METROPOL lTAN LIFE LIMITED

and

COMNIISSIONER FOR THE SOUTH AFRI€?AN REVENUE SERV IC E

JUDGMENT: 16 May 2008

DAVIS J:

Appellant

Respondent

(1 j This is an appeal against the judgment of the Special Incomc Tax Court delivered on 5 March 2006, dismissing the appellant’s appeal against certain value added tax (VAT) assessments raised by the respondent.

The appellant is a life insurance company and its main business in vol ves the provision of li fe insurance to both local and international clients. Pursuant to its business, it makes Use of various overseas consultants, business advisors and computer services. 4 fee appellant adopted the approach that where such services, with the exception of telecommunication services have been physically rendered outside of South Atrica no, VA 1 is payable in terms of the Value Added Tax Act 59 of 199 I (‘the Act’). I lence these international supplies stood to be zero ratcd in terms of section I (2)(k) of the Act.

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The respondent adopted the view that the appellant had received “imported serv ices" as defined in section I of the Act and thus raised assessment tor VAT on such services to the extent that the services were used or consumed in the Republic others ise than for the purpose of making taxable supplies.

The court ri 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 zeto rating invoked the by appellant in terms of section 11 (2)(lc) of' the Act was inapplicable. The court applied section 1 4(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

As Mr Enislie, 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

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 pt ovides as fol lows: “Subject to the exemptions, exceptions, deductions and adjust ments provided for in this Act, there sh all be levied and paid for the benefit of the National Revenue Fund a tax, to be known as the value-added tax-

on the su pply by any vendor of goods or services supplied by him on or after the commencement date in the course or fu rthcrance of any enterprise carried on fly him;

on the importation of any goods into the Repu blic by any person on or after the commencement date; and

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 su pply concerned or the importation, as the case may be.”

The term ‘services" is defined as follows in section 1 of the Act:

“’services’ mean anything done or to be done, including the granting, assign ment, 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 ca rd contemplated in paragra ph (c) of the definition of ‘goods’.

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The phrase "imported sci vices” is defined as Joflows 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 othei wise than for the purpose of making taxable supplies”.

[9| Throughout the relevant period ot the pi esent dispute section 11(2)(i) of the Act provided as follows:

“Where, but for this section, a supply of sei-vices 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 wherv —

(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”.

I *1 Section 14(5)(a) and (ñ) provided that:

“the tax chargeable in terms of section 7(1)(c) shall not be payable in respect of —

a supply which is chargeable »'ith tax in terms of section 7(1)(c) at the i ate provided in section 7;

u supply which, if made in the Republic, would be cliarp•ed 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;”.

[1.1 ] 1 he 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 wade by a supplier resident or carrying can business outside the Repu blic to a recipient, the appellant, a resident of the Republic. The services werc utilised or consumed in the Republic. otherwise than for the purpose of making taxablc supplies. In general, imported services stand to be taxed at the rate ot 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, wlsich section.

Appellant's a rgii ment

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 incl uded the zero rating provisions contained in section 1.1 (2) of the Act. Accordingly, if the supply of ‘imported services' fell with in any of the provisl ons 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).

Mr Emslie submitted that in terms o1 the relevant facts the supplies t'ell within section 11(2)(1) 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 ot the latter. fhC ap|a Ilcation of section I I (2) was not restricted to vendor-s who were required to register for CAT purposes. On the plain wording of section 7(1) read with section 11(2)(k), the supply of these imported services stood to be zero rated.

However, in the light of the finding of the court a quo and its reliance upon section 14(5)(A) of the Act, Mr Lmslie went on to exatnine the wording

application of section 14(5) ot the Act. The court a quo held that the kind o1 imported services performed in the present dispute tell exclusively within the scope of this section. Ey contrast, Mr Emslie su bm itted that imported services are to be taxed at the rate ot zero percent ‹n terms of section. 11 (2)(k). Accordingly, if imported serviccs were taxable in terms section 7(1) (c) of the Act, section 14(5) (n) did not apply because there was no supply ‘which is chargeable with tax in terms of section 7(1)(o) at the rate providcd by section 7‘. Furthermore, section 14 (5) (A) could not apply because if the supplies have been made in the Itepublic they would not have been ‘charged with tax at the rate of zero pcrcent applicable in terms of section I I ’.

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Appellant’s criticism of the court c quo's reliance on section 14(5)(b)

Mr Ernst ie criticized the finding of the court u Our› to the effect that section 14 (5)(/›) ot the Act was cxhaustive of the question of the taxation of importcd services that are otherwise charged to VAT under section 7( I) (c) ot the Act: that is imJaortcd seivices which fat I under section 7(1) (c) but not simultaneously under section 7(l) (a) of the Act. I or the court a quo, the final question was whether the supplies ai e those w1i ich, ‘if made in the Republic’, would qiial icy tñr zero rating in terms of section 1.1 (2) of the Act. By contrast Mr. Emslie contended tieat the wording ot 14 (5)(/ ) implies clearly that the tax is not payable in the casc of a supply that is taxed in terms of section 7(1)(ri) 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 cii cumstances, the provisions of section 14 (5)(n) do not apply. In other words. where a servlce is both an "imported service” and a service rendered by a registered vendor, (in terms of an enterprise as defined) and section 11(2) appl ies to zero rate such service. both section 7(1) (o) and section 7(1)(c) can and do apply to that service. Secti on 1.4 (5)(a) is not applicable because the service is zero-rated and tax is accordingly not chargeable u/ lhe rate proviJe J in section +.

Mr. Emslie further contended that section 1.1 (2) could apply to section 7(1) (c) in the event of an overlap between section 7(1)(c) and section 7(1) (o). 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)(h) which provided ‘ the tax chargeable in terns of section 7(1)(c) shal I not be payable” was that it suspcndcd the levying of tax on imported services but dld not rendei- an imported service either cxcmpt or zero rated.

Appellants' case can thus be undcrstood best in counter position to the central finding of the court a 9«o. The court a quo held that section I 4(5)(A) applied for the following reasons: “Imported services that are made by registered vendors and whi ch can stand to tall under Section 14(5)(h) is a sell contained prov is ion which exclusivel y governs the zcro-rating and exemption ot those “imported services” which fall under section 7(1)(c) while not at the same time fall ing under s 1(1)(a). As such, s 14(5)(5) is exhaustive of the circumstances in which “imported scrvi ce” fall ing under s 7(1)(c) qualify for zere-rating and exemption. Section 14(5)(o) and (ñ) have formed part of the Act since its inception. Scction 14(5)(b) was plainl y intended to be the exclusive source of zero-rating and exemption for imported services otherwise chargeable under s 7( I )(c), since s

1.1 (2) in its original form referred explicitly to services under s 7( 1)(u). i.e.

bcye

ices de ed

s e d c do s. the removal ot “(n) ’ from ‘s 7(1)(n)” in

s 11(2) does not alter the role ot s 1.4 (5)(h) as the exclusive governing clause in 7ep)ec) of zero-rating and exemption of imported goods which fall under s

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By contrast. appellant’s case can be summarized thus: Where supplies of serviccs are zero ratcd, these supplies do not stand to be taxed at the rate of 1.4 perccnt in terms o1 section 7. Accordingly section 14 (5)(a) 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 l4(5)(b) is inapplicable to such transactions. The role of section 14 (5)(6) can be summarized thus: where tax is to be charged in terms of section 7(1)(c) and the provisions ot section 14(5)(h) arc appl icable, there is a suspension of the levying o1 the tax on such imported scrviccs: that is the tax to be charged shall not be payable. Further, as 14 (5)(A) cannot be definitively i‘cad to conclude that it is exhaustive of the circumstances in which the imported services arc zcro rated or exempt, the plain wording of sectlon

1.1 (2)(I) should prevail and be appl ied to the pi esent dispute

Respondent's Argument

Mr Rogers. who appeared together with Mr Masul‹u on behalf of the respondent, referred to the amendment effected to section 1.1 of the Act in tcrms of

Act 27 of 1997. Prior to this amendment, section 1.1 (2) ot the Act was lim ited in its amb it to silpplics of services retei i ed to in section 7(1)(n) of the Act. That provision clearl y provided that iirpot-ted services would only be subject to zero rated tax if the supply was made by a vendor. The amendment to scction 1.1 (2) replaced an earlier refei ence to section 7( I){a) with the present phrase: “the tax at the rate referred to in section 7 (l)”. Pi-ior to the amendment, Mr Rogers correctly submitted that section 7(1)(o) referred to the supplier of goods and

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services by a vendor. 1 dence imported services with whîch the present case was concerned, not having been supplied by a vendor, would not otherwise be char geable with VA 1 Finder section 7(1)(a).

[20a Mr Roeers subrn itted that, since section 1.1(2) was concerned with the zero rating of VA F, the 1997 amcndirent made, in effect, a cosmetic change to the legislation in that it made better sense to refer to the rate ot VAT specified in section 7 (1); in particular because the rate ot 14 percent was not referred to in either sub paragraphs (a). (b) and (c) of’ section 7 but only in the concluding pail of the subsection. Accordingl y, it was textriali y more accurate to refer to section 7( î ), rather than to any of its sub pai-agraphs as had bec•n the case prior to the 1997 amendment.

Mr Rogers su bmitted furtlier that it was clear that section 1.1 was intended to remain applicable only to goods and services suppl ied by vendors, otherwise chargeable under section 7(1)(a), notW ItÙStäflding the tcxtual airendment. This conclusion becaine apparent when section Il(3) was examined in relation to the issue of imported services. 4 his provision provides, inter alia, that whete a rate of zero percent ‘Iras been applied by any vcndor under the provisions of this section’, the vendor, ‘shall obtain and retain such documentary proot 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

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seivices are suppliers by vendor that section 11 comes into operation. If it had been intended to apply to “imported services” rendered by a non vendor as ln the present disputa, it vould have been necessari 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 1 1(3).

Mr Rogers correctly contended that the overall solution to the meaning of the 1.997 amendment, in particular. anc! the general scope of section 14(5)(A) of the Act in general, required an analysis of thc overall scheme of the Act in order to fully grasp the implications of respondent’s arguments. It is to his argument about the scheme o1 the Act that I now turn.

[2*1 ice y stated, section 7 provides for thc imposition ot VAT Section 11 provides for the zero rating or the supply of certain goods and services wlJiCh otherwise would be charged with tax at the rate referred to in section 7 (1). Section 12 covers a range of suppl icrs ot goods or services which arc exempt from the rate of tax imposed ln terms of section 7 (1)(u). Section 13 deals with the col Section of

tax on the importation of goods and section 14 with the collection of tax an imported services.

Qtr ROgers sUbinitted 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 oJ' VAT at a zero rate upon

various services speci fled within section 11 wit ich would otherwise fall within section (1)(a); that is the supply ot serviccs by a vendor in the coursc or furtherance of any enter prjse cal i ied by him or her. Where there is a supply ot imported services by any person. that is serv ices which are covered by section 7 (1)(c). then any refief front the imposition of the normal rate of tax ot 14 percent rn ust be found in section 14 (5)(5); that is the provision which provides tax relief for imported services and wla ich section accordingl y does all ltte regulatory world. In brief. section 14(5)(A) pt ovidcs for zero-rating and exemption ir utalis mutandis in accordance with ss1 I and 12. In terms o I s14(5)(5) the prerequisite for the application ot these provisions is that the supply must fee one which “/ inadc• in the ficj›n/blic” would have qualifi ed for zero-rating or exemption under s11 and s12. Expressed differently, the essential question is whether section 11 (2) applics to all services or only vendor related services in terms ot section 7 (1)(n). For section 1.1 (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 bc redundant.

Section 7(1)(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.

W ithout the provisions of section 14(5)(a), a situation may arise, albeit rare,

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where an imported service is supplied by a vendor who would then be taxed in terms of section 7 (1)(u). The recipient. being the customer, could find herself taxed in terms of section 7(1 )(c). Accordingly. section 14(5)(a) won Id appear to prevent the comm isioner from recovering the tax, both from the suppl ier in respect of‘ the supply of the service, and from the recipient, being the recipient of the imported services.

Evaluation

4 he amendment brou glut about in 1.997 may not, as sad ly is often the case

with tax legislation, leave been an exemplary illustration of clarity ot legislative drafting. Howcvel, 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 bcen unnecessary for section 14(5)(5) to contin ue to make provision for zero rating of services on the basis of a hypothetical enquiry as to the position of a supply in questir›n leaving been wade in the Ilepublic. 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 quad ify that supply for zero rating in terms of scction 11(2)(â).

The respondent seems 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)(k) may apply without an application of section 1.4 (5)(b) or vice versa. As a counter to the redundary

1 4

argument, Mr Emslie offcrcd an exainp ie of services not ph ysically rendered which fall within the scope of the definition of service in tcrms of section 1. The service could be zero rated in terms of section 14(5)(h) of the Act even though, as they were not physically rendered section 1 I (2)(i) would be inapplicable. The problem with this example is that it fail s to provide an answer as to when zero rating does apply in terms of section 1 I (2)(k) and thus it tai1s to adequately explain the rote of section 14(5)(5) of the Act.

(29] Signiticantly, appel tant’s accountants in a letter of 10 January 2003 conceded that, on the line of argument adopted by appel lant, section 14(5) would be redundant tn that, af\er the 1997 amendment, section 1 4 (5)(fi) should logically have been amended to withdraw art the references to services which would have been zero rated if suppl ied in the Republ ic 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 makO Sense of It in its entirety. In my view, section 14(5)(6) can be construed so as to be exhaustive of’ the cases of imported services which may well otherwi se have been charged under section 7(1)(c). TO is will allow section l l (2) to govern those services rendered by a vendor which would otherwise be taxed in terms of section 7(1)(o). 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

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amendment, described in the Explanatory Memorandum as ‘textual’, than would be the case urged upon this court by appel tant, namely an amendment which would have changed the very nature ot the relationship between section 1 4(5)(5) and section 1 1(2).

[.31 ] Faced with competing meanings to both sections 11(2) and I 4(5), a court shou Id follow the approach of hurt AIA in SA RS v A irworld 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 easi Iy discern ible) is used, in conjunction with time appropriate meaning of the language of thc provision, as a guide in orclcr to ascertain the legislator's intention. Thus, In Standard Genere I Insurance Co Ltd v Comm issioiacr for Customs and Excises, Nugent and Lewis .UA said: ‘ Rather thaw attempting to draw interference as to the drafter's intention from an uncertain premise we have Coun d grcatcr assistance in rcaching our conclusion from considering the extent to wiki ch the mean ing that is given to the words acla icves or defeats the apparent scope and purpose of the leg is ration. As pointed out by Nienabcr JA in De Beers Marine when dealing with the meaning or export” for the purpose of s 20(4) — which draws a distinction between export snd home consumption— the word must “take its colour, like a chameleon, from its setting and surrounds in the Act”.’

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[32a This dictum supports the approach that the Act and the 1997 amendment should be interpreted putposively and holistically and that provisions should be given a clear meaning whenever plausible. "Fhus, in both sections 11(2)(k) and I 4(5)(b) can be made to do work within the scheme of the Act, that must constitute the preferred interpretative approach.

Conclusion

DA IS J

[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)(/t), is inapplicable to this kind of service. Accordingly, the appeal is dismissed with costs, including the costs of two counsel.

I agree

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ZONDI J

I agree

I

Schippcrs AJ