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[2020] ZASCA 34
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Diageo South Africa (Pty) Ltd v Commissioner for the South African Revenue Service (330/2019) [2020] ZASCA 34; 82 SATC 351 (3 April 2020)
THE SUPREME COURT OF
APPEAL OF SOUTH AFRICA
JUDGMENT
Case
no: 330/2019
Reportable
In
the matter between:
DIAGEO SOUTH
AFRICA (PTY)
LTD
APPELLANT
and
COMMISSIONER FOR THE
SOUTH
AFRICA REVENUE SERVICE
RESPONDENT
Neutral
citation:
Diageo South Africa (Pty) Ltd
v Commissioner for the
South African Revenue Service
(330/2019)
[2020] ZASCA 34
(03
April
2020)
Coram:
PETSE DP, SWAIN, MBHA, MAKGOKA and MBATHA JJA
Heard
:
27 February 2020
Delivered
:
03 April 2020
Summary:
Value Added Tax Act 89 of 1991 – interpretation of s 8(15)
– deeming provision – single supply of advertising and
promotional goods and services to non- resident entities –
applicability of deeming provision applied to goods portion of
the
supply – VAT at standard rate correctly levied in terms of s
7(1)
(a)
of the Act.
ORDER
On
appeal from:
The Tax Court, Cape Town (Savage J), sitting as
court of first instance):
The
appeal is dismissed with costs, such costs to include the costs of
two counsel.
JUDGMENT
Mbha
JA (Petse DP, Swain, Makgoka and Mbatha JJA concurring)
[1]
This appeal concerns the proper interpretation and application of s
8(15) of the Value Added Tax Act 89 of 1991 (the Act), in
the context
of a single supply of advertising and promotional goods and services
(the A&P services) by the appellant, Diageo
South Africa (Pty)
Ltd (Diageo), a South African VAT vendor, to various non-resident
entities (the brand owners).
[2]
Diageo made supplies of the A&P services to the brand owners and
levied a fee for the supplies during its VAT periods ending
June
2009, 2010 and 2011. Pursuant to s 11(2)
(l)
of the Act, Diageo
charged VAT on the said fee at zero percent. However, the respondent,
the Commissioner for the South African
Revenue Service (the
Commissioner), invoked s (8)(15) of the Act and maintained that
Diageo had made deemed separate supplies of
zero rated A&P
services and standard rated goods in the form of promotional
giveaways and samples that were not exported but
consumed in the
Republic of South Africa (the Republic).
[3]
Section 8(15) provides as follows:
‘
For the
purposes of this Act, where a single supply of goods or services or
of goods and services would, if separate considerations
had been
payable, have been charged with tax in part at the rate applicable
under section 7(1)
(a)
and in part at the rate applicable under
section 11, each part of the supply concerned shall be deemed to be
separate supply.’
[4]
Section
7(1)
(a)
of
the Act levies VAT at a standard rate on the supply by a vendor of
goods and services supplied in the course or furtherance of
an
enterprise. The zero rating provisions in terms of s 11, constitute
an exception to this general rule. These include services
supplied to
non-residents of the Republic in terms of s 11(2)
(l)
of
the Act.
[1]
[5]
The Commissioner assessed Diageo for additional output VAT on the
goods component of the supply of the A&P services rendered
by
Diageo to the brand owners during the aforementioned periods.
Diageo’s output VAT was accordingly adjusted by the inclusion
of the further amounts of R3 444 764 (June 2009), R4 631 620 (June
2010) and R5 932 209 (June 2011).
[6]
Diageo challenged the additional assessment in the Tax Court, Cape
Town (Savage J), contending that it made a supply only of
zero-rated
A&P services to the brand owners and that it did not make
separate or dissociable supplies of both services and
goods. The Tax
Court disagreed and held that the supply of promotional goods, as a
portion of the single A&P service was, by
virtue of s 8(15), a
cognisable supply of goods capable of notional separation from the
total A&P services supplied to the
brand owners. This local
supply of promotional goods, not exported but consumed in the
Republic, was accordingly deemed to be a
separate supply, and VAT at
the standard rate in terms of s 7(1)
(a)
of the Act, was
justifiably levied on these goods, with the result that the
additional assessments were confirmed. Diageo was therefore
liable
for the VAT output tax adjustment under s 8(15) in respect of the A&P
services costs incurred by Diageo constituting
goods not exported but
consumed in the Republic. This appeal, with the leave of the Tax
Court, is against that finding.
[7]
The factual matrix against which the dispute in this appeal falls to
be determined, can be summarised as follows:
(i) Diageo, which is
engaged in the business of the importation, manufacturing and
distribution of alcoholic beverages, entered
into an agreement with
foreign brand owners for the advertising and promotion of their
alcoholic products in South Africa. The
brand owners granted Diageo
the exclusive rights in respect of the brands distributed by Diageo
to use the brand owners’
trademarks, intellectual property,
equipment, packages and labels in South Africa;
(ii) The brand
owners invested in advertising and promotions to build and maintain
brand recognition and perception, with the aim
of generating sales
and sustainable long term cash flow, by way of enhanced brand equity.
The brand owners however did not perform
or undertake these
activities themselves in respect of their brands. They relied instead
on Diageo which rendered these services
to the brand owners in return
for a fee, which was calculated with reference to the costs and
expenditure incurred on advertising
and promoting the brand owners’
brands;
(iii) The
advertising and marketing activities consisted of a range of
activities such as advertising from various channels, brand
building
promotions, events, sponsorships and market research. Services which
were rendered by Diageo included advertising media
cost and digital,
website design and build, social networks and sponsorship of, amongst
others, sports events. In addition, Diageo
made use of promotional
merchandise and packaging; alcoholic products for sampling; and
branded giveaways items such as glasses,
optics, towels, beer mats,
lanyards, keyrings, T-shirts, aprons, caps and the like. These were
given away free of charge to third
parties for use or consumption
within the Republic for purposes of promoting the product;
(iv) The handing out
of the physical goods by Diageo in the course of rendering the A&P
services to the brand owners was not
an end in itself but simply
another means to enhance brand equity and sales. Two categories of
goods were used. Firstly, products
of the brand owners namely,
alcoholic beverages were taken out of the trading stock and used for
product sampling or tasting. Secondly,
point of sales items such as
branded glasses and T-shirts were given to third parties, for no
consideration. Similarly, aprons
and caps were supplied to employees
at no cost to them;
(v) Importantly, it
was left to the discretion of Diageo how much of the budget was to be
spent on, for example, promotional giveaways
and samples, which
particular items were to be used and in what quantities and manner
they were to be used and distributed. This
activity was undertaken as
part of an integrated and synergetic marketing campaign as the
ultimate objective was to build and maintain
the brand image;
(vi) The fee charged
by Diageo to the brand owners represented the cost incurred by Diageo
in rendering the A&P services, which
comprised the supply of both
goods and services, to the brand owners. However, the tax invoices
rendered by Diageo to the brand
owners reflected a total fee for
services rendered. It did not differentiate between goods and
services. Although such fee was
charged through a South African
joint-venture entity, known as Brandhouse Beverages, to which Diageo
had outsourced the marketing
function, the supply remained one by
Diageo to the brand owners. The fee was charged on the basis that it
constituted a zero-rated
supply of the A&P services in terms of s
11(2)
(l)
of the Act; and
(vii) The brand
owners and Diageo split the A&P services expenditure 50:50 up to
15 percent of net sales value. The brand owners
funded the balance of
the A&P services expenditure in instances where it exceeded 15
percent. The portion of the A&P services
expenditure funded by
Diageo was accordingly limited to a maximum of 7.5 percent of the net
sales values for each brand.
[8]
Diageo
submitted that s 8(15) is incapable of being applied to the facts of
this case. Relying on certain foreign authorities,
[2]
Diageo contended that in order for s 8(15) to apply, it is required
that a vendor must make ‘separate dissociable supplies
of both
services and goods’ or supplies that are ‘economically
divisible, independent and hence dissociable’
and which
constitute ‘an end in itself’, not a means to achieve
that end. In Diageo’s view, the A&P services
concerned in
this case were not such a supply as they did not involve an
independent supply of goods capable of standing alone
for VAT
purposes, as something separate from the A&P services. The
section did not deem supplies to be separate when they were
economically not
dissociable.
[9]
In support of its contention that the A&P services it provided to
the brand owners were not economically dissociable, Diageo
submitted
that the sole contractual obligation owed by it to the brand owners
was to provide a service for the purposes of the
Act, and that it
owed no contractual obligation to the brand owners to supply goods at
all. In other words, its use and distribution
of promotional goods
was not an end in itself, but a means to achieve the objective of the
preservation and enhancement of the
brands, through the provision of
the A&P services. The fact that it incurred expenditure in
acquiring goods for the purpose
of enabling it to supply a service,
did not mean that it supplied both goods and services.
[10]
According to Diageo, there was only a ‘single supply’ for
purposes of s 8(15) where what was presented as a single
supply was
in fact a conglomeration of economically divisible, independent and
hence dissociable supplies. Section 8(15) then deemed
these
independent supplies to be separate supplies, each carrying its own
VAT treatment. The purpose of the section was thus not
the creation
of an economically, or commercially unreal outcome, but rather the
avoidance of one. Therefore, the section did not
deem single supplies
to be separate when they were dissociable. On this basis, Diageo
claimed that the Commissioner’s approach
erroneously sought to
artificially dissect a single supply and that the Commissioner’s
interpretation of the section produced
artificial and insensible
results.
[11]
The Commissioner, on the other hand, submitted that s 8(15) is a
deeming provision which postulates a state of affairs that
does not
exist, but is to be taken to exist. In this regard, the Commissioner
reasoned as follows:
(i) The invoice
issued by Diageo to the brand owners was in respect of the rendering
of a single supply;
(ii) Notwithstanding
this, the supply rendered to the brand owners comprised both goods
and services;
(iii) For purposes
of s 8(15), if separate considerations had been payable by the brand
owners (in respect of the single supply
of services by Diageo), and
would have resulted in tax charged in part in terms of the standard
rate and in part in terms of the
zero rate, each part of the supply
(goods and services) shall be deemed to be a separate supply;
(iv) Therefore, to
the extent that the supplies made by Diageo constituted a supply of
goods, and such goods were not exported but
consumed in the Republic,
such supply was subject to VAT at the standard rate in terms of s
7(1)
(a)
of the Act. Such supply of goods was accordingly
deemed to be a separate supply for purposes of the s 8(15) deeming
provision.
[12]
Section
8(15) is, as the Commissioner has correctly submitted, a deeming
provision. Section 8, under which it is located, is headed
‘Certain
supplies of goods or services deemed to be made or not made’.
The effect thereof was aptly summed up as follows
in
Mouton
v Boland Bank
:
[3]
‘
The intention
of a deeming provision, in laying down an hypothesis, is that the
hypothesis shall be carried as far as necessary
to achieve the
legislative purpose, but no further.’
[13]
The jurisdictional requirements that must be met before the deeming
provision can be invoked are, first, a ‘single supply’
of
two or more types of goods or services or a combination of goods and
services. Secondly, one consideration must be payable as
only a
single supply is made. Lastly, the circumstances must be such that if
the supply of the goods or services or of the goods
and services had
been charged for separately, part of the supply would have been
standard rated and part zero-rated (‘notional
separate
considerations’).
[14]
In addition, s 8(15) must be interpreted in the context of the
provisions of s 7(1)
(a)
of the Act, in terms of which the
supply of goods and services by a vendor, in the course or
furtherance of an enterprise, attracts
VAT at a standard rate, and s
11(2)
(l)
which constitutes an exception to the provisions of s
7. As previously explained, goods or services, or goods and services
supplied
to non-residents in the Republic are zero-rated in terms of
s 11(2)
(l)
. Simply put, the purpose of s 8(15) is to provide,
by way of a deeming provision, for a situation where the provisions
of ss 7(1)
(a)
and 11(2)
(l)
of the Act are implicated in
a single supply of goods, or services, or goods and services so that
the appropriate rate of VAT is
charged in respect of the particular
goods or services or goods and services supplied.
[15]
In an attempt to bolster its argument that s 8(15) did not apply in
this case, Diageo sought to rely on the terms of its agreement
with
the brand owners that it was contracted to supply only a single A&P
service, and that it consequently invoiced the brand
owners for that
single supply of an A&P service, and not for goods which were
only an incidental element of the supply of the
A&P services. The
Commissioner pointed out, correctly in my view, that the single
supply provided by Diageo to the brand owners
consisted of both goods
and services that were distinct and clearly identifiable from each
other. Only one consideration was payable
to Diageo in respect of
that single supply. Had separate considerations been payable in
respect of the goods and of the services,
part of the supply (the
goods consumed in the Republic) would have been standard-rated and
the part consisting of the services
supplied to non-residents would
have been zero-rated. Thus, by application of s 8(15), each part of
the supply was deemed to be
a separate supply. The supply of goods
forming part of the A&P services rendered by Diageo to the brand
owners therefore constituted
a standard rated supply.
[16]
Diageo’s reliance on foreign authorities is in my view,
unhelpful. As the Commissioner correctly submitted, these do
not deal
with the interpretation of statutory provisions that are the
functional equivalent of the deeming provision or an apportionment
provision as one finds in s 8(15) of the Act. Thus, formulations such
as ‘economically not dissociable’, ‘the
supply not
being an end in itself’ and the question of ‘principal
and ancillary supplies’, which find expression
in those
authorities, play no role whatsoever in the interpretation and
application of s 8(15). Furthermore, the respective statutory
provisions have very little in common with s 8(15) of the Act.
[17]
For s 8(15) to apply, it only has to be determined whether ‘each
part of a single supply’ properly falls within
its ambit for
the deeming provisions to be triggered. The meaning of the section
was clearly described in
Commissioner, South African Revenue
Service v British Airways plc
2005 (4) (SCA) 231 in the following
terms (paras 10 and 11):
‘
The section
applies to a single supply of goods or services comprising parts that
would each, if they had been supplied separately,
have attracted a
different rate of tax. In such cases, each part of the single service
is deemed to be a separate supply of goods
or services –
although, in truth, they are not – with the result that the
separate parts each attract the tax that
is levied by s 7 but at
different rates (0% for that part of the service that, had it been
separately supplied, would have fallen
within s 11, and 14% for the
remainder).
A “single
supply of services” is only capable of notional separation into
its component parts, as contemplated by the
section, if the same
vendor supplies more than one service, each of which, had it been
supplied separately, would have attracted
a different tax rate. If
that were not so, there would be no parts of the “single supply
of services” by the vendor
capable of notional separation from
one another.’
Of
significance to the present appeal is what was stated at para 13:
‘
. . . The
section does no more than apportion the rate at which the vendor is
required to pay the tax that is levied by s 7 when
the vendor has
supplied different goods or services as a composite whole.’
[18]
Having regard to the facts of this case, I find that the provision of
the A&P services by the appellant, Diageo, to the
foreign based
brand owners comprised a single supply of goods and services, which,
if they had been supplied separately, would
have attracted a
different rate of tax and for which a single consideration was
payable. The jurisdictional requirements of s 8(15)
were therefore
satisfied with the result that the deeming provision had the effect
of notionally separating the supply of services
from the supply of
goods, when in fact they were not separate supplies. Furthermore,
there can be no justification for importing
into s 8(15) a
requirement derived from foreign authorities, as the appellant would
have it, that the deeming provision may apply
only to a single supply
of economically divisible, independent and hence dissociable supplies
of goods and services.
[19]
Accordingly,
Diageo’s criticism of the approach of the Commissioner and the
Tax Court to the interpretation of s 8(15), that
it produced an
artificial and insensible result and a commercially unreal outcome,
cannot be justified. To the contrary, that approach
accords with this
Court’s dictum in
Natal
Joint Municipal Pension Fund v Endumeni
,
[4]
that:
‘
. . .
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.’ (Emphasis added.)
[20]
As I have shown above the meaning of s 8(15) of the Act is clear. Its
purpose is to ensure that in a case like the present
the appellant
and other similarly positioned VAT vendors fulfil their obligation to
pay VAT at the standard rate on the goods that
they have supplied.
Clearly, this cannot be an artificial and insensible result and does
not in any way produce a commercially
unreal outcome.
[21]
In the light of all what I have stated above, I find that the
appellant is accordingly liable for the VAT output tax adjustments
under s 8(15) of the Act in respect of advertising and promotional
costs incurred by the appellant constituting goods, not exported
but
consumed in the Republic.
[22]
I accordingly make the following order:
The
appeal is dismissed with costs, such costs to include the costs of
two counsel.
__________________
B
H MBHA
JUDGE
OF APPEAL
Appearances
For
appellant: M Janisch SC (with him M Blumberg)
Instructed
by: Webber Wentzel, Cape Town;
Honey
Attorneys Inc, Bloemfontein
For
respondent: A R Sholto-Douglas SC (with him H Cassim)
Instructed
by: State Attorney, Cape Town;
State
Attorney, Bloemfontein.
[1]
Section 11(2)(l) provides in relevant part as follows:
‘
(2) Where,
but for this section, a supply of service would be charged with tax
at the rate referred to in section 7(1), such supply
of services
shall be charged with tax . . . at the rate of zero-percent where –
(l) the services
are supplied for and to a person who is not a resident of the
Republic or a specified country and who is outside
the Republic and
the specified countries at the time the services are rendered, not
being services which are supplied directly
in connection with –
(i) . . .
(ii) . . .’
[2]
Card Protection Plan Ltd v Commissioners of Customs and Excise
(European Court of Justice) case number c-349/96; Auckland Institute
of Studies Ltd v Commissioner of Inland Revenue
(2002) 20 NZTC 17
,
685 (HC); Revenue and Customs Commissioners v Weight Watches (UK)
Ltd [2008] STC 2313. The principles underpinning the European
and
New Zealand approach is the emphasis on distilling on the basis of
the totality of the evidence, the essential features of
the
transaction, and thereby (i) determining the economic or commercial
reality of the transaction, (ii) examining the supply
from the point
of view of the consumer, and (iii) avoiding the ‘unreal’
situation that would result from an overzealous
and artificial
dissection of the transaction into components that are economically
not dissociable.
[3]
Mouton v Boland Bank
2001 (3) SA 877
(SCA) para 13, quoting from
Bennion Statutory Interpretation 3rd ed sec 304 at 736.
[4]
Natal Joint Municipal Pension Fund v Endumeni
[2012] ZASCA 13
;
2012
(4) SA 593
(SCA) para 18.