Edbel Vyk (Pty) Ltd v South African Revenue Service (11244) [2005] ZAFSHC 21 (27 January 2005)

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[2005] ZAFSHC 21
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Edbel Vyk (Pty) Ltd v South African Revenue Service (11244) [2005] ZAFSHC 21 (27 January 2005)

IN THE INCOME TAX
COURT OF THE FREE STATE
HELD
IN BLOEMFONTEIN ON 11 OCTOBER 2004
Appeal No. : 11244
In
the appeal between:
EDBEL
VYF (PTY) LTD
APPELLANT
and
SOUTH
AFRICAN REVENUE SERVICE
RESPONDENT
_____________________________________________________
HEARD
ON:
11
OCTOBER 2004
_____________________________________________________
CORAM:
RAMPAI
J
_____________________________________________________
ASSESSORS
:
MR
A J KOCH
et
MR G DE WAAL
_____________________________________________________
JUDGMENT:
RAMPAI
J
_____________________________________________________
DELIVERED
ON:
27
JANUARY 2005
_____________________________________________________
[1] The matter came
before me sitting with two assessors. It came by way of an appeal
against the decision of the South African Revenue
Service
Commissioner. The appeal is aimed at the reversal of the
commissioner’s assessment of the appellant’s normal tax liability
for the fiscal year ending on 29 February 2000.
[2] At all times material
to this dispute the appellant carried on a money-lending business in
the micro lending sector. In short
the appellant operated as a bank.
Its operational business activities consisted of long-term loans for
study and housing purposes.
[3] As
the provider of those financial services, the appellant in the course
of his business, concluded various written agreements
with a number
of persons whose duty it was to market such financial products. As
on 29 February 2000 there were fourteen such individuals.
I shall
call them marketing agents. The total commission the appellant paid
to the marketing agents for the financial year ending
on 29 February
2000, was R1 158 784,55. See p 35 of the red bundle.
[4] The appellant
submitted its annual income tax returns form IT14 2000, together with
the supporting financial statements for the
fiscal year ending 29
February 2000. The appellant indicated that it had incurred certain
expenses in the sum of R1 159 084,00 as
marketing costs. The
marketing costs included the aforesaid total commission the appellant
had paid to the marketing agents. Seeing
that the appellant regarded
the marketing agents as independent contractors and not as part of
its ordinary employees, the appellant
did not deduct any employee tax
from the amounts it paid to such marketing agents to be paid over to
the South African Revenue Services.
[5] In determining the
appellant’s tax liability for the aforesaid year of assessment, the
respondent rejected the appellant’s
claim that the marketing agents
were independent contractors. The respondent held the contrary view
that the marketing agents were
employees of the appellant and not
independent contractors. Consequently the respondent classified the
marketing agents accordingly
and recovered from the appellant the sum
of R289 694,14 as employees’ tax which according to him was payable
to the South African
Revenue Service on the remuneration of R1 158
784,55 paid to the marketing agents by the appellant.
[6] The appellant lodged
an objection against this assessment. However, the respondent
dismissed the appellant’s objection. Now
the appellant comes to
this special tax court on appeal against the respondent’s decision
relating to the status of the marketing
agents.
[7] A concise exposition
dated 3 August 2004 of the grounds of appeal in terms of rule 11 of
the Tax Court Rules as promulgated in
the Government Notice No. R467
of the Government Gazette No. 24639 of 1 April 2003 was then given.
It boiled down to the contention
that the marketing agents were
independent contractors exempted from the payment of employees’ tax
in terms of the exclusion contained
in the definition of the word
remuneration -
vide
paragraph
2(1) Fourth Schedule Act No. 58/62.
[8] On 28 August 2004 the
appellant amended its aforesaid grounds of appeal in terms of rule 13
Tax Court Rules as follows:
2
Ad
Kort uiteensetting van Appèlgronde (Para 1)
Die boete en rente, gehef ingevolge
Para 6(1) van die Vierde Bylae en rente, ingevolge art 89
bis
van die Wet, is nie regtens hefbaar nie, omrede dit slegs gehef kan
word in gevalle waar ‘n werkgewer versuim het om teruggehoue
werknemersbelasting oor te betaal, binne 7 dae na die einde van die
maand, waartydens die bedrag afgetrek, of teruggehou is.
3
Ad
Feitelike- en regsgronde van Appèl
Die onderhawige werknemersbelasting is
nie deur die Appellant teruggehou van die bedrae wat aan die betrokke
persone uitbetaal is
nie en dus was daar geen versuim om dit binne 7
dae na maandeinde aan die Respondent oor te betaal nie.”
[9] Before the appeal was
argued, counsel for the appellant informed the court that the
appellant intended calling two witnesses to
give
viva
vace
evidence. Counsel for the respondent confirmed that it was so agreed
inter
partes
.
He further indicated to the court that the respondent intended
calling no witnesses.
[10] Johan Vorster was
called as appellant’s witness number one. He testified that he was
one of the directors of the appellant.
He was the chief executive
officer of the company. He gave a history of the appellant’s
company, its workforce, its financial
products, its fertile marketing
grounds, its custom recruitment strategies, its financial products
providers or marketing agents.
He described its marketing agents as
independent service providers with their own autonomous business
enterprises, offices, equipment
and own employees.
His company used a
separate and a different standard agreement in respect of a marketing
agent which was distinct from the standard
agreement used in respect
of an ordinary employee. For instance, the former provided among
others: that a marketing agent would
act as an independent service
provider towards the appellant; that the provisions of the Labour
Relations Act No. 66/1995 as amended
would not apply or govern such
relationship; that a marketing agent was not subject to the control
or supervision of the appellant
at all in respect of the manner in
which he executed his duties or arranged his working hours. He also
said that although marketing
agents were entitled to have their
commission paid to them monthly the less industrious of them did not
always get commission every
month. Quite often such marketing agents
received nothing for a particular month and that no employee tax was
deducted from the
commission earned by any marketing agents, retained
and paid over to the South African Revenue Service since the
appellant was of
the opinion that the marketing agents were not its
employees in any sense.
[11] During cross
examination he answered that one of the indicators of the marketing
agents’ independence was the completed application
form. However,
he conceded that a completed application form for a loan as such was
of no value to the customer since it could not
immediately be
regarded as a complete product. The complete form only became a
meaningful document to the customer upon the approval
of the loan
application by the appellant’s head office and not upon its mere
submission to the appellant by the marketing agents.
He also
conceded that as a rule the marketing agents were not expected
independently to make enquiries from the credit bureau concerning
the
creditworthiness of the applicants for financial aid. He testified
that such credit checks were matters which the appellant
had
jealously reserved unto itself. He was positive that the final
powers of approving a loan application vested in the appellant
and
not the marketing agents. He confirmed that the marketing agents
were not allowed to market any other money-lending products
other
than those of the appellant.
However,
he denied the suggestion that none of the control mechanisms as
insinuated by counsel for the respondent, indicated lack
of the
necessary independence on the part of the marketing agents but rather
an overwhelming degree of contractual independence.
He maintained
that the marketing agents were never appointed or treated as ordinary
employees of the appellant.
[12] Derek Gerhard Botha
was called as appellant’s witness number two. He testified that he
was an entrepreneur of Polokwane in
Limpopo. He acted as a marketing
agent of the appellant prior to 29 February 2000. Before he entered
into a marketing service agreement
with the appellant, he was already
an established farmer and funeral undertaker. He carried on with
those businesses even after
his appointment as the appellant’s
marketing agent. He had offices at Louis Trichardt, Giyani,
Lebowakgomo and Pietersburg. He
had a number of fieldworkers or
sub-agents who worked as his employees in order to market the
appellant’s money-lending products.
His mandate entailed
recruiting customers, completing loan forms and submitting such loan
forms to the appellant. He was appointed
as an independent
contractor and treated as such. He never regarded himself as a
subordinate employee of the appellant. It was
not his obligation to
ascertain the creditworthiness of a prospective applicant before he
completed and forwarded the loan application
to the appellant.
Notwithstanding this fact, sometimes he did so on his own accord.
From what Vorster told him, he was aware that
the appellant did such
credit cheques on its own in any event. The amounts he received from
the appellant varied from month to month
because his sub-agents did
not constantly work hard.
[13] Nothing
new and significant emerged during his cross examination. The
appellant’s case was then closed. So was the respondent’s.
[14] On the one hand Mr.
van Breda, counsel for the appellant, submitted that the appellant
had made out a case which showed on a
balance of probability that the
marketing agents were independent contractors and not ordinary
employees. He contended on this basis
that the additional employee
tax in the amount of R289 696,00 together with the penalty plus
interest in the extra sum of R103 483,00
in respect of the tax year
which ended on 29 February 2000 were not really legally leviable
since such alleged additional employees’
tax was incorrectly
assessed on the payment which the appellant had made to individuals
who were independent contractors and thus
exempted from employee tax
in terms of the exclusionary clause (ii) relating to the definition
of the word “remuneration” in
paragraph 1 Fourth Schedule to the
Income Tax Act No. 58/62. He argued that additional tax in terms of
section 89
bis
Act No. 58/62, penalty and interest in terms of paragraph 6(1) Fourth
Schedule to Act No. 58/62 can only be levied in cases where
an
employer has failed to pay over to the South African Revenue Services
within seven days from the end of the relevant month employee
tax
deducted from employee’ remuneration and retained for the purpose
of meeting and employees’ tax obligation.
Therefore he urged me to
grant the appeal and to direct the respondent to withdraw the
assessment made in terms of section 89
bis
and paragraph 6(1).
[15] On the other hand,
Mr. Stephens, counsel for the respondent, submitted that the
appellant had failed to discharge the onus in
accordance with section
82 Act No. 58/62 by showing on a balance of probability that the
appellant was not liable for the payment
of employees’ tax in
respect of the individuals concerned in this dispute. He singled out
seven specific clauses of the standard
independent marketing contract
which he contended justified the respondent’s classification of the
marketing agents as employees
of the appellant because, as he argued,
such clauses were clear indicators that in relation to the
appellant’s enterprise, the
manner in which the marketing agents
executed their duties was subject to the control and supervision of
the appellant. Therefore,
he urged me to dismiss the appeal and to
confirm the respondent’s assessment.
[16] The real issue which
the court is called upon to determine in the instant case is the true
status of the marketing agents. The
appellant’s case is that the
marketing agents were genuine independent contractors whose
remuneration does not attract employees’
tax. The respondent puts
up the defence or argument that the marketing employees were
disguised ordinary employees whose remuneration
attracts employees’
tax. These two divergent viewpoints concerning the status of the
marketing agents make it necessary to explore
the true nature of the
bilateral relationship between the marketing individuals and the
appellant.
[17] In
order to succeed, the appellant has to show on a balance of
probability that a marketing individual who is involved in the
appellant’s operational activities, quite independent of the
appellant’s control and supervision, conducted his or her own
autonomous
trade anchored on two cornerstones, namely:
The manner in which
such an individual does his marketing work on behalf of another, in
other words the appellant, should not
be subject to the superior
whims and dictates of the mandator often expressed in the statutory
phrase “control and supervision”
vide
the first inclusionary proviso (aa) in respect of the definition of
the word remuneration in paragraph 2(1) of the Fourth Schedule.
The amount paid by the
appellant to such an individual for the promotion of the former’s
products was no fixed remuneration
payable at any regular intervals
e.g. daily, weekly, fortnightly, monthly or any other periodic
interval
vide
the second inclusionary proviso (bb) in the definition of the word
remuneration in paragraph 2(1) of the Fourth Schedule.
[18] The dispute has its
origin in the legislative definition of the word remuneration in the
Fourth Schedule Act No. 58/62. The
definition recognises two
distinct categories of earners, namely: The category of ordinary
employees and the category of independent
contractors. Somewhere
between those two legitimate categories an unrecognised and
illegitimate category of earners is sometimes
found. There is a
tendency by this category of ambivalent characters to cosmetically
project itself as independent contractors whereas
in substance and in
truth it is a group of ordinary workers.
[19] Whenever the status
of an earner of remuneration is challenged, as in this instant case,
such an individual should be placed
in the middle position of
ambivalent earners. It seems to me that the correct approach to be
adopted is to accept albeit provisionally
the taxpayer’s claim that
such an individual, whose status is in doubt, is an independent
contractor.
[20] The first leg of the
enquiry must entail scrutinising the relationship between the
taxpayer and the ambivalent earner by applying
the rigor of the
primary inclusionary proviso (aa) to determine whether on that
primary basis an individual concerned qualifies to
be classified as
an independent contractor. If the primary basis of inclusion
disqualifies such an individual then the individual
concerned must be
excluded from a category of independent contractors and included in a
category of dependent employees and has to
be classified as an
employee within the extended meaning of the word remuneration as
defined by this particular legislation. Whatever
peculiar
characteristics of an independent contractor such individual might
have exhibited until now, are disregarded and such individual
becomes
an employee extraordinaire liable to pay employees’ tax. This will
be the end of the enquiry.
[21] The second leg of
the enquiry entails scrutinising the relationship between the
taxpayer and the ambivalent earner by applying
the rigor of the
secondary inclusionary proviso (bb) to determine whether on this
secondary basis an individual concerned, qualifies
to be classified
as an independent contractor. In a case where the secondary basis of
inclusion disqualifies such an individual
then the individual has to
be classified as an ordinary employee notwithstanding any features
which may tend to suggest contractual
independence.
[22] Where the ambivalent
earner cannot be disqualified as an independent contractor by virtue
of either the primary inclusionary
rule or the secondary inclusionary
rule, then and only then does such an individual qualify to be
classified as an independent contractor.
[23] It
follows from the aforegoing approach that where the outcome of the
primary inclusionary rule and the outcome of the secondary
inclusionary rule differ, an individual concerned must be classified
as an employee within the special meaning of the word employee
as
defined in the legislation we are dealing with. Put differently, the
taxpayer has to prove that both inclusionary rules are inapplicable
to the case at hand in order to succeed on appeal.
[24] The definition of
the word remuneration has a bearing on the words employee and trader
or independent contractor. The word remuneration
is defined as any
amount of income which is paid or is payable to any person by way of
any salary, wages, bonus, commission, fee,
allowance and so on …
whether in cash or otherwise and whether or not in respect of
services rendered … but not including:
(ii) any amount paid or
payable in respect of services rendered or to be rendered by any
person in the course of any trade carried
on by him independent of
the person by whom such amount is paid or payable or of the person to
whom such services have been or are
to be rendered: Provided that
for the purposes of this paragraph a person shall not be deemed to
carry on trade independently as
aforesaid – (aa) if he is subject
to the control and supervision of any other person as to the manner
in which his duties are performed
or are to be performed or as to his
hours of work; or (bb) if the amounts paid or payable for his
services consist or include earnings
of any description which are
paid or payable at regular daily, weekly, monthly or other intervals
- v
ide
paragraph
2 (1) Fourth Schedule Act No. 58/62.
These two deeming
inclusions apply to persons who would otherwise have been classified
as independent contractors. By deeming them
as no independent
contractors or traders they are effectively relegated to the category
of employees. In this way the word employee
is given two extended
dimensions.
[25] Before an employees’
tax is deducted from the earner’s remuneration certain elementary
rules have to be borne in mind. In
the first place the general rule
is that an employee is liable to pay employees’ tax. In the second
place it is the statutory
obligation of an employer to deduct
employees’ tax in a specified way from an employee’s remuneration
and to pay it over to the
South African Revenue Service on behalf of
an employee concerned. In the third place the general norm is that a
genuine independent
contractor, in other words the earner of
remuneration who autonomously execute his mandate without the
prescriptive and authoritative
instructions from an employer, is not
liable to pay employees’ tax. In the fourth place an ambivalent
independent contractor,
in other words an individual who projects
himself as an independent contractor but earns fixed remuneration at
regular intervals
under such pretext but executes his mandate or
rather more appropriately his duties in accordance with the
prescriptive and authoritative
control and supervision of an
employer, is liable to pay employees’ tax just like an ordinary
employee.
[26] The position of an
independent contractor
vis-a-vis
the position of an ordinary employee in the situation of master and
servant from common law perspective was thoroughly elucidated
in
SMIT
v WORKMEN’S COMPENSATION COMMISSIONER
1979 (1) SA 51
AD,
LIBERTY
LIFE ASSOCIATION OF AFRICA LTD v NISELOW
1996 (7) BLLR 825
LAC and
NISELOW
v LIBERTY LIFE ASSOCIATION OF AFRICA LTD
[1998] ZASCA 42
;
1998 (4) SA 163
SCA.
[27] From these decisions
it emerges that in a service contract –
locatio
condictio operarum
the
one person who performs the task, surrenders his productive capacity
completely to the other person he serves who demands that
he be
served through the rendering of the service in a way he wants it
rendered. This is the scenario which pertains to a dependent
ordinary employee. Here the parties envisage a long term
relationship. The one party is a dominant master, the other a
subordinate
servant. The fixed wages are paid at defined regular
intervals. The dominant party decides and dictates the manner in
which the
work must be done by the subservient party. A typical
ordinary worker is normally under a contractual obligation to serve
his employer
and him alone. Another important feature of this type
of relationship is that a compulsory notice is required to terminate
the service
contract. This then is a service contract. It is by its
very nature a very personal service.
[28] As regards a mandate
contract –
locatio
condictio operis
,
the person who executes the mandate does not surrender his productive
capacity to the one who gave him the mandate. The manner
in which he
executes his mandate is characterised by a great measure of
independence or degree of freedom. His hands are not exclusively
tied to a particular mandatory who engaged or mandated him. He is at
liberty to attend to two or more mandates at a time. He is
not bound
to one mandate only at any given time. Here the contractants usually
envisage a short-term relationship rather than a
long-term
relationship. The emphasis is to deliver a fine finished product
chiselled and shaped by independent use of unbridled
or free
productive capacity. This then is a work contract.
[29] However, it has to
be borne in mind that in adjudicating tax dispute, the current
legislative definitions of concepts such as
independent contractor or
ordinary employee should prevail over the conventional definitions
wherever any discords may exist. However
helpful such common law
definitions or expositions may be, the tax legislation must be
consulted as the primary source of guidance
in order to ascertain the
tax position of an individual.
Vide
Meyerowitz:
MEYEROWITZ
ON INCOME TAX
2003 – 2004 edition Chapter 1 paragraph 1.2:
“
It
is therefore clear that the concept of ‘employee’ can neither be
equated with nor is it completely congruent with the common
law
definition of employee as is known in our contracts of master and
servant.”
per Davis J in
ITC
1695: 63 SATC 133
at 136 H.
[30] Davis J went a step
further and said the following op.cit. p 137 F – G:
“
Therefore,
where a person is in a relationship which exhibits independent
characteristics; that is characteristics which would not
in the
ordinary course be classified as employment relationship, but is paid
regularly on a defined basis, whether daily, weekly,
monthly or other
defined intervals, such a person receives remuneration.”
[31] The next quotation
by Davis J is also instructive. He observed as follows op.cit. p 139
I – J:
“
When
the legal edifice described above is taken into account, it must be
remembered that contractors who are neither employees
strictu
sensu
and are not
independent fall within the scope of the Fourth Schedule,
notwithstanding that for all other purposes they are not employees.

To put it differently, great care has to be taken by those who wish
to change their operations from that of employment to subcontracting
to ensure that on the extended approach of the Fourth Schedule they
fall outside of its scope.”
I share the sentiments
expressed by Davis J in the three passages I quoted above. Javerso J
in
ITC
1718: 64 SACT 42 expressed herself in an affirmative mood.
[32] There are certain
specific clauses in the standard independent marketing agreement
signed by the marketing agent which according
to Mr. Stevens
submission negatived the appellant’s claim of the alleged
contractual independence of the marketing agents but affirmed
the
respondent’s determination that the marketing agents lacked the
requisite contractual independence and that these clauses indicated
that they were controlled and supervised by the appellant in
providing the marketing services. I shall deal with them seriatim.

The legal relationship between the parties must be gathered from the
terms used in the written contract
NISELOW
v LIBERTY
supra
p 166 A SCA decision.
[33] The
first ground is clause 4.03 which reads as follows:
“In
respect of D G Botha:
The PROVIDER acknowledges and agrees
that the marketing of loan products of the COMPANY is limited to the
province and area of Pietersburg
and Northern Province and that
should the PROVIDER render his services outside the borders of this
area it is by choice of the COMPANY
not to remunerate the PROVIDER
for approved loan applications, either in total or in part.
In respect of C H Pitchers:
The
PROVIDER acknowledges and agree that the marketing of loan products
of the COMPANY is limited to the province and area of Bloemfontein
and Free State Province and that should the PROVIDER render his
services outside the borders of this area it is by choice of the
COMPANY not to remunerate the PROVIDER for approved loan
applications, either in total or in part.”
It seems to me obvious
that before the marketing agents were appointed the appellant had
identified certain areas that had the potential
of being fertile
grounds for marketing its money loan products for consumption. When
D G Botha was appointed the Northern Province,
now Limpopo, with
Pietersburg, now Polokwane, as his base, was assigned to him alone to
exploit its potential. His marketing operations
were restricted to
this particular province. But the clause did not only prohibit Botha
from exceeding the boundaries of his recruitment
domain, it also
prohibited other marketing agents from entering the same area to
market the same money loan products on behalf of
the appellant.
[34] It appears that the
underlying purpose of the clause was to give each marketing agent
absolute independence within a specific
area, and to prevent conflict
or unhealthy competition between two or more marketing agents
recruiting customers in the same area
for the same company. There is
no evidence to the effect that Botha previously marketed money loan
products, for instance in Mpumulanga
Province as well as in Limpopo
Province and that he was subsequently forced to pull out of
Mpumulanga as a result of some powerful
pressure brought to bear by
the appellant.
[35] In my view the
clause represents an ordinary term of the agreement between the two
contractants and was not designed to diminish
the contractual trade
independence of a marketing agent in marketing the appellant’s
money loan products or touting interested
individuals to consume such
products. Therefore the respondent erred in using this clause as a
factor justifying its determination.
[36] The
second ground is clause 5.02 which reads as follows:
“
the PROVIDER shall market the
microlending and/or other financial products of the COMPANY in the
Republic of South Africa to the best
of his ability and that it would
be done in proper, trustworthy, honest and adhere to a high moral and
ethical standard.”
See also clause 5.08 and
5.12 which are to the same effect:
“
to trade to high moral, legal and
ethical standards and to uphold the good name of the COMPANY.
he shall not employ unlawful and/or
unethical business practices to entice or lure clients and/or
prospective clients.”
My comments in respect of
clause 5.02 will therefore apply equally well to clause 5.08 and
clause 5.12.
[37] The question of good
corporate governance and good work-ethic are the buzz words in the
business world today. Now and then we
read about the business
conferences held to discuss the topical matters such as good
governance, code of conduct, ethical standards
and so on. Quite
often the business leadership both private and public has openly
expressed some concern that the monster of corrupt
business practices
was threatening to tear the ethical, legal and moral fibre in our
business community.
Throughout the country
serious captains of the various industries are determined to
eradicate unworthy corporate and individual practices
so as to
improve the images of their companies. The public images of the
money lending enterprise for instance has been so severely
dented in
this country that the small money-lenders like the appellant are
often derogatively referred to as the loan sharks or “bo-matjhonisa”
meaning the impoverishers.
[38] The appellant
operates in a notorious industry and is obviously aware of this
problem. The purpose of the clause was to protect
its image by
extracting a contractual obligation from those that it has business
dealings with that they were obliged to market its
products in a
proper manner untainted with untrustworthy, dishonest, unethical,
immoral or unlawful acts. In my view the clause
is about good
governance. It is not about limiting the contractual independence of
the marketing agent. No marketing agent can
ever claim having any
independence to indulge in such unworthy practices. Therefore the
respondent erred in using this clause against
the appellant.
[39] The
third ground is clause 5.03 which reads as follows:
“
The
provider … undertakes to market ONLY the microlending and financial
products of the COMPANY.”
Mr. Stevens submitted
that this restrictive clause alone was fatal to the appellant’s
case. Mr. van Breda disagreed. He submitted
that the clause was
inserted in order to obviate problems which often arise when similar
loan applications are simultaneously marketed
to other rival
financial institutions, a practice which often causes problems to
money lenders on the market.
It
is important to note or to stress that the clause does not preclude a
marketing agent from marketing any dissimilar financial product
by
other financial institutions.
There
is yet another evil which the clause seeks to prevent besides
preventing a marketing agent from presenting one and the same
loan
applicant to two different banks in order to obtain financial aid for
one and the same need. Had this clause not been inserted,
a
marketing agent would have been free to overreach the appellant by,
for instance, concluding secret deals with other rivals or
competitors and diverting some loan applicants to such rival
competitors who would offer him say R400,00 instead of R250,00 per
each
loan application presented and approved.
[40] It seems to me that
the primary objective of the clause was the appellant’s natural
instinct for self preservation or survival
in the highly competitive
and tough sphere of money-lending. Again it has to be mentioned that
some marketing agents were novices
in the fields the appellant wanted
to explore. They were unskilled. They were unskilled and like
franchisees they were schooled
or trained and skilled in the business
of marketing the appellant’s loan products. For instance Botha was
not a experienced and
skilled marketing agent who had to abandon his
existing mandates in order to execute the sole mandate newly found.
Therefore I cannot
be persuaded that the restrictive clause was a
fatal indication that the marketing agents were subject to the
control and supervision
of the appellant.
[41] The fourth ground is
clause 5.05 which reads as follows:
“
The
provider states that …. he might come to information regarded as
confidential trade secrets and that should it be disclosed
and come
to the knowledge of competitors or related third parties that it
might be to the financial detriment of the COMPANY and
therefore the
PROVIDER undertakes non-disclosure for the duration of this agreement
and for a period of at least 36 (thirty six)
months after termination
of this agreement.”
This contention is
flawed. A restraint of trade clause in a contract is not
per
se
an
indication that the person against whom the clause operates was a
subordinate to the person in whose favour the clause operates.
Such
clauses can also be found, for instance, in a contract where a lawyer
sells his lawfirm to another, or a doctor sells his medical
practise
to another or a butcher sells his butchery to another.
See DE WET & YATES:
KONTRAKTEREG
4
TH
edition p 308.
[42] The contract
restrains the marketing agent from divulging to the appellant’s
rival competitors or related thirds sensitive
information relative to
confidential trade secrets imparted by the appellant and acquired by
the marketing agents by virtue of their
business dealings founded on
the bond of trust. Both parties acknowledged through this clause
that left unregulated, disclosed confidential
trade secrets could
lead to the financial detriment if not the downfall of the appellant.
Mr. Stevens’ contention that the restraint
entails limitation of
the marketing agent’s future productive capacity which amounts to a
form of control over an employee by an
employer overlooks the real
purpose of the restrained in these circumstances. The clause
protects confidential trade secrets but
limits no productive
marketing activities at all, of the individuals concerned in the
future. From day one after termination of
the independent marketing
agreement the marketing agent is at liberty to continue with his
marketing activities on behalf of any
other mandatory provided he
does not disclose the confidential trade secrets of the appellant.
Therefore, this factor alone cannot
be a decisive indicator that the
marketing agents we are here concerned with were ordinary employees
of the appellant or could be
equated to special employees as
contemplated by the deeming inclusion rule (aa) paragraph 2.1 forth
schedule.
[43] The fifth ground is
clause 5.13 which reads as follows:
“
The
provider …. agrees that he shall adhere to proper administrative
requests and compliance requested or instructed by the COMPANY.”
Counsel for the
respondent contended that an independent contractor would not accept
this sort of restriction on his mandate or services.
However,
counsel for the applicant argued that:
“
Dié
klousule het geen betrekking op die
wyse
waarop die lashebber sy opdrag moet uitvoer nie (naamlik om
leningsapplikante te werf) en is ingevoeg bloot om effektiewe
administrasie
en kommunikasie daar te stel, tot voordeel van leners.
Dit is ‘n erkende verpligting by lasgewing dat die lashebber
rekenskap
van sy bewindvoering aan die lasgewer moet voorlê.
Sien:
DE WET & YATES – KONTRAKTEREG - bl 308.”
[44] It seems that an
example or two will clarify the matter. Suppose a marketing agent
successfully recruited customer X to apply
for a study loan. He then
submitted the required application form to the appellant for
consideration. Upon perusing the application
form, the appellant
discovers that no copy of X’s identity document was annexed and
that a page of the application form which deals
with the loan
applicant’s trade references was not completed at all. The
appellant returns the loan application form to the marketing
agent,
say Pitchers, for further attention. But Pitchers simply ignores the
appellant’s administrative request to complete the
loan application
form fully and to attach the required copy of the identity document.
The appellant again writes one more letter
and request Pitches to
comply with the previous administrative request. Again Pitchers does
nothing despite the fact that he had
received numerous letters, faxes
and calls from the appellant and from the said X. Five weeks later
the appellant sends a fax message
instructing Pitchers to comply
within seven days.
I
hold a firm view that such requests, demands or instructions to
comply do not entail by any serious stretch of imagination any
superior authoritative or prescriptive control and supervision of a
marketing agent. Similarly any instructions by the appellant
to any
marketing agent demanding lawful compliance with the terms of the
independent marketing agreement cannot be said to be limiting
the
manner in which the loan products have to be marketed.
[45] The sixth ground is
clause 7.02 which reads as follows:
“
The
company agrees: That the remuneration in 7.1 above be paid by the
COMPANY to the PROVIDER on a monthly basis and in such a manner
and
on such a date that it is available to the PROVIDER before that last
day of the specific month.”
Clause 7.01 referred to
in this passage provides that the company, in other words the
appellant, undertakes to remunerate the provider,
in other words the
marketing agents, with the amount of R250,00 for every loan product
submitted by the provider provided certain
conditions are met.
[46] The first crucial
question here is whether the marketing agents received fixed
remuneration. The marketing agents were remunerated
at the rate of
R250,00 per each loan product marketed and approved. But there were
no prescribed minimum or maximum targets of loan
products a marketing
agent was obliged to meet a month. The remuneration earned by a
particular marketing agent in a particular
month depended on the
industry of such a marketing agent. It probably fluctuated from time
to time and differed from marketing agent
to marketing agent.
Notwithstanding the
wording of the independent marketing agreement clause 7.01 does not
stipulate the fixed remuneration but a formula
at which the marketing
agents were to be remunerated.
[47] The second crucial
question is whether the marketing agents were remunerated at the
regular defined periodic intervals. It is
also conceivable that the
not-so-industries were not regularly remunerated every month when
they had not submitted any loan product
as the witnesses Vorster and
Botha said. This much Mr. Stevens conceded. He said:
“
Dit
word aan die hand gedoen dat daar heel moontlik gevalle kon voorkom
waar werkers nie op ‘n maandelikse basis besoldig is nie.”
But he went on to say:
“
Hierdie
feit is egter neutraal, aangesien die Appellant in sy kontrak met die
werkers
die
reg
voorbehou het om
hierdie werkers maandeliks te besoldig en hierdie reg kon uitoefen
soos hy inderdaad in die twee gevalle op rekord
gedoen het.”
[48] Although the
appellant had remunerated two marketing agents, namely Pitchers and
Botha, every month during part of the year under
review, such
payments did not offend the tax rule against regular remuneration for
independent contractors. In other words remunerating
those two
marketing agents regularly on a monthly basis or fortnightly basis
did not have an adverse impact on the entrepreneurial
autonomy of the
marketing agents as independent contractors. The bottom line of the
matter is that each marketing agent was entitled
to be paid per loan
product marketed and approved which loan product he was at liberty to
submit at any irregular intervals during
the month. For instance, a
marketing agent could lodge three claims during the first week, seven
during the second week, twenty
during the third week and zero during
the fourth week. On behalf of the respondent it was contended that
seeing that the appellant
had the right to remunerate the marketing
agents monthly according to their contracts in the docket which right
the appellant enforced
as evidenced by the testimony of Vorster, the
appellant squarely falls within the second inclusion (bb) of the
Fourth Schedule on
this technical point alone. The following passage
by Traverso J in
ITC
1718:
64 SATC 43
at par 12 on p 47:
“
Even if it is found that Mr. B was
carrying on an independent trade he is disqualified because his
earnings were payable on a regular
monthly basis subparagraph (bb) of
the definition of remuneration.”
[49] Where a marketing
agent is found to be remunerated periodically on, say monthly basis,
then his claim of autonomous trade status
is nullified by the second
inclusion (bb) definition of the word remuneration in par 2.1.
Where, however, the frequency at which
the earnings are payable is
occasionally interrupted, as
in
casu
,
by one or more unpredictable events the trade independence of such a
marketing agent cannot be ensnared by the second proviso (bb)
in par
2.1), in other words a marketing agent cannot be disqualified as an
independent trader. An individual remunerated does not
become an
independent contractor because the contract labels him or her so. By
analogy the frequency of payment does not become
a regular frequency
merely because the contract described it as such. The words used in
the contract must be scrutinised in order
to find their true meaning.
To do other words would be to prefer form to substance.
[50] The underlying idea
of the clause was influenced by considerations of sound financial
management and pragmatic dictates of administrative
convenience. It
made a perfectly sound financial proposition from an accounting
perspective to draw up one composite cheque each
month or each
fortnight in favour of the marketing agent concerned in order to
avoid a multiplicity of numerous small cheques of
R250,00 each drawn
in favour of one and the same marketing agent by the same drawer.
Though the remuneration was to be paid monthly,
no fixed and
precisely determined date such as the 25
th
of each month was agreed upon for the payment of remuneration. The
remuneration could be paid on any day other than the last day
of any
particular month. For instance, one marketing agent was paid twice
per month despite the provisions of the standard independent
marketing agreement. Such date could vary from month to month and
from marketing agent to marketing agent. It follows that no
remuneration
would be paid for a loan product lodged on the last day
of the month. All these various aspects show that the concept of
defined
regular intervals was not violated on the facts of the
instant case.
[51] The seventh ground
was clause 8.04 which reads as follows:
“
The
agreement can be cancelled by either party with 30 (thirty) days
written notice to the other.”
This clause must be read
together with clause 8.05 which empowers the appellant to resile from
the contract on 24 hours notice if
it suspects that a marketing agent
has breached the provisions of clause 6.
Now counsel for the
respondent contended that by reserving unto itself the drastic power
to terminate the independent marketing agreement
at such a short
notice, was indicative of a master and servant relationship instead
of a bond underpinned by contractual independence
between autonomous
contractants e.g. a marketing agent and a mandatory.
[52] I am not persuaded.
The appellant has the right to expect honest information, clean
dealings, right morals and lawful practises
on the part of any
marketing agent. Every banker expects the same from an independent
broker who markets it financial products.
It cannot be argued with
serious conviction that one contractant who is required by another
contractant to pursue those business
virtues is subordinate to the
one seeking no dishonest information, underhand dealings, wrong
morals or any illegal practices. Should
a marketing agent violate
such contractual obligation in the course of marketing the
appellant’s loan products, he will obviously
be in breach of the
independent marketing agreement. Prohibiting a marketing agent from
acting unlawfully can hardly be described
as exercising oppressive
employeral authority or restrictive supervision. If we accept this
proposition then there can be no logical
reason for rejecting
termination of the contractual relationship as a remedy for putting
an end to an agreed wrong method of marketing
a product. Doing so
cannot be seen as controlling or supervising the manner in which a
product has to be marketed. It boils down
to virtually stopping the
entire business of marketing itself. Logically there can be no
controlling or supervising of the product
when a marketing process
itself has been done away with.
[53] Having said all that
I have to hasten to add that there are a number of features which
seem to have a negative effect on the
alleged contractual trade
independence of the marketing agents. I propose dealing with them
one by one.
[54] The first factor is
the employee computer code. The appellant used the so-called pastel
computer program. This program is apparently
a user-friendly system
concerning the creation of accounts. Vorster did not think so. But
I accept that the program is supposed
to help management to quickly
obtain the necessary financial information from the computer program
and to preserve it for the purpose
of drawing up the required annual
financial statement of a program user such as the appellant. After
all buying a computer program
which does not serve one’s particular
needs makes no sense at all.
[55] In normal
circumstances one would expect management of a company the size of
the appellant to draw up a clear distinction especially
in its annual
financial statements between its dependent ordinary workers and its
independent special traders in order to have the
necessary
information readily available for decision-making by management. For
instance, ordinary employees could be given code
340 and special
traders’ code 440. It was never done in the instant case. Instead
one and the same code 440 was used in respect
of both categories
whose earnings were decoded as salaries, wages and commission. As
the situation stood on 29 February 2000 the
total number of special
traders, in other words independent contractors if any, was not
separately and distinctly reflected in the
annual financial
statements. In turn the omission to distinguish them obscured the
alleged marketing costs.
The
fact that Edbel Five (Pty) Ltd had employed a full-time bookkeeper as
an ordinary employee and also had at the helm of its echelons
of
power Vorster who was not just a director but a director who was a
chartered accountant by profession deepens the omission problem
and
raises some worrying questions about the alleged marketing costs and
the status of the individuals involved.
[56] The marketing agent
440/307 C H Pitchers independent marketing agreement which endured
from 9 June 2000 was belatedly signed
on 12 June 2000. The strange
feature of this marketing agent is that he was remunerated from 23
July 1999 almost a year before the
independent marketing agreement
became operative. It seems to me that the independent marketing
agreement in respect of Pitchers
which appears on p 76 – 82 of the
red bundle has no bearing on the year of assessment we are here
dealing with. Clause 9.01 thereof
suggests that there could have
been an earlier independent marketing agreement which preceded the
2000 agreement. But no such earlier
written agreement forms part of
the docket before me.
[57] Pitchers was
remunerated twice a month as from 23 July 1999 despite the wording of
the standard independent marketing agreement.
An analysis of the
transactions recorded in his general ledger account shows:
That during a period of
about eight months immediately preceding the year of assessment (29
February 2000) he received from the
appellant a turnover of R703
374,00;
That this sum included
six months commission of approximately R605 995,00;
Refund of rent of
approximately R28 700,00;
As well as various
payments of debts which Pitchers owed to his apparent sundry
creditors.
It is unusual for a
company to pay such expenses on behalf of an independent trader
contracted to it. Moreover, Pitchers was not
reflected as a debtor
to the appellant. There is no evidence that the moneys were loaned
to him. The rest of the marketing agents
did not earn as much income
as Pitchers did. The second highest earner was Botha. But even he
lagged far behind by a substantial
amount. Botha earned R275 124,55
less than Pitchers. The third highest earner was Le Grange with a
modest commission of R6 500,00.
These strange features and the vast
earning disparities raise some questions about the alleged trade
independence of the marketing
agency system in this case.
[58] Mr. Stevens
submitted that:
“
Dit
word ten slotte aan die hand gedoen dat ten beste vir die Appellant
se saak die werkers hulle in ‘n niemandsland tussen ‘werknemer’
en ‘onafhanklike kontrakteur’ bevind het en daarom as
‘werknemers’ geklassifiseer moet word in terme van die Vierde
Bylae
en dat die Appellant gevolglik werknemersbelastng van hulle
besolding moes afgetrek het of teruggehou het:
Vide
ITC 1695
supra
te 139”
[59] Mr. van Breda
submitted that:
“4.2.1 Uitsluitingsbepaling (aa)
geld nie daar die betrokke bemarkers nie aan enige beheer en toesig
onderworpe was, met betrekking
tot die wyse waarop hulle hul pligte
moes uitoefen, of hul werksure nie;
Hierdie bepaling (inclusion (bb)
in other words) geld ook nie omrede die kontrak in die
onderhawige saak, nie voorsiening
maak vir
gereëlde
en vaste
maandelikse
betalings nie, maar slegs vir betalings
as
daar ‘n eis is.
(K17
– Dossier bl 72).
The words in brackets are
mine.
[60] One of the obstacles
on the road of the appellant to success is that it bears the onus of
proof. The issue on which the onus
falls to be discharged by the
appellant was whether the appellant was liable upon proper and
correct classification of the marketing
agents, to have employees’
tax deducted from the sum of the various payments it made to them.
It would appear that the
appellant intended using independent outsiders to market its loan
products to public consumers. Now the
crucial question is whether
the intended relationship was so structured that it attained that
objective or not. In other words whether
the appellant has
discharged the onus of showing that it had been done. I am inclined
to conclude that the appellant has discharged
the onus.
As regards the primary
inclusion (aa) my findings are that each marketing agent acted
towards the appellant as an independent service
provider and was
treated as such by the appellant in keeping with the independent
mandate agreement; that the parties stipulated
in the relevant
independent mandate agreement that their relationship would not be
governed by the provisions of the current legislation
relating to
labour relations; that no marketing agent was a member of the
appellant’s pension fund, provident fund or medical aid
society;
that all the marketing agents carried on with their own autonomous
trades subsequent to their appointment as the marketing
agents of the
appellant’s loan products; that a marketing agent could not
contractually bind the appellant to the third parties;
that the
appellant was not vicariously or delictually liable for the civil
wrongs committed by a marketing agent himself or his employee
and
that the appellant did not control or supervise any marketing agent’s
productive capacity or manner in which he executed his
duties or
regulated his working hours.
As regards the secondary
inclusion (bb) I could find no conclusive evidence that the marketing
agents were routinely paid at defined
periodic intervals irrespective
of their performances; that they always received fixed payments or
that they received one payment
every month. I accepted the evidence
of the appellant’s two witnesses. No real evidence was tendered on
behalf of the respondent
to discredit them in any manner. The
respondent called none of the marketing agents or obtained any sworn
statements from them.
[61] Having considered
the pros and cons of the appeal both ways I have come to the
conclusion that consideration of the factors the
dominant impression
created by the facts is:
That the marketing
agents were not disqualified as independent contractors in terms of
the primary inclusionary hurdle (aa). The
appellant has established
on a balance of probabilities that it exercised no control and
supervision over the marketing agents;
That the marketing
agents were also not disqualified as independent contractors in
terms of the secondary inclusionary hurdle (bb).
The appellant has,
in my view, also shown on a balance of probabilities that it paid no
fixed remuneration at defined regular
periodic intervals to the
marketing agents;
[62] In the circumstances
I have come to the conclusion:
That the marketing
agents were independent contractors and not employees in an ordinary
or extended sense of the word employee;
That their proven
contractual trade independence or status demands that they be
classified as independent contractors and not employees;
That the respondent’s
claim or decision which led to their classification as employees was
not justified by the facts;
That the appellant was,
therefore not liable to deduct any amount in the form of employees’
tax from the amounts it paid to the
individuals concerned.
In the case of
NISELOW
v LIBERTY
supra
,
in terms of a written contract, the appellant, a marketing agent of
the respondent, undertook to canvass insurance applications
on a
fulltime basis exclusively for the respondent. His remuneration was
paid in a form of a commission on insurance contracts canvassed
by
him and of course approved by the respondent. In court he claimed he
was a
locator
operarum
– in other words – an employee to the respondent. The Labour
Appeal Court in
LIBERTY
v NISELOW
supra
held
that he was not. On appeal the Supreme Court of Appeal confirmed the
decision of the Labour Appeal Court that the appellant
was a
locator
operis
–
in other words – an independent contractor. By analogy I am
satisfied that the marketing agents
in
casu
were
indeed independent contractors.
I would therefore uphold
the appeal.
[63] Paragraph 5(5) of
the Fourth Schedule Act No. 58/62 provides that the sort of
employees’ tax that we are concerned with if
proven, is deemed to
be a penalty due and payable by an employer concerned to the South
African Revenue Service.
Paragraph 6.1 of the
Fourth Schedule Act No. 58/62 provides that where an employer deducts
employees’ tax from the earnings of
an employee, but fails to pay
it over to the South African Revenue Service on behalf of an employee
within seven days from the end
of the month within which such
employee tax was deducted and retained, such defaulting employer
shall be liable to pay a further
penalty of 10% on such employees’
tax to the South African Revenue Service.
Section 89
bis
Act No. 58/62 provides that after the expiry of a prescribed seven
day period referred to in paragraph 2 the Fourth Schedule Act
No.
58/62 interest at the prescribed rate shall become payable by the
employer to the South African Revenue Service for the full
period
during which such employee tax remains unpaid.
Since there is no
employees’ tax which the appellant deducted or retained but failed
to pay over to the South African Revenue Service
the provisions of
paragraph 6.1 relative to additional penalty and those of section 89
bis
relative to interest do not apply. There is no deemed capital
penalty as paragraph 5(5) envisages.
[64] Section 87(17) Act
No. 58/62 empowers the court to make an order in favour of an
aggrieved party where the assessment of the
respondent is found to be
unreasonable or where the hearing of an appeal was postponed at the
request of one of the parties. It
has been held that the respondent
commissioner’s claim was unreasonable if it rested on a decision
which no reasonable person could
have come to.
See
ITC
945: 24 SACT 455 on p 457 and
ITC
1703: 63 SACT 247 on p 257 – 258.
In the former case
Williamson J observed that the commissioner was not to be ordered to
pay the cost in a case of a successful appeal
against his decision
merely because his decision was wrong. Something more was required.
That is still the position today in the
Income Tax Law. The
commissioner could also be directed to pay the cost should the court
find that his claim was obviously frivolous
or where the court finds
that his claim was manifestly futile.
See
ITC
1316:
42 SATC 229
and
ITC
1703
supra
at 258.
However, I am of the
view that in a scenario where a marketing agent’s landlord is paid
by a tax payer a company whose products
he was appointed to market.
On that ground alone if the commissioner suspects that the alleged
independent marketing contract was
probably a disguised master and
servant contract camouflaged as independent mandate contract it
cannot be said that the commissioner’s
claim was so unreasonable
that no reasonable person would have come to such a decision on the
facts.
[65] The hearing of the
appeal was postponed to 11 October 2004 not at the request of the
respondent as Mr. van Breda would want us
to have it. The fact of
the matter is that the appeal simply had to be postponed. The
postponement was due to the lateness of the
hour.
[66] In the circumstances
I cannot accede to the appellant’s request for a cost order against
the respondent. The case presented
by the commissioner was very
plausible. Although the appellant has suffered financial prejudice,
the respondent is not to blame.
Such financial loss as the appellant
might have incurred, is squarely attributable to the dubious or
ambivalent dealings he had
with its marketing agents, especially
Pitchers.
[67] Accordingly I make
the following order:
The appeal succeeds.
The respondent is
directed to withdraw the assessment in question.
______________
M.H. RAMPAI, J
I
concur.
_________
A.J. KOCH
I
concur.
___________
G. DE WAAL
On
behalf of the appellant: Adv. C van Breda
Instructed
by:
PriceWaterhouseCoopers
On
behalf of the respondent: Adv. G Stevens
Instructed
by:
SARS
/sp