Judgment: TL vs Zimbabwe Revenue Authority 20 HH 413 Full Judgment and Summary

Summary supplied by: Ms Deone Roos (Pieterse TRM Erasmus)

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Summary

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FACTS

  1. TSCL, the holding company of the appellant, TL, and on behalf and for TL, entered into a Technical Assistance Agreement (the “Agreement”) with Tongaat Hullet Sugar Limited (“Tongaat”).
  2. TL accepted the agreement made on its behalf and complied with all rights and obligations in terms of the same.
  3. TL paid Tongaat all fees due for the technical assistance rendered and also paid ZRA the withholding tax as required by section 30 read with the seventeenth schedule of the Income Tax Act Chapter 23:06 on all such technical fees.
  4. ZRA at all material terms accepted the withholding tax.
  5. ZRA raised amended assessment for the years 2010, 2011, 2012, 2013, 2014, 2015 and 2016.
  6. TL made the following contentions:
    1. The amended assessments in respect of the 2010 and 2011 years were unlawful in that the right of ZRA to issue such amended assessments had prescribed in terms of provision (ii) to section 47(1) of the ITA.
    2. All seven amended assessments issued by ZRA did not specify the determination of taxable income and of credits to which TL was entitled to in terms of law. Each amended assessment was issued as an additional assessment in terms of section 47(1)(a) of the ITA and not as an estimated assessment in terms of section 45.
    3. In each amended assessment, the figures attributable as technical fees had been assessed in a prior tax year in which the liability to pay was the following year.
    4. ZRA failed to apply the provisions of section 16(1)(r) of the ITA in that the fees paid by TL to Tongaat were not incurred as expenditure on administration and management but on the provision of technical fees.

Issues in Dispute

The issues in dispute were as follows:

  1. Whether the additional assessments in respect of the 2010 and 2011 tax years were unlawful by reason of prescription.
  2. Validity of the 2010-2016 years of assessment due to lack of specificity of the determination of taxable income and of credits entitled.
  3. Whether ZRA erred in law in disallowing the deductions in respect of fees for technical services incurred by TL and in terms of section 16(1)(r) of the IT and further whether ZRA erred on the facts of the matter after applying the aforesaid sub-section to the deductions.
  4. If a finding were to be made that the fees paid by the TL were in respect of administration or management services in terms of Section 16(1)(r) of the ITA, whether ZRA erred in any event by not allowing such deductions to the level of at least 1% of th net income of TL.
  5. Whether or not each of the original assessments for each of the relevant tax years was made in terms of the practice generally prevailing at the time each of the assessments was made and therefore ZRA was by virtue of the proviso to section 47(1) of the ITA precluded from issuing additional assessments for those years.

Judgment and Reasoning

Issue of prescription

  1. The court referred to section 47 of the ITA which specifically provides that ZRA had the right to re-open audits after the lapse of the six-year period if satisfied that there is on the part of the taxpayer evidence of fraud, misrepresentation or wilful or non-disclosure of facts.
  2. ZRA had to prove that any one of the offenses listed was committed by the responded, and that an allegation of such nature would have to be placed before the taxpayer for due process to take place.
  3. No evidence was presented to show that TL was guilty of any of the offences listed and the court accordingly held that the additional assessments for the tax years 2010 and 2011 were invalid.

Validity of the additional assessments (2010-2016)

  1. Section 2 of the ITA requires an assessment to reflect taxable income, credits to which a person is entitled to, an assessed loss ranking for deduction.
  2. In Barclays Bank of Zimbabwe Revenue Authority 04 HH 162 it was stated that “It is imperative that an assessment contains the requirements of the Act as the administrative functions bestowed by the Act on the Commissioner amount to a determination which is executable through a garnishee. He is also bestowed with the power to hear any objections in terms of the assessments made, after which he can insist on payment of the tax pending the determination of any dispute arising from an assessment. The legislature could only have envisaged granting the Commissioner power to execute pending determination in circumstances where the tax payer been clearly advised of the basis for the assessment.”
  3. In referring to the above quoted case the court stated that the lumping up of figures does not meet the requirements set out in section 2 of the ITA. ZRA must ensure that whatever information it gives to the taxpayer can be properly understood and interpreted. He furthermore stated that “The appellant’s right to correct information is paramount in these matters and to that end lumped up figures without any explanation becomes meaningless.”
  4. The court held that the additional assessments were invalid and should be set aside.

    Whether or not the Respondent erred in law in disallowing the deductions in respect of fees for technical services incurred by the Appellant at all and in terms of section 16(1)(r) of the ITS and whether the Respondent erred on the facts of the matter after applying the aforesaid subsection 16(1)(r) to the deductions
  5. The court stated that the Technical Assistance Agreement served as evidence that there was indeed an agreement between the parties where TL had an obligation to pay for a service. The technical service was also clearly spelt out in the agreement and with respect to fees.
  6. The court stated that the Technical Assistance Agreement served as evidence that there was indeed an agreement between the parties where TL had an obligation to pay for a service. The technical service was also clearly spelt out in the agreement and with respect to fees.
  7. The ZRA only surfaced in 2017 unconvinced that the fees were indeed technical fees. There was no change in the manner the TL had been submitting its self-assessed income tax returns. ZRA provided not convincing explanation supporting the sudden change approach.
  8. The court referred to the fact Agreement enjoyed the approval of the Reserve Bank of Zimbabwe and that for 7 years the audited accounts reflected the technical fees payable to Tongaat in terms of this agreement.
  9. It was ZRA’s position that the expenditure claimed as technical fees by TL was expenditure actually incurred on management fees and general administration fees. In this regard the court held that although the broad provisions of the Agreement did not preclude Tongaat from offering expertise to TL in the fields of administration and management, that kind of expertise did not take away the technical nature of the agreement. Accordingly, liaison between the contracting parties in relation to both administrative and management services cannot be ruled out, however the liaison cannot, without evidence, be taken to mean Tongaat was offering administrative and management services.
  10. The court found that Tongaat did render the technical services which services were paid for in terms of the agreement. As a result, ZRA erred in law in disallowing deductions in respect of technical fees.
  11. The court did not find it necessary to go into the issue of whether ZRA erred in any event by not allowing such deductions to the level of at least 1% of th net income of TL

    Whether or not each of the original assessments for each of the relevant tax years was made in terms of the practice generally prevailing at the time each of the assessments was made and therefore ZRA was by virtue of the proviso to section 47(1) of the ITA precluded from issuing additional assessments for those year
  12. The court had to determine what was the practice generally prevailing and also the validity of the initial self-assessments, if they were lodged with ZRA in accordance with that practice.
  13. Reference was made to CIR v SA Mutual Unit Trust Management Co Ltd 1990 (4) SA 529 (A) wherein it was stated that a practice generally prevailing is one which is applied generally in different offices of the Department in the assessment of taxpayers and in seeking to establish such a practice in regard to a particular aspect of tax assessment it would not be sufficient to show that the practice was applied in merely one or two offices. Furthermore, practice in that context meant a habitual way or mode of acting.
  14. The existence of such practice could be established by showing that the ZRA or his representative had issued a directive to that effect.
  15. The case of DNS (Pvt) Ltd v Zimbabwe Revenue Authority 19-HH-772 was also referred to wherein the court dismissed an argument that a self-assessment falls outside the contemplation of section 47(1) of the ITA.
  16. The court stated that there was a practice generally prevailing as at the time TL started executing the Agreement and ZRA accepted taxes paid under that Agreement. The income tax returns were based on an existing self-assessment system and there was no departure from that practice or system.
  17. The court held that the initial assessments had been presented in accordance with the practice generally prevailing at the time they were made, were valid and that the ZRA was precluded from issuing additional assessments.

Order

The following order was made:

  1. The appeal succeeds.
  2. The amended assessments from 2010-2016 be and are hereby set aside.
  3. The initial self-assessments from 2010 to 2016 be and are hereby confirmed.
  4. Each party shall bear its own costs.

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