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[2008] ZAWCHC 105
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Metropolitan Life Limited v Commissioner for the South African Revenue Services (A 232/2007) [2008] ZAWCHC 105; 2009 (3) SA 484 (C); [2008] 4 All SA 558 (C); 70 SATC 162 (16 May 2008)
IN
THE HIGH COURT OF SOUTH AFRICA CAPE OF GOOD HOPE PROVINCIAL DIVISION
Case
No.: A 232/2007
In
the matter between:
METROPOLITAN
LIFE LIMITED
Appellant
and
COMMISSIONER
FOR THE SOUTH AFRICAN
REVENUE
SERVICE
Respondent
JUDGMENT:
16 May 2008 DAVIS J:
[1]
This is an appeal against the judgment of the Special Income Tax
Court delivered on 15 March 2006, dismissing the appellant's
appeal
against certain value added tax (VAT) assessments raised by the
respondent.
[2]
The appellant is a life insurance company and its main business
involves the provision of life insurance to both local and
international clients. Pursuant to its business, it makes use of
various overseas consultants, business advisors and computer
services. The appellant adopted the approach that where such
services, with the exception of telecommunication services have been
physically rendered outside of South Africa no, VAT is payable in
terms of the Value Added Tax Act 89 of 1991 ('the Act'). Hence
these
international supplies stood to be zero rated in terms of section
11
(2)(k)
of
the Act.
[3] The
respondent adopted the view that the appellant had received "imported
services" as defined in section 1 of the
Act and thus raised
assessment for VAT on such services to the extent that the services
were used or consumed in the Republic
otherwise than for the purpose
of making taxable supplies.
[4] The
court
a
quo
found
that the 'imported services' were assessed correctly as falling under
section 7 of the Act which imposes VAT at a rate of
14% and that the
ground for zero rating invoked the by appellant in terms of section
11 (2)(k) of the Act was inapplicable. The
court applied section
14(5)(b) of the Act, which it held was dispositive of the scope for
zero rating of 'imported services'. As
these services would not be
zero rated if made in South Africa, they did not qualify to be zero
rated in terms of the applicable
provision, section 14(5)(b). It is
against this decision that the appellant approaches this court on
appeal.
[5] As
Mr Emslie, who appeared on behalf of the appellant, correctly
submitted, the appeal is concerned exclusively with questions
of
law, being the interpretation of various provisions of the Act in
relation to facts which are essentially common cause between
the
parties.
The
relevant legislation
[6] Given
that this appeal turns entirely on certain provisions of the Act, it
is necessary to reproduce the relevant provisions.
The
charging provision in the Act is section 7(1), which provides as
follows:
"Subject
to the exemptions, exceptions, deductions and adjustments provided
for in this Act, there shall be levied and paid
for the benefit of
the National Revenue Fund a tax, to be known as the value-added tax-
(a)
on the supply by any vendor of goods or services supplied by him
on
or after the commencement date in the course or furtherance
of
any enterprise carried on by him;
(b)
on the importation of any goods into the Republic by any person on or
after the commencement date; and
(c)
on the supply of any imported services by any person on or after the
commencement date,
calculated
at the rate of 14 per cent on the value of the supply concerned or
the importation, as the case may be."
[7] The
term "services" is defined as follows in section 1 of the
Act:
"'services'
mean anything done or to be done, including the granting, assignment,
cession or surrender of any right or the
making available of any
facility or advantage, but excluding a supply of goods, money or any
stamp, form or card contemplated in
paragraph (c) of the definition
of 'goods'.
[8]
The
phrase "imported services" is defined as follows in section
1
of
the Act:
"'imported
services' means a supply of services that is made by a supplier who
is resident or carries on business outside the
Republic to a
recipient who is a resident of the Republic to the extent that such
services are utilised or consumed in the Republic
otherwise than for
the purpose of making taxable supplies".
[9]
Throughout the relevant period of the present dispute section 11
(2)(k)
of
the Act provided as follows:
"Where,
but for this section, a supply of services would be charged with tax
at the rate referred to in section 7(1), such
supply of services
shall, subject to compliance with subsection (3) of this section, be
charged with tax at the rate of zero per
cent where -
....
(k)
the
services are physically rendered elsewhere than in the Republic, not
being telecommunication services supplied to any person
who utilizes
such services in the Republic".
[10]
Section
14
(5
)(a)
and
(b)
provided
that:
"the
tax chargeable in terms of section 7(l)(c) shall not be payable in
respect of-
a
supply which is chargeable with tax in terms of section 7
{1)(a)
at
the rate provided in section
7;
a
supply which, if made in the Republic, would be charged with tax at
the rate zero per cent applicable in terms of section 11
or would be
exempt from tax in terms of section 12;".
[11]
The facts in the present dispute reveal that the services with
which this appeal
is
concerned, are imported services in that what was involved, was the
supply of services made by a supplier resident or carrying
on
business outside the Republic to a recipient, the appellant, a
resident of the Republic. The services were utilised or consumed
in
the Republic, otherwise than for the purpose of making taxable
supplies. In general, imported services stand to be taxed at
the rate
of 14 per cent VAT in terms of section 7(1)(c)of the Act. The
question for determining in the present case is whether
another
section of the Act was applicable to tax the transaction and, if so,
which section.
Appellant's
argument
[12]
Mr Emslie's essential point against the unqualified application of
section 7(1
)(c)
the
present transaction was that the entire scope of section 7 had been
made "subject to the exemptions, exception, deductions
and
adjustments provided for in this Act". In his view, this phrase
clearly included the zero rating provisions contained
in section
11(2) of the Act. Accordingly, if the supply of 'imported services'
fell within any of the provisions of section 11
(2), the tax to be
levied would be at the rate of zero percent and not at 14 percent as
provided for in section 7(1).
[13]
Mr Emslie submitted that in terms of the relevant facts the
supplies fell within section 1
](2)(k)
and
thus stood to be taxed at zero percent. He further submitted that
imported services were no less a supply of services than any
other
supply of services, the former being merely a subgroup of the latter.
The application of section 11(2) was not restricted
to vendors who
were required to register for VAT purposes. On the plain wording of
section 7(1) read with section 11(2)(A), the
supply of these imported
services stood to be zero rated.
[14]
However, in the light of the finding of the court
a
quo
and
its reliance upon section 14(5)(6) of the Act, Mr Emslie went on to
examine the wording application of section 14(5) of the
Act. The
court
a
quo
held
that the kind of imported services performed in the present dispute
fell exclusively within the scope of this section. By contrast,
Mr
Emslie submitted that imported services are to be taxed at the rate
of zero percent in terms of section 11
(2)(k).
Accordingly,
if imported services were taxable in terms section 7(1)
(c)
of
the Act, section 14(5)
(a)
did
not apply because there was no supply 'which is chargeable with tax
in terms of section 7(l)(a) at the rate provided by section
7'.
Furthermore, section 14 (5)
(b)
could
not apply because if the supplies have been made in the Republic they
would not have been 'charged with tax at the rate of
zero percent
applicable in terms of section 11'.
Appellant's
criticism of the court
a
quo's
reliance
on section
X4(5)(b)
[15]
Mr Emslie criticized the finding of the court
a
quo
to
the effect that section 14
(5)(b)
of
the Act was exhaustive of the question of the taxation of imported
services that are otherwise charged to VAT under section 7(1)
(c)
of
the Act: that is imported services which fall under section 7(1) (c)
but not simultaneously under section 7(1)
(a)
of
the Act. For the court
a
quo,
the
final question was whether the supplies are those which, 'if made in
the Republic', would qualify for zero rating in terms of
section
11(2) of the Act. By contrast Mr. Emslie contended that the wording
of 14 (5)(6) implies clearly that the tax is not payable
in the case
of a supply that is taxed in terms of section 7(1
)(a)
at
the standard rate of 14 percent provided for in section 7. If a
supply of services by a registered vendor is zero-rated, it is
not
taxed at the standard rate provided for in section 7 and, in these
circumstances, the provisions of section 14 (5)(a) do not
apply. In
other words, where a service is both an "imported service"
and a service rendered by a registered vendor, (in
terms of an
enterprise as defined) and section 11(2) applies to zero rate such
service, both section 7(1)
(a)
and
section 7(l)(c) can and do apply to that service. Section 14
(5)(a)
is
not applicable because the service is zero-rated and tax is
accordingly not chargeable
at
the rate provided in section 7.
[16]
Mr. Emslie further contended that section 11(2) could apply to
section 7(1) (c) in the event of an overlap between section
7(l)(c)
and section 7(1) (a). Hence, there was no conceivable reason as to
why the provision could not apply in the absence of
an overlap
between sections 7(1)
(a)
and
(c).
So
viewed, the purpose of 14
(5)(b)
which
provided "the tax chargeable in terms of section 7(1 )(c) shall
not be payable" was that it suspended the levying
of tax on
imported services but did not render an imported service either
exempt or zero rated.
[17] Appellants'
case can thus be understood best in counter position to the central
finding of the court
a
quo.
The
court
a
quo
held
that section 14(5)(6) applied for the following reasons: "Imported
services that are made by registered vendors and
which can stand to
fall under Section 14(5)(6) is a self contained provision which
exclusively governs the zero-rating and exemption
of those "imported
services" which fall under section 7(1
)(c)
while
not at the same time falling under s 7(1)(a). As such, s 14(5)(b) is
exhaustive of the circumstances in which "imported
service"
falling under s 7(1)(c) qualify for zero-rating and exemption.
Section 14(5) (a) and
(b)
have
formed part of the Act since its inception. Section
\4(5)(b)
was
plainly intended to be the exclusive source of zero-rating and
exemption for imported services otherwise chargeable under
s
7(1)(c), since s 11(2) in its original form referred explicitly to
services under s 7(l)(a), i.e.
services
rendered by registered vendors
;
the removal of
"(a)"
from
"s 7(1)(a)" in s 11(2) does not alter the role of s 14
(5)(b)
as
the exclusive governing clause in respect of zero-rating and
exemption of imported goods which fall under s 7(1
)(c)."
[18]
By contrast, appellant's case can be summarized thus: Where supplies
of services are zero rated, these supplies do not stand
to be taxed
at the rate of 14 percent in terms of section 7. Accordingly section
14
(5)00
is
inapplicable in that, on its own wording, once the transaction does
not stand to be charged at the rate provided for in section
7,
section 14(5)(b) is inapplicable to such transactions. The role of
section 14
(5)(b)
can
be summarized thus: where tax is to be charged in terms of section
7(1)(c) and the provisions of section 14(5)(6) are applicable,
there
is a suspension of the levying of the tax on such imported services;
that is the tax to be charged shall not be payable.
Further, as 14
(5)(b)
cannot
be definitively read to conclude that it is exhaustive of the
circumstances in which the imported services are zero rated
or
exempt, the plain wording of section 11(2)(k) should prevail and be
applied to the present dispute
Respondent's
argument
[19]
Mr Rogers, who appeared together with Mr Masuku on behalf of the
respondent, referred to the amendment effected to section
11 of the
Act in terms of Act 27 of 1997. Prior to this amendment, section
11(2) of the Act was limited in its ambit to supplies
of services
referred to in section 7(1
)00
of
the Act. That provision clearly provided that imported services
would only be subject to zero rated tax if the supply was made
by a
vendor. The amendment to section 11(2) replaced an earlier reference
to section 7(1
)(a)
with
the present phrase: "the tax at the rate referred to in section
7 (1)". Prior to the amendment, Mr Rogers correctly
submitted
that section 7
(1)00
referred
to the supplier of goods and services by a vendor. Hence imported
services with which the present case was concerned,
not having been
supplied by a vendor, would not otherwise be chargeable with VAT
under section
7(1)(a).
[20]
Mr Rogers submitted that, since section 11(2) was concerned with
the zero rating of VAT, the 1997 amendment made, in effect,
a
cosmetic change to the legislation in that it made better sense to
refer to the rate of VAT specified in section 7 (1); in
particular
because the rate of 14 percent was not referred to in either sub
paragraphs (a), (b) and (c) of section 7 but only
in the concluding
part of the subsection. Accordingly, it was textually more accurate
to refer to section 7(1), rather than to
any of its sub paragraphs
as had been the case prior to the 1997 amendment.
[21]
Mr Rogers submitted further that it was clear that section 11 was
intended to
remain
applicable only to goods and services supplied by vendors, otherwise
chargeable under section 7
(1)(a),
notwithstanding
the textual amendment. This conclusion became apparent when section
11(3) was examined in relation to the issue
of imported services.
This provision provides,
inter
alia,
that
where a rate of zero percent 'has been applied by any vendor under
the provisions of this section', the vendor, 'shall obtain
and
retain such documentary proof substantiating the vendors entitlement
to apply the said rate under those provisions as is
acceptable to
Commissioner'. Mr. Rogers thus contended that section 11(3) provided
support for his submission that it was only
where goods or services
are supplied by vendor that section 11 comes into operation. If it
had been intended to apply to "imported
services" rendered
by a non vendor as in the present dispute, it would have been
necessary to stipulate that the recipient
of the service would have
had to obtain and retain the necessary documentation, a circumstance
not provided for by section 11(3).
[22]
Mr Rogers correctly contended that the overall solution to the
meaning of the 1997 amendment, in particular, and the
general scope
of section 14(5)(b) of the Act in general, required an analysis of
the overall scheme of the Act in order to fully
grasp the
implications of respondent's arguments. It is to his argument about
the scheme of the Act that I now turn.
[23]
Briefly stated, section 7 provides for the imposition of VAT
Section 11 provides for the zero rating of the supply of certain
goods and services which otherwise would be charged with tax at the
rate referred to in section 7 (1). Section 12 covers a range
of
suppliers of goods or services which are exempt from the rate of tax
imposed in terms of section 7 (l)(a). Section 13 deals
with the
collection of tax on the importation of goods and section 14 with
the collection of tax an imported services.
[24]
Mr Rogers submitted that section 11(2) did not apply to imported
services nor did it deal with transactions canvassed
in section
7(1
)(c)
of
the Act. On this basis, the Act would appear to provide for the
imposition of VAT at a zero rate upon various services specified
within section 11 which would otherwise fall within section 7
(l)(a); that is the supply of services by a vendor in the course
or
furtherance of any enterprise carried by him or her. Where there is
a supply of imported services by any person, that is
services which
are covered by section 7 (l)(c), then any relief from the imposition
of the normal rate of tax of 14 percent must
be found in section 14
(5)(b);
that
is the provision which provides tax relief for imported services and
which section accordingly does all the regulatory work.
In brief,
section 14(5)(b) provides for zero-rating and exemption
mutatis
mutandis
in
accordance with ss11 and 12. In terms of sl4(5)(b) the prerequisite
for the application of these provisions is that the supply
must be
one which
"if
made in the Republic"
would
have qualified for zero-rating or exemption under sll and s12.
Expressed differently, the essential question is whether
section
11(2) applies to all services or only vendor related services in
terms of section 7 (l)(a). For section 11(2) to apply
to a service
rendered by a non vendor which can be categorized as an imported
service, section 14 (5) would then appear to be
redundant.
[25]
Section
l{\){a)
imposes
a tax upon the supplier of a service, that is a
tax
on his or her act of supply. By contrast, the tax imposed in section
7(1
)(c)
is
imposed on the receipt of the service; that is it is imposed on the
recipient.
[26]
Without the provisions of section 14(5)(a), a situation may
arise, albeit rare, where an imported service is supplied
by a
vendor who would then be taxed in terms of section 7
(l)(a).
The
recipient, being the customer, could find herself taxed in terms of
section 7(l)(c). Accordingly, section 1
4(5)(a)
would
appear to prevent the commisioner from recovering the tax, both from
the supplier in respect of the supply of the service,
and from the
recipient, being the recipient of the imported services.
Evaluation
[27]
The amendment brought about in 1997 may not, as sadly is often
the case with tax legislation, have been an exemplary illustration
of clarity of legislative drafting. However, if all imported
services stood to be zero rated in terms of section 11(2)(k) as
it
applied after the 1997 amendment, it would have been unnecessary for
section
14(5)(b)
to
continue to make provision for zero rating of services on the basis
of a hypothetical enquiry as to the position of a supply
in question
having been made in the Republic. In short, there would have been no
need for further grounds of zero rating, if
the very fact that the
service had been rendered outside South Africa was sufficient to
qualify that supply for zero rating in
terms of section 11(2)(k).
[28]
The respondent seeks to reconcile section 11(2) with section 14(5).
By contrast the appellant argues that section 11(2) applies,
given
its plain meaning but it then fails to put up a plausible
illustration of where section 11(2)(A) may apply without an
application of section 14
(5)(b)
or
vice versa. As a counter to the redundary argument, Mr Emslie
offered an example of services not physically rendered which
fall
within the scope of the definition of service in terms of section 1.
The service could be zero rated in terms of section
14(5)(b) of the
Act even though, as they were not physically rendered section
11
(2)(k)
would
be inapplicable. The problem with this example is that it fails to
provide an answer as to when zero rating does apply in
terms of
section 11(2)(k) and thus it fails to adequately explain the role of
section 14(5)(b) of the Act.
[29] Significantly,
appellant's accountants in a letter of 10 January 2003 conceded
that, on the line of argument adopted by appellant,
section 14(5)
would be redundant in that, after the 1997 amendment, section 14
(5)(b)
should
logically have been amended to withdraw all the references to
services which would have been zero rated if supplied in
the
Republic so that the subsection only referred to the exemption
applying to services which would had been exempt if supplied
in the
Republic.
[30 Tautologous
legislation is not unknown but it is preferable to seek to construe
a statute so as to make sense of it in its
entirety. In my view,
section
\4(5)(b)
can
be construed so as to be exhaustive of the cases of imported
services which may well otherwise have been charged under section
7(1)(c). This will allow section 11(2) to govern those services
rendered by a vendor which would otherwise be taxed in terms
of
section
7(l)(a).
Not
only does this conclusion give a coherence to the Act as a whole but
it also gives far greater sense to the effect of the
1997 amendment,
described in the Explanatory Memorandum as 'textual', than would be
the case urged upon this court by appellant,
namely an amendment
which would have changed the very nature of the relationship between
section 14(5)(b) and section 11(2).
[31]
Faced with competing meanings to both sections 11(2) and 14(5), a
court should follow the approach of Hurt AJA in
SARS
v Airworld CC and another
[2007] SCA 147 at para 25: In recent years courts have placed
emphasis on the purpose with which the Legislature has enacted
the
relevant provision. The interpreter must endeavor to arrive at an
interpretation which gives effect to such purpose. The
purpose
(which is usually clear or easily discernible) is used, in
conjunction with the appropriate meaning of the language of
the
provision, as a guide in order to ascertain the legislator's
intention. Thus,
In
Standard General Insurance Co Ltd v Commissioner for Customs and
Excise
2005 (2) SA 168
(SCA) para 25, Nugent and Lewis JJA said: 'Rather
than attempting to draw interference as to the drafter's intention
from an
uncertain premise we have found greater assistance in
reaching our conclusion from considering the extent to which the
meaning
that is given to the words achieves or defeats the apparent
scope and purpose of the legislation. As pointed out by Nienaber JA
in
De
Beers Marine
when dealing with the meaning of "export" for the purpose
of s 20(4) - which draws a distinction between export and
home
consumption â the word must "take its colour, like a
chameleon, from its setting and surrounds in the Act".'
[32]
This
dictum
supports
the approach that the Act and the 1997 amendment should be
interpreted purposively and holistically and that provisions
should
be given a clear meaning whenever plausible. Thus, in both sections
1l(2)(k) and 14(5)(b) can be made to do work within
the scheme of
the Act, that must constitute the preferred interpretative approach.
Conclusion
[33]
For these reasons, the imported services rendered in the present
case were assessed correctly as charged to VAT in terms
of section
7(1 )(c) of the Act. The basis for taxation at a zero rate, which
appellant sought to invoke in terms of section 11
(2)(k),
is
inapplicable to this kind of service. Accordingly, the appeal is
dismissed with costs, including the costs of two counsel.
DAVIS, J
I agree
ZONDI, J
I agree
Schippers, A J