscum
rule still applies in South African law
and that it would be incorrect to conclude that the
contra fiscum
rule has no application in the context of an interpretation of a
fiscal provision, anti-avoidance or otherwise. The rule is clearly
consistent with the values underlying the Constitution. It is
conceded that in the modern era of a purposive approach to
interpretation,
this rule may have a reduced application when
compared to the previous era which favoured a strict literal approach
to interpretation
which more easily appeared to lead to ambiguity.
However, to the extent that following analysis, a purposive approach
ultimately
yields two constructions which are both equally plausible,
it is submitted that the
contra fiscum
rule should apply and
the court should ultimately conclude in favour of the taxpayer.’
[20]
Counsel for Telkom submitted that the
contra fiscum
rule
should be applied at the outset, as part of the interpretive
technique to be utilised in establishing the meaning of words,
contained in a fiscal statute. I, however, agree with the submission
by counsel for the Commissioner, that the rule should only
be
invoked, after an interpretational analysis results in an irresoluble
ambiguity as to the meaning of the particular provision
in the fiscal
statute.
[21]
As regards the issue of whether any general distinction should
be drawn between the interpretation of fiscal statutes and other
statutes, the following dictum in
Secretary for Inland Revenue v
Kirsch
1978 (3) SA 93
(T) at 94D, sets out the correct approach:
‘
There is no
particular mystique about “tax law”. Ordinary legal
concepts and terms are involved and the ordinary principles
of
interpretation of statutes fall to be applied.’
[22]
I turn to consider the submission by Telkom, that the
interpretation advanced by the Commissioner produced a result that
was unjust,
inequitable or unreasonable. The enquiry is not whether
this result is produced after the application of the section to the
particular
facts of this case, but rather whether this result is
produced after the application of the fundamental interpretive
technique
to the section. Prof L M du Plessis writing in 25
Lawsa
2ed at 334, answers in the affirmative, the question as to
whether the common-law presumption that statute law is not unjust,
inequitable
or unreasonable, still has a function in the
constitutional era. By reference to Constitutional Court decisions he
states the following:
‘
These dicta and
others after 1994 dealing with just and equitable statutory
interpretation, show that the days of the presumption
are not
numbered: it can and has been used to guide constitutional
interpretation and amplify certain of its procedures, and to
supplement, facilitate and mediate resort to constitutional values in
statutory interpretation. However, if the presumption’s
traditional scope of application is considered, it becomes evident
that much of the presumption has been subsumed under more specific
and clearly articulated provisions of the Constitution guaranteeing
rights and just procedures.’
I
can accordingly see no reason why the common-law presumption, which
may facilitate resort to constitutional values in statutory
interpretation, may not be used as a useful aid in purposive
statutory interpretation.
[23]
I turn to consider the competing submissions by the parties as
to the interpretation of the provisions of s 24 I of the Act, which
deals with ‘gains or losses on foreign exchange transactions’.
The resolution of the dispute as to the deduction of
R3 961 295 256
by Telkom is to be found in this section, because the loan to Multi-
Links in US dollars, constituted an ‘exchange
item’ as
defined in s 24 I(1) of the Act, as it was an amount in foreign
currency owing and payable to Telkom.
[24]
The relevant provisions of s 24 I, as they read at the
relevant time, are as follows:
(a)
Subsection 24 I(3), provided as follows:
‘
In determining the
taxable income of any person contemplated in subsection (2), there
shall be included in or deducted from the
income, as the case may be,
of that person -
(a)
any exchange difference in respect of an exchange item of
or in relation to that person, subject to subsection (10) ’
(b)
The relevant portion of s 24 I(10), which is central to a resolution
of the dispute, provided as follows:
‘
(10) Subject to
the provisions of subsection (7 A), no amount shall in terms of this
section be included in or deducted from the
income of -
(a)
any resident in respect of any exchange difference determined on
the translation of an exchange item to which that resident and any
company are parties, where that company is –
(i) a connected person in
relation to that resident; or
(ii) a controlled foreign
company in relation. . . to that resident. . .
(b)
.
.
(c)
. .
(d)
. .
Provided that where that
exchange item is realised during any year of assessment, the exchange
difference in respect of that exchange
item shall be determined by
multiplying that exchange item by the difference between the ruling
exchange rate on the date on which
that exchange item is realised and
the ruling exchange rate on transaction date, after taking into
account any exchange difference
included in or deducted from the
income of that person in terms of this section in respect of that
exchange item. ’
(c)
‘
Exchange difference’
is defined as:
‘
. . . the foreign
exchange gain or foreign exchange loss in respect of an exchange item
during any year of assessment determined
by multiplying such exchange
item by the difference between -
(a)
the ruling exchange rate on transaction date in respect of such
exchange item during that year of assessment, and –
(i) the ruling exchange
rate at which such exchange item is realised during that year of
assessment; or
(ii) the ruling exchange
rate at which such exchange item is translated at the end of that
year of assessment; or
(b)
the ruling exchange rate at which such exchange item was translated
at the end of the immediately preceding year of assessment
or at
which it would have been translated had this section been applicable
at the end of that immediately preceding year of assessment,
and –
(i) the ruling exchange
rate at which such exchange item is realised during that year of
assessment; or
(ii) the ruling exchange
rate at which such exchange item is translated at the end of that
year of assessment.’
As correctly observed by
the Tax Court, an ‘exchange difference’ is accordingly
either a ‘foreign exchange gain’
or a ‘foreign
exchange loss’, determined in the manner set out in the
definition.
(d)
‘
Ruling exchange rate’
is defined as:
‘
. . . in relation
to an exchange item, where such exchange item is -
(a)
a loan
or advance or debt in a foreign currency on -
(i) transaction
date, the spot rate on such date;
(ii) the date it is
translated, the spot rate on such date; or
(iii) the date it is
realised, the spot rate on such date:
Provided that where the
rate prescribed in respect of a loan or advance or debt in terms of
this definition is the spot rate on
the transaction date or the spot
rate on the date on which such loan or advance or debt is realised,
and any consideration paid
or payable or received or receivable in
respect of the acquisition or disposal of such loan or advance or
debt was determined by
applying a rate other than such spot rate on
transaction date or date realised, such spot rate shall be deemed to
be the acquisition
rate or disposal rate, as the case may be.’
(e)
‘
Spot rate’
is defined in s 24 I(1) of the Act as:
‘
. . . the
appropriate quoted exchange rate at a specific time by any authorised
dealer in foreign exchange for the delivery of currency.’
(f)
‘
Realised’
means, ‘in relation to an
exchange item, where such exchange item is -
(a) A loan or advance or
debt in any foreign currency, when and to the extent to which payment
is received or made in respect of
such loan, advance or debt, or when
and to the extent to which such loan, advance or debt is settled or
disposed of in any other
manner’.
(g)
‘
Disposal rate’
means, ‘the exchange rate in
respect of an exchange item obtained by dividing the amount received
or accrued in respect of
the disposal of such exchange item by the
foreign currency amount in respect of such exchange item.’
(h)
‘
Acquisition rate’
means, ‘the exchange rate
in respect of an exchange item obtained by dividing the amount of the
expenditure incurred for the
acquisition of such exchange item by the
foreign currency amount in respect of such exchange item.’
(i)
‘
Transaction date’
means, ‘in relation to -
(a). . .
(b). . .
(c) a loan or advance
owing to a person, the date on which the amount payable in respect of
such loan or advance was paid to another
person or the date on which
such loan or advance was acquired by such person in any other
manner’.
[25]
As correctly pointed out by the Commissioner, the application
of the provisions of s 24 I of the Act to the following aspects of
the loan by Telkom to Multi-Links, were not in dispute:
(a) The loan in US
dollars to Multi-Links constituted an ‘exchange item’, as
it was an amount in foreign currency owing
and payable to Telkom.
(b) The loan was
‘realised’ in terms of the definition, when Telkom
received USD 100 in the 2012 year of assessment,
when the loan was
settled.
(c) Telkom and
Multi-Links were ‘connected parties’ in relation to each
other as defined in s 24 I of the Act, because
Multi-Links was a
foreign company controlled by Telkom. Consequently, in terms of s 24
I of the Act, Telkom was not obliged to
include or deduct any amount
from its income, which arose from an ‘exchange difference’
ie a ‘foreign exchange
gain’ or ‘foreign exchange
loss’, calculated in the manner set out above, where such
exchange difference was
not realised, but only ‘translated’
and restated at the end of each prior year of assessment.
(d) However, when the
loan (the exchange item) was realised by Telkom in its sale to HIP
Oils Topco Ltd, for USD 100, Telkom was
obliged to determine an
‘exchange difference’ in accordance with the proviso to s
24 I(10) of the Act, in the 2012
year of assessment.
[26]
The Commissioner submits that the exchange difference in
respect of the loan had to be determined by multiplying the loan, by
the
difference between the ruling exchange rate on the date on which
the loan was realised and the ruling exchange rate on the transaction
date, being the date when the loan was advanced. The ruling exchange
rate of the loan on the transaction date, being the spot rate,
was
agreed between the parties.
[27]
It is the determination of the ruling exchange rate, on the
realisation date of the loan, that lies at the heart of the dispute
between the parties. Central to the argument of Telkom was that the
proviso to the definition of ‘ruling exchange rate’
applied on the facts of this case, with the result that the ‘disposal
rate’ was to be used in lieu of the ‘spot
rate’,
because the ‘disposal rate’ was another ‘rate’,
which was used to determine the consideration,
payable for the loan.
Telkom submitted that the USD 100 received by it as consideration for
the disposal of the Multi-Links loan,
was obviously not determined by
applying the spot rate, defined as an exchange rate quoted by an
authorised dealer at a specific
time. The spot rate, as defined, on
the relevant date, was 7,9600. According to Telkom, if that rate had
been applied, the consideration
would have been R3 959 520 551 and
not R799, being the then equivalent of USD 100.
[28]
Telkom submitted that the pertinent question was whether the
consideration of USD 100 was determined by applying a ‘rate’.
By reference to the
Shorter Oxford English Dictionary
6 ed at
2467, it was submitted that the word ‘rate’ is defined as
an ‘estimated value or worth’ or ‘estimation,
consideration’ or ‘the price paid or charged for a thing
or class of things’ or ‘the amount of or of a
charge or
payment as a proportion of some other amount or as a basis of
calculation’. Consequently, the consideration of
USD 100,
having been agreed upon by the parties to the Multi-Links
transaction, fell within any of these meanings and the language
of
the proviso indicated that the consideration of USD 100 was
determined by applying a ‘rate’.
[29]
In addition, as pointed out above, Telkom submitted that in
the context of the proviso to the definition of ‘ruling
exchange
rate’, where another ‘rate’ was applied to
determine the consideration payable, the ‘disposal rate’
as defined, was to be used in lieu of the ‘spot rate’ as
defined. The word ‘rate’ in the proviso was therefore
directly linked with the definition of ‘disposal rate’.
Consequently, and so the argument went, the immediate context
of the
word ‘rate’ was accordingly the definition of ‘disposal
rate’. The ‘disposal rate’ was
determined by
dividing the amount received or accrued in respect of the exchange
item (expressed in rand), by the foreign currency
amount in respect
of such exchange item. The context of the word ‘rate’,
therefore indicated that the word did not
refer to an exchange rate
between currencies, but to an agreement as to value or worth.
[30]
The Tax Court rejected the argument of Telkom and concluded
that it had impermissibly invoked the provision involving exchange
rate
gains and losses, in order to deduct a commercial loss, which
was completely unconnected to foreign exchange currency differences
and that s 24 I of the Act, was not a self-standing deduction
provision. It based this conclusion upon the following findings:
(a) The section was
introduced to deal with the problem of how to tax gains or losses,
caused by fluctuations in the value
of the rand, in circumstances
where the underlying transaction had been concluded in a foreign
currency. It was designed to ensure
that amounts, which had to be
taken into account in the determination of taxable income, were
converted into rands at a defined
exchange rate, thus avoiding
disputes as to the rand value of what was received, or expended.
(b) By contrast,
the proviso to s 24 I(10) on which the dispute centred, dealt with
the difficulty of applying a rate other
than the spot rate. Viewed
within the purpose of the section, the word ‘rate’ when
used in the proviso, meant an exchange
rate; namely a rate that
reflected the value of the particular currency in question. The
purpose of the section was to solve the
problem of amounts to be
included in, or deducted for tax purposes, where these amounts were
denominated in a currency other than
the rand. This meaning accorded
with the definition of ‘acquisition rate’ which referred
specifically to ‘the
exchange rate in respect of an exchange
item’.
(c) Consequently,
when the section was read as a whole in order to interpret the
proviso to a ‘ruling exchange rate’,
what the legislature
had in mind was an exchange rate as opposed to a discount rate. The
section facilitated the conversion of
foreign currency into rands, as
opposed to serving as a form of a general deduction for a loss which
had little to do with exchange
rate fluctuations and everything to do
with what appellant conceded, was a disastrous investment. The
section dealt with losses
or gains caused by foreign exchange
fluctuations and was not applicable to a ‘business’ loss
of the kind incurred by
Telkom.
[31]
The Commissioner supported the findings of the Tax Court and
submitted that for the proviso to the ‘ruling exchange rate’
to apply, Telkom had to demonstrate that the consideration received
by it in respect of the disposal of the loan, was determined
by
applying a rate other than the spot rate, on the realisation date.
However, the consideration for the loan of USD 100 was agreed
by
reference only to the perceived value of the loan, expressed in
absolute terms in US dollars. The Commissioner pointed out that
Telkom had not suggested that currency exchange ratios played any
role in the determination of the price. In addition, no consideration
was given to any ratio to be ‘applied’ to the face value
of the loan to yield a sale price, as the proviso required.
Because
the reference in the proviso to a ‘rate other than [the] spot
rate’, was a reference to a currency exchange
rate, the
argument of Telkom was to be rejected.
[32]
The Commissioner also submitted that the proviso only
envisaged a currency exchange rate, because the proviso formed part
of the
definition of ‘ruling exchange rate’. In addition,
the amount to be included or deducted under s 24 I(3) of the Act,
is
an ‘exchange difference’, which is defined as ‘the
foreign exchange gain or foreign exchange loss in respect
of an
exchange item’, and s 24 I is titled ‘gains or losses on
foreign exchange transactions’. Consequently,
the textual
context reflects only exchange rates and differences. The ‘exchange
difference’ is calculated by multiplying
the face value of the
exchange item by the difference between two ‘ruling exchange
rates’. The rate on the realisation
date must be compared with
another ruling rate, which can only be the ‘spot rate’ on
the transaction date, or the translation
date. The spot rate is a
currency exchange rate and it would make no sense to compare that
rate with a ‘rate’ that
does not reflect the relative
value of the two currencies in question. Such a comparison could
never yield an ‘exchange difference’.
[33]
The Commissioner submitted that Telkom’s argument that
‘rate’ can mean an absolute amount or price, so that USD
100 was the ‘rate’ which was applied and that ‘rate’
means ‘an agreement as to value or worth’,
falls to be
rejected, because in the context of the proviso, ‘rate’
must refer to a basis of comparison, or calculation
between two
items, for a number of reasons. The proviso requires that the
consideration is ‘determined’ by ‘applying’
the rate. The
Concise Oxford English Dictionary
12 ed at 390,
states that ‘determine’ means to ‘ascertain or
establish by research or calculation’ and at
63 that ‘apply’
means to ‘bring into operation or use’. The consideration
must therefore be the result
of a process of calculation which puts
the ‘rate’ into use as a factor, to produce that result
and the only type of
rate that is able to perform this function, is
one which compares two items against one another, such as a currency
exchange rate.
Consequently, Telkom’s selection of a discounted
absolute price to sell the Multi-Links loan, based on its perceived
value,
cannot on any sensible basis be described as ‘the
determination of the consideration by applying a rate’. On such
an
approach, the ‘consideration’ and the ‘rate’
are the same thing, and there is nothing to ‘determine’
or ‘apply’.
[34]
In my view, the argument of Telkom falls to be rejected for
the following reasons:
(a) When the
proviso to the definition of a ‘ruling exchange rate’ is
interpreted in the context of the section
as a whole, the use of the
word ‘rate’ means an exchange rate, that reflects the
value of a particular currency in
question. A currency exchange rate
and not a discount rate is contemplated by the proviso.
(b) The Tax Court
correctly concluded that the purpose of s 24 l(10) of the Act was to
solve the problem of amounts to be
included in, or deducted for tax
purposes, where these amounts were denominated in a currency other
than the rand. It was designed
to ensure that amounts, which had to
be taken into account in the determination of taxable income, were
converted into rands at
a defined exchange rate, thus avoiding
disputes as to the rand value of what was received or expended. The
section dealt with losses
or gains caused by foreign exchange
fluctuations and was not applicable to a ‘business’ loss
of the kind incurred by
Telkom.
(c) The central
argument of Telkom that the USD 100 received by it as a consideration
for the disposal of the Multi-Links
loan, was determined by applying
a ‘rate’, being ‘the price paid or charged for a
thing or class of things’
and that this ‘rate’ fell
within the definition of the ‘disposal rate’ (to be used
in lieu of the ‘spot
rate’ as defined), fails to satisfy
the requirement in the proviso that the consideration must be
‘determined’
by ‘applying’ the rate. The
consideration must be the result of a process of calculation which
utilises the ‘rate’
as a factor to produce that result.
The only type of rate that was able to perform this function, was one
which compared two items
against one another, such as a currency
exchange rate. It is quite clear that the consideration for the loan
of USD 100 was agreed
by reference only to the perceived value of the
loan. Currency exchange ratios played no role in the determination of
the price.
[35]
Accordingly, the submission by Telkom that its interpretation
of s 24 I of the Act, that resulted in a foreign exchange loss of R3
961 295 256, reflected the commercial reality of the transaction,
whereas the interpretation advanced by the Commissioner, that
resulted in a foreign exchange gain of R267 421 739, did not, and was
not sensible or businesslike, falls to be rejected. The meaning
of
the relevant portions of the section, interpreted in context, are
clear. As correctly pointed out by the Commissioner, Telkom
loses
sight of the fact that the section is not intended to deal with the
tax consequences of commercial losses. Its operation
is limited to
gains and losses arising out of currency fluctuations. The fact that
Telkom realised a foreign exchange gain on disposal
of the loan was a
product solely of the fluctuation of exchange rates. In a different
year of disposal, Telkom may have suffered
a foreign exchange loss.
As pointed out by the Commissioner the section is agnostic towards
the commercial value of the exchange
items in which taxpayers choose
to invest.
[36]
The Commissioner correctly submitted that what was insensible
or unbusinesslike was the contention by Telkom that parties could
generate a revenue tax deduction, based solely on the deterioration
of the quality of foreign currency- denominated debt by applying
s 24
I of the Act, that dealt exclusively with gains and losses as a
result of exchange rate differences. In addition, as stated
in
New
Adventure Shelf 122 (Pty) Limited v Commissioner, South African
Revenue Service
[2017] ZASCA 29
;
2017 (5) SA 94
(SCA) para 28:
‘
. . . even if in
certain instances it may seem “unfair” for a taxpayer to
pay a tax which is payable under a statutory
obligation to do so,
there is nothing unjust about it. Payment of tax is what the law
prescribes, and tax laws are not always regarded
as “fair”.
A tax statute must be applied even if in certain circumstances a
taxpayer may feel aggrieved at the outcome.’
[37]
In addition, Telkom impermissibly sought to interpret the
section by reference to the factual setting, in which it was applied.
The fundamental principle is that its provisions must apply equally
to all, regardless of the circumstances in which the section
is
applied. The interpretation placed upon the section accords with its
purpose and is neither unjust, inequitable nor unreasonable.
Nor are
its provisions oppressive, as submitted by counsel for the appellant.
As there is no ambiguity in the interpretation of
the section the
contra fiscum
rule is not applicable.
[38]
In reaching this conclusion I do not overlook two further
arguments advanced by Telkom in support of its interpretation of s 24
I of the Act. The first argument is based upon the Explanatory
Memorandum, which preceded the insertion of s 24 I into the Act,
by s
21 of the Income Tax Act 113 of 1993. The memorandum provided that
the section had:
‘
. . . the object
of treating, for tax purposes, all gains made and losses incurred in
respect of foreign exchange transactions in
a manner which takes into
account as far as possible the principles of fairness, simplicity,
economic reality, current tax principles.
’
[39]
Telkom points out that the Explanatory Memorandum gives an
explanation concerning the proviso in the definition of ‘ruling
exchange rate’, as well as an example of its application. The
relevant portions relied upon by Telkom are as follows:
‘
The ruling
exchange rate on the realisation date is normally the spot
rate.
However, when the loan .
. . is disposed of on the date of realisation and the consideration .
. .
received or receivable in
terms of that realisation or disposal, is calculated by using a rate
other than the spot rate on that
date, then the “ruling
exchange rate” is the “disposal rate”.
The “disposal rate”
will, for example, apply when a person disposes of a loan (asset) of
$ 10,000 on a date that the
spot rate was R3 per dollar, and the
value of the asset is therefore R30 000 (R3 x $10,000), to another
person for R29 000,00.
The disposal rate will thus be R2.90 per
dollar (R29 000 / $10 000).’
Telkom
then submits that in the present matter, the amount of R29 000 in the
example, would be R799 (the equivalent of USD 100),
and USD 10 000,
would be USD 531 022 901. The calculation accordingly gives a
disposal rate of 0,000002, the application of which
rate results in a
loss of R3 961 295 256.
[40]
However, as correctly pointed out by the Commissioner, the
example does not reflect the present facts. In the present case, the
consideration for the loan was not agreed to in rand, but in US
dollar and it cannot be said that the rand price was ‘determined’
by applying a different rate from the spot rate, as it was determined
by reference to the loan’s value. In addition, in the
example
the price agreed was not the result of the application of some
discount rate as a result of the devaluation of the loan,
as opposed
to pure currency value considerations. Telkom has however applied the
spot exchange rate to convert the US dollar price
to a rand amount,
which the parties in the present case did not do in deciding on the
price. The consideration for the Multi- Links
loan was not R799 but
USD 100.
[41]
The second argument advanced by Telkom was based upon the
introduction of subsection (4) to s 24 I of the Act, with effect from
1 January 2017. Telkom submitted that this amendment, contradicted
the conclusion of the Tax Court, that s 24 I was intended to
deal
with exchange rate fluctuations and not general deductions. It was
submitted that it catered for what the Tax Court referred
to as ‘a
disastrous investment’. The Commissioner however disputed the
interpretation placed upon the amendment by
Telkom and submitted that
the amended subsection, did not allow for the deduction of an amount
as a bad debt and did not cater
for a commercial loss. It was
submitted that the amended subsection merely reduced the burden on an
affected taxpayer, by not requiring
the taxpayer to also for account
for foreign exchange gains, where such a loss was sustained. It had
no bearing on how the commercial
loss, as opposed to the foreign
currency aspects, was to be dealt with in terms of the Act.
[42]
In
Patel v Minister of the Interior and Another
1955
(2) SA 485
(A) 493 A – D, the following was stated;
‘
There is authority
for the view that Acts of Parliament, without having been passed for
the express purpose of explaining previous
Acts, may nevertheless be
used as “legislative declarations” or “Parliamentary
expositions” of the meaning
of such Acts… It is not
surprising that Court’s are cautious in the use of this aid to
interpretation, since it is
usual for later legislation to amend
rather than to declare the meaning of earlier statutes on the same
topic. It is, of course,
the function of the Courts to expound the
true interpretation of the law, including statute law, but where
Parliament has clearly
shown in a later Act what it meant by an
earlier one it seems to me to be not only helpful but even proper to
have regard to the
later Act in interpreting the earlier.’
The
competing submissions by the parties as to the correct interpretation
to be placed upon the amendment to subsection (4) of s
24 I of the
Act, precludes a finding that Parliament ‘has clearly shown in
a later Act what it meant by an earlier one’.
This is
particularly so, as the introduction of the subsection was intended
‘to amend rather than to declare the meaning’,
of the
subsection in issue.
[43]
The Tax Court therefore correctly dismissed the appeal of
Telkom against the additional assessment issued by the Commissioner,
on
the basis that Telkom ‘invoked the provision involving
exchange rate gains and losses in order to deduct a commercial loss
which was completely unconnected to foreign exchange currency
differences’.
The Cash Incentive Bonus
Issue.
[44]
Telkom made a ‘cash incentive bonus’ payment of
R178 788 421 to Velociti in the 2012 year of assessment. The
Commissioner
allowed as a deduction only R42 256 879, by invoking s
23H(1) of the Act. The issue was whether the Commissioner was
entitled to
apply the section to limit the deduction in the year of
accrual, with the result that the balance paid was spread out over a
number
of tax years. Telkom successfully appealed against this
decision to the Tax Court and the Commissioner now cross-appeals
against
that finding and seeks to have the assessment confirmed.
[45]
The facts which are common cause are as follows:
(a) Telkom paid
cash incentive bonuses to dealers on the connection of the initial
subscriber contract in respect of a special
tariff plan.
(b) The amount of
R178 788 421 related to connections that Velociti made to Telkom
Mobile, which Telkom contends were cash
incentive bonuses, for every
subscription which Velociti made on behalf of Telkom Mobile.
(c) Of the R178 788
421 claimed as a deduction by Telkom, the Commissioner added back
R136 531 542 in terms of s 23H(1)
(b)
(ii) of the Act.
[46]
The Tax Court, in upholding the appeal, made the following
findings:
(a) The benefit
that was attached to the expenditure was the conclusion of the
contract with the customer in question.
(b) Velociti
rendered all the services which it was obliged to do in terms of the
incentive letters and for which the payment
of R178 788 421 was made.
(c) As a result,
there was no basis to add back and disallow R136 531 542 of the cash
incentive bonus expenditure by the application
of s 23H in the 2012
year of assessment.
[47]
The relevant portions of s 23(H)(1), as it read at the
relevant time, were as follows:
‘
Where any person
has during any year of assessment actually incurred any expenditure
(other than expenditure incurred in respect
of the acquisition of any
trading stock) –
(a)
which
is allowable as a deduction in terms of the provisions of section 11
(a). . .; and
(b)
. . .
in respect of –
.
. .
(ii) any other benefit,
the period to which the expenditure relates extends beyond such year
of assessment, the amount of the expenditure
which shall be allowable
as a deduction in terms of such section in the said year and any
subsequent year of assessment, shall
be limited to, in the case of
expenditure incurred in respect of –
. . .
(iii) any other benefit
to which such expenditure relates, an amount which bears to the total
amount of such expenditure the same
ratio as the number of months in
such year during which such person will enjoy such benefit bears to
the total number of months
during which such person will enjoy such
benefit or where the period of such benefit is not determinable, such
period over which
the benefit is likely to be enjoyed:
Provided that the
provisions of this section shall not apply –
(aa) Where all the goods
or services are to be supplied or rendered within six months after
the end of the year of assessment during
which the expenditure was
incurred, or such person will have the full enjoyment of such benefit
in respect of which the expenditure
was incurred within such period,
unless the expenditure is allowable as a deduction in terms of
section 11D (2); or ’
[48]
Telkom submitted that from the wording of s 23H(1) of the Act,
it was clear that the benefit to which the expenditure related,
should
extend beyond the relevant year of assessment. This required
an enquiry into that to which the expenditure ‘relates’.
Relying upon the
Shorter Oxford Dictionary
6 ed at 2518,
Telkom submitted that the relevant meanings of the word ‘relate’,
were as follows; ‘bring (a thing
or person) into relation with;
establish a connection between’ and ‘have reference to,
concern’. In order to
establish to what the expenditure
‘relates’, it was necessary according to Telkom, to
establish the quid pro quo received
as a result of the expenditure
having been incurred.
[49]
According to Telkom, in terms of the agreement between Telkom
and Velociti, a once-off incentive bonus was paid for each new
connection
(contract) effected by Velociti and the connections were
to have been made prior to 30 September 2011, being the date on which
the dispensation ended. Therefore, the benefit that was attached to
the payment of the cash incentive bonuses related to the new
contracts that were concluded. These contracts were concluded before
the end of the 2012 year of assessment. Consequently, the
benefit did
not extend beyond the 2012 year and s 23H of the Act was not
applicable. Telkom paid a separate commission for the
benefit that it
derived from the subscription fees, over the term of the subscription
agreement, being 24 months. This ongoing
commission was separate and
apart from the dealer incentive bonuses payable on the conclusion of
the contract. On this basis Telkom
submitted that the purpose of the
payment of the dealer incentive bonus was to ensure the connection of
new customers. The benefit
to Telkom was the connection of the new
customer. The subscription fees over the term of the subscription
agreement was a separate
benefit, in respect of which Telkom paid a
separate commission, for that benefit.
[50]
The Commissioner, however, submitted that the key question was
when and how the benefit, in respect of which the expenditure was
incurred, was enjoyed. This was because the pleaded dispute turned
on, when and how Telkom enjoyed the benefit, received from the
cash
incentive bonus payment. The Commissioner pleaded that it was the
subscription agreement with the client that was the source
of the
direct benefit to Telkom. The Commissioner also pleaded that the
benefit to Telkom, flowed primarily and directly from the
service
contract, in terms of which the individual customer paid monthly
subscription fees. The dealer was a mere facilitator,
who brought
about the source of the benefits, and the benefits ie the fees, were
direct and central to Telkom’s business.
It was the agreement
concluded between Telkom and the respective dealers which was the
indirect source of the benefit.
[51]
Telkom, however, pleaded that the full incentive bonus related
to connections that Velociti made to Telkom, which was a cash
incentive
bonus for every subscription the company made, on behalf of
Telkom. The benefit was received by Telkom in respect of the amounts
paid to Velociti upon the connection of the new subscribers by
Velociti. The benefit arising from the obtaining of subscribers
fees,
over a period of 24 months was described by Telkom, as an indirect
benefit.
[52]
The Commissioner, in support of the submission that the
central issue to be determined was when and how Telkom enjoyed the
‘benefit’,
in respect of which the expenditure was
incurred, relied upon the following provisions in s 23H:
(a) Section
23H(1)
(b)
(ii), referred to ‘any other benefit’,
where ‘the period to which the expenditure relates extends
beyond such
year of assessment’.
(b) Section
23H(1)
(b)
(iii) referred to the ratio based on ‘the
number of months during which such person will enjoy such benefit’;
and
(c) Paragraph (aa) to the
proviso limited the application of the section where the taxpayer
‘will have the full enjoyment
of such benefit in respect of
which the expenditure was incurred’ within such period ending
six months after the year-end.
[53]
The Commissioner therefore correctly submitted, that the
period to which the expenditure ‘relates’, must be the
period
during which the benefit is enjoyed. Telkom does not incur the
incentive bonus expenditure solely to establish a new connection
with
a customer. The benefit lies in having a customer who pays
subscription fees over the fixed term of the contract. Telkom does
not enjoy any benefit immediately upon the conclusion of a new
contract. It has nothing to show for it until such time as the
connection turns into fee income. That is when Telkom begins to enjoy
the true benefits of the cash incentive payments.
[54]
The Commissioner therefore correctly submitted that the Tax
Court erred, in disregarding the true benefit obtained by Telkom, in
the form of the monthly subscriber payments over an anticipated 24
month period. Although the conclusion of the contract benefited
Telkom, the enjoyment of that benefit was spread out over the period
of the contract, so that the period to which the expenditure
related
could not be limited to the first year. The Commissioner also
correctly submitted that the Tax Court erred in treating
as relevant
to the application of s 23H, the fact that Velociti had rendered all
the services which it was obligated to do in terms
of the agreement
with Telkom, because this had no bearing upon the central question,
being when and how Telkom would enjoy the
benefit of the contract.
[55]
As regards the submission by Telkom, that it paid a separate
ongoing commission to Velociti over the subscription period and that
this commission, and not the connection bonus was the quid pro quo
for the subscription fees, the Commissioner correctly submitted
that
the question was whether Telkom enjoyed the benefit of the cash
incentive bonus, over the contract period. The fact that another
type
of payment was made as well, did not render the prior question,
irrelevant. In addition, it was not apparent that Velociti
had to do
anything more to earn its ongoing commission and it was artificial to
say that the ongoing commission was any more closely
linked to the
subscription fees, than the incentive payments.
[56]
The Tax Court therefore erred, in concluding that there was no
basis to add back and disallow R136 531 542 of the cash incentive
bonus expenditure by the application of s 23H, in the 2012 year of
assessment.
[57]
I grant the following order:
1. The appellant’s
appeal in respect of the foreign exchange dispute is dismissed with
costs, such costs to include the costs
of three counsel.
2. The respondent’s
cross-appeal in respect of the cash incentive bonus dispute is upheld
with costs, such costs to include
the costs of three counsel.
3. The order of the Tax
Court is set aside and is replaced with the following order: ‘The
appellant’s appeal is upheld
in part and the understatement
penalties imposed in the appellant’s income tax assessment for
the 2012 year of assessment
are set aside.’
____________________
K G B Swain
Judge of Appeal
Appearances:
For
the Appellant: J J Gauntlett SC QC (with P J J Marais SC and C Louw
SC)
Instructed
by: MacRobert Attorneys, Brooklyn Lovius Block Inc, Bloemfontein
For
the Respondent: A R Sholto-Douglas SC (with M W Janisch SC, H Cassim
and M Tjiana)
Instructed
by: The State Attorney, Johannesburg The State Attorney, Bloemfontein
[1]
The background facts to the dispute, set out above, appear from the
judgment of the Tax Court and are common cause between the
parties.
[2]
I have had the advantage of seeing in advance a copy of my brother
Wallis’ judgment in United Manganese of Kalahari, which
is to
be delivered today and agree with his analysis of Daikin, in paras
16 and 17 thereof.