This is an income tax appeal filed in the High Court in terms of section 65 of the Income Tax Act [Chapter 23:06].
The two questions for determination are:
(i) Whether the appeal is valid; and
(ii) Whether the commission paid to two foreign agents for facilitating the sale of tobacco constituted fees for services of a technical, managerial, administrative or consultative nature as contemplated by section 30 of the of the Income Tax Act and the Seventeenth Schedule to the Income Tax Act.
THE BACKGROUND
The appellant, an exporter and seller of processed tobacco from Zimbabwe, is a locally registered company. It entered into two successive sales and marketing agreements with two foreign companies on 1 April 2004 (annexure 1 of respondent's case and p1-2 of appellant's bundle) and 1 April 2011 (annexure 2 of respondent's case and p3-4 of appellant's bundle) respectively, for the sale of export tobacco in foreign markets.
The sales were on commission of 7.5% of the aggregate net export sales and FCA Zimbabwe sales value of each export, respectively.
In 2007, the respondent audited the affairs of the appellant. It decided that the commission paid for the period to 2005 constituted fees for services of a technical and administrative nature performed by the overseas agent on behalf of the appellant for which the appellant was liable for withholding non-resident tax in terms of the Seventeenth Schedule to the Income Tax Act.
On 5 April 2007, the respondent submitted schedules showing the appellant's withholding tax liability on the tobacco sales commissions payable to the overseas agent.
The tax adviser of the appellant objected to the schedules and imposition of withholding tax on the sales commissions.
On 10 August 2007, the respondent disallowed the objection.
A notice of appeal was filed on 24 August 2007.
The appellant's case was not filed within 60 days of the service of the notice of appeal or at all. In accordance with the provisions of section 65(3) of the Income Tax Act, the appeal lapsed.
The appellant continued to remit non-residents withholding tax to the respondent until the advent of the multi-currency era.
On 24 October 2013, officials of the respondent conducted a routine audit visit at the premises of the appellant during which the Finance Director of the appellant indicated that further remittals had stopped in consequence of the unresolved 2007 appeal.
In a further meeting of 5 December 2013, the appellant requested and was provided with a schedule of the non-residents tax on fees payable from January 2009 to October 2013.
The schedules consisted of 11 columns showing the period covered, the amount of commission paid, the withholding tax rate, the witholding tax due, the penalty charged at 100%, the period covered in respect of interest computation, the period of delay in paying, the interest rate, and the amount of tax due.
The principal amount of the non-residents tax on fees due was in the sum of US$4,252,647=57. An equivalent amount was imposed as penalty and a further US$795,988=62 was imposed as interest.
The penalties were later reduced by half leaving the revised total liability of US$5,974,959=97.
The appellant responded to the schedule by way of the objection letter dated 10 December 2013, which was served on the respondent on the same day.
It disputed that the commissions constituted the fees contemplated in section 30 and the Seventeenth Schedule of the Income Tax Act. It undertook to pay the outstanding principal amount in four instalments between 13 December and 20 January 2014. In consequence of the undertaking, the respondent further waived the reduced penalty and interest by e-mail of 19 December 2013.
The appellant, however, paid the principal amount by 20 December 2013.
A meeting was held between the appellant's tax advisers and the respondent on 13 December 2013. The parties appeared to have agreed, in that meeting, that, the objection had been improperly made.
However, the appellant filed a notice of appeal on 25 March 2014 and served it on the respondent on the following day. The appeal was based on the deemed decision arising from the failure to respond to the letter of objection within three months as contemplated by section 62(4) of the Income Tax Act. The parties filed their respective cases on 28 May 2014 and 13 August 2014....,.
THE MERITS
The Facts
The facts in this matter are derived from the pleadings, the Rule 11 documents, and the appellant's bundle. Both the appellant and the respondent did not call any oral evidence.
The facts were as follows:
The appellant company executed two successive "Sales and Marketing Commission Agreements" with two foreign companies domiciled in Bermuda and Switzerland, respectively. The appellant was identified, in both Agreements, as the "Principal" while the two were specifically termed agents.
In the first agreement, the appellant was represented by its Managing Director and Finance Director while the agent was represented by its Management Committee member and secretary. In the second, the parties were represented by their respective Managing Director and President.
Except for the first two declarations in the preamble and the initial rate of commission in the first agreement, all the other terms of the two agreements were similar.
In terms of clause 6 of the agreements:
"…, the validity, interpretation and enforcement of the agreement shall be governed by the laws of Zimbabwe."
The preamble proclaimed that the agent had "demonstrated expertise in the international marketing and trading of leaf tobacco enabling it to provide such services with greater efficiency and lower costs" and was willing to utilize its sales and marketing capacity and render services on behalf of the appellant.
Four duties of the agent were set out in clause 1:
(i) The agent undertook to use its "best efforts" to help the principal in the export sale of leaf tobacco without incurring financial responsibility or obligations even where it did not disclose that it was an agent of the appellant;
(ii) The agent also undertook to promote the export sales by the appellant in all major markets based on prices and conditions set by the appellant;
(iii) It undertook to maintain and safeguard the quality of the product and image of the appellant; and
(iv) To supply personnel and materials necessary for the promotion of the appellant's exports.
In addition, the agreements authorised the agents to inform the appropriate local authorities in those export countries, where necessary, that it was the sales and marketing agent representing the principal's business interests for the sale of leaf tobacco exported from Zimbabwe.
The commissions under the first agreement were initially equal to 8.5% of the aggregate net sales from the export tobacco of the principal for each statutory year ending 31 March during the term of the agreement but was reduced to 7.5% in November 2005 to comply with the Zimbabwe Exchange Control approval.
Under the second agreement, the agent was paid commission of 7.5% of the Foreign Currency Account Zimbabwe sales value of each export of the principal during the term of the agreement.
Both the aggregate net sales and the FCA Zimbabwe sales value for exports were computed by deducting freight costs to the destination port from the gross invoice value CIF port of destination. These amounts were captured in the CD1 Form as gross FCA value.
The commissions payable were approved by the Exchange Control Authority.
In terms of paragraph 2 and 3 of the Exchange Control Authority, dated 1 February 2012, the authority was granted on condition the 7.5% commission, as well as value addition, would be declared on all the relevant Form CD1 prior to the export and "payment of the commission shall be from the appellant's local FCA".
The provisions of the sales agreement constituted the entire agreement between the parties.
It was certainly not a term of the agreement that the agents would deduct commission before remitting the balance into the FCA account of the appellant.
The suggestion, in the pleadings, that it was in the agreement was contrived.
A meeting was held, on 18 July 2013, at the premises of the appellant, between the appellant and the respondent.
As a result, the appellant wrote the letter of 30 July 2013 in which it set out the duties of the agent in detail.
The agent accompanied a major tobacco buyer and took part in price negotiations in Zimbabwe with the appellant. Other customers did not purchase their tobacco requirements in Zimbabwe. They were first supplied with samples of the available export tobacco before placing their orders. The customers assessed the colour and appearance (the styles) and the sugar and nicotine levels, texture and quality (the smoking characteristics) of the export tobacco.
Generally, price negotiations and marketing logistics for these customers were held outside Zimbabwe by the agent.
The shipping mandate was the final responsibility of the Sales Administration Director. The invoice papers of all export sales from the appellant flowed through the agent.
The agent's main function was to establish and maintain customer relationships on a global scale.
In the letter of 30 July 2013, the appellant listed eight functions of the agent.
The agent interacted with international customers by phone, e-mail, and visits and conducted reviews of previous purchases and deliveries and projected order indications of the new season. In addition, it arranged customer samples and volumes and assessed the price expectations of each customer and followed up customers shipping arrangements. All shipping documents were sent to the agent for processing. The agent also invoiced the customers, collected payments, and retained the commissions.
The appellant's bundle contains the kind of documentation handled by the agent during the process of facilitating and making a sale. They show that the agent played a major role in selling the export tobacco.
The appellant contended, that, as the commissions were not fees, as defined in the Seventeenth Schedule of the Income Tax Act, it had no obligation to withhold non-residents tax.
In addition, the appellant further contended, that, as the commissions were deducted by the agents from the gross foreign currency account value outside Zimbabwe, before the balance was remitted to its account, it could not have withheld any non-residents tax nor would it have been obliged to remit any such tax to the respondent.
The respondent contended, that, the commissions were fees, as defined, and that the appellant, as the principal, was obliged to withhold and remit the non-residents tax on fees due to the respondent.
The Issues
The issues for determination are:
(i) Whether the commissions constituted fees as defined in the Seventeenth Schedule that were chargeable, leviable, and collectable under section 30 of the Income Tax Act?
(ii) Whether the appellant was liable for withholding and remittal of non-residents tax on fees arising from the deduction of these commissions outside Zimbabwe before any proceeds of the sales had been remitted to it?
The Legislative Provisions
The relevant tax is imposed by section 30 of the Income Tax Act which reads:
"30 Non-residents Tax on Fees
There shall be charged, levied, and collected throughout Zimbabwe for the benefit of the Consolidated Revenue Fund a non-residents tax on fees in accordance with the provisions of the Seventeenth Schedule at the rate of tax fixed from time to time in the charging Act."
The Seventeenth Schedule of the Income Tax Act defines fees, foreign company, non-resident person, payee, and payer in paragraph 1(1) in the following manner:
"1(1) In this Schedule, subject to subparagraph (2) —
'fees' means any amount from a source within Zimbabwe payable in respect of any services of a technical, managerial, administrative or consultative nature, but does not include any such amount payable in respect of — (none of the 8 apply herein)
'foreign company' means a body corporate that is incorporated in a state or territory other than Zimbabwe under the laws of that state or territory;
'Non-resident person' means -
(b) A partnership or foreign company which is not ordinarily resident in Zimbabwe;
'payee' means a non-resident person to whom fees are payable or paid;
'payer' means any person who or partnership which pays or is responsible for the payment of fees…,.”
The application of the two sections to the appellant and the agents
The non-residents tax is imposed on the agents.
The first agent was resident in Bermuda and the second in Switzerland. The two agents were foreign companies and non resident persons as defined in paragraph 1(1) and (1)(b) of the Seventeenth Schedule.
The two agents would also be payees, if the commissions constituted fees payable or paid.
Again, in the event that the commissions were fees, as defined, the appellant would be a payer, defined "as any person who…, pays or is responsible for the payment of fees."
A positive duty to withold such tax is thrust upon the payer by paragraph 2(1) of the Seventeenth Schedule of the Income Tax Act. It reads:
"2(1) Every payer of fees to a non-resident person shall withhold non-residents tax on fees from those fees and shall pay the amount withheld to the Commissioner within ten days of the date of payment or within such further time as the Commissioner may for good cause allow."
Such a payer is mandated, in subsection (2) of paragraph 2, to furnish the payee with a certificate showing the amount of fees paid and the amount of non-residents tax on fees deducted and kept back. A payee who fails to furnish such a certificate, or who furnishes an inaccurate certificate, is liable to suffer the criminal sanctions set out in paragraph 2(3) of the Schedule.
The duties and responsibilities of the payer, and the resultant sanctions stipulated in paragraph 2 above, apply in equal measure in terms of paragraph 3(1)(2) and (2a) of the same Schedule to an agent who receives the gross fees due to the payee from the payer.
In terms of sub-paragraph (3), the agent is deemed to be an agent of the payee if the payer records its address as the address of the payee and delivers the fees to that address. The agent is treated, under subparagraph (4), as an agent of a taxpayer who is absent from Zimbabwe.
It is apparent from the provisions of paragraph 6 of the Seventeenth Schedule that the agent contemplated by paragraph 3(3) and (4) of the same Schedule is one who is in Zimbabwe.
In terms of paragraph 5, the payer or agent attaches a prescribed form to the payment of the fees.
In terms of paragraph 6(1), a payer or agent who fails to withhold or pay the prescribed tax to the Commissioner, under paragraph 2 or 3, is personally liable for the payment not later than 10 days from the period that the actual amount was due and to an additional equivalent amount of such tax.
Counsel for the appellant listed six (6) other instances in the Income Tax Act where Parliament thrust a similar duty on a payer to withhold tax from a third party and remit it to the statutory tax collecting body.
He correctly submitted, that, the resident payer had no obligation to pay the non-resident tax unless it failed to deduct and keep back the tax from the fees paid or from the fees payable.
Counsel for the appellant submitted, that, paragraph 6 of the Schedule did not create a tax liability for a resident taxpayer, rather, it created a penalty for the resident taxpayer.
He suggested, that, the heading of the section be amended to reflect that it was a penalty for failure to withhold non-residents tax. He based his submission on the well-recognised and established common law principle that the Commissioner is not accorded any legal right to waive taxes.
I agree that the Commissioner is not accorded the legal right to waive taxes: see Foroma v Minister of Public Construction and National Housing and Anor 1997 (1) ZLR 447 (H)…,.; Ritch & Bhyat v Union Government (Minister of Justice) 1912 AD 719…,.; and SAR & H v Transvaal Consolidated Land & Exploration Co. Ltd 1961 (2) SA 467…,.
The Commissioner is only accorded the power to waive the equivalent penalty imposed under paragraph 6(1)(a). He cannot waive the amount of tax not withheld.
The logical conclusion of the argument by counsel, arising from such an inability to waive the tax not withheld, would be that this paragraph creates a tax liability and not a penalty for the appellant.
In my view, Parliament imposed a tax on the resident who failed to withhold the non-resident tax on fees. Paragraph 6(1)(a) therefore created a tax payable by the appellant if it is found that it failed to withhold the contemplated tax.
In this vein, counsel contended, in paragraph 13 of his written submissions, that:
"The resident becomes personally liable for the payment of the tax only if he, she, or it fails to withhold the tax from the fees payable, in the sense, that, he could do so and did not withhold the tax or thereafter failed to remit the tax so withheld to the Commissioner. But, in normal circumstances, the local resident is not the taxpayer in terms of section 30."
The word 'withhold' is defined in the Shorter Oxford English Dictionary as "to keep from doing something, to hold back, restrain, refrain from, to keep back, to keep in one's possession what belongs to or is due to."
I would accept the word "to keep back" as the best possible meaning of the word in the context of the provision.
Were the commissions fees as defined?
I turn to determine whether the commissions constituted fees as defined in the Seventeenth Schedule of the Income Tax Act.
I dealt with a similar question in G Bank Zimbabwe Ltd v Zimbabwe Revenue Authority HH207-15. The facts in that case are distinguishable with those in the present case in two material respects:
(i) In that case, the appellant used the term bank charges interchangeably with bank fees, while, in the present matter, the appellant used the term "commissions" for the contract payments that it was obliged to pay.
(ii) Again, G Bank admitted paying the charges directly to the foreign banks while in the instant case the appellant disputed making any direct payments.
At paragraph 109 [p29-30 of the cyclostyled judgment] I said:
"Mr de Bourbon submitted, that, the Nostro bank charges were not subject to withholding tax as they did not fall under any one of the four categories of technical, administrative, managerial or consultative.
It seems to me that the four categories in question are merely adjectives which describe a particular activity.
According to the Shorter Oxford English Dictionary 'administer' means inter alia 'to manage'; 'to handle'; while 'administrative' is defined as 'pertaining to management.'
One of the many permutations of 'to manage' is 'to deal with carefully'. Like McDONALD JP in Commissioner of Taxes v 1 supra at 115F, where he was of course referring to 'transaction, operation or scheme' I would agree that each of the words 'technical, managerial, administrative and consultative' that is used in the para under consideration is of wide and general import and there are a few activities of a taxpayer which will not be appropriately described by one or other of them.”
Counsel for the appellant vigorously attacked my finding, that, the four categories in the definition of fees are of wide and general application and suffice to cover almost every activity undertaken by a taxpayer.
My finding was based on the meaning I ascribed to the ordinary grammatical meaning of the adjectives "technical, managerial, administrative or consultative".
The Income Tax Act itself does not define any of these words.
The established position in Zimbabwe is to adopt the ordinary, literal, and grammatical meaning of words unless doing so leads to glaring absurdity or to results which Parliament would never have intended (per GARWE J…, in Mashamhanda v Mpofu 1999 (1) ZLR 1…, and CHATIKOBO J in Expedite Haulage (Pvt) Ltd v Scotfin Ltd 2000 (2) ZLR 113 (H)…,.
See also Madoda v Tanganda Tea Company 1999 (1) ZLR 374 (S)…,. and the cases cited thereat.
In doing so, the Court must be mindful of the words of WESSELS AJA…, in Stellenbosch Farmers Winery Ltd v Distillers Corp (SA) Ltd 1962 (1) SA 458 (A)…, on the importance of the textual context in which words sought to be interpreted are found, that:
“In my opinion, it is the duty of the court to read the section of the Act which requires interpretation sensibly, i.e. with due regard, on the one hand, to the meaning or meanings which permitted grammatical usage assigns to the words used in the section in question, and, on the other hand, to the contextual scene, which involves consideration of the language of the rest of the statute as well as the matter of the statute, its apparent scope and purpose, and, within limits, its background.”
See also the sentiments of CHEDA J in Sunfresh Enterprises (Pvt) Ltd v Zimra 2004 (1) ZLR 506 (H)…,.
Counsel for the appellant contended, that, our established position is better expressed by WALLIS JA in Natal Joint Municipal Pension v Endumeni Municipality 2012 (4) SA 593 (SCA)…, in these words:
"The present state of the law can be expressed as follows:
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 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 un-businesslike results or undermine the apparent purpose of the document. Judges must be alert to and guard against the temptation to substitute what they regard as reasonable, sensible or businesslike for the actual words used. To do so, in regard to a statute or statutory instrument, is to cross the divide between interpretation and legislation; in a contractual context, it is to make a contract for the parties other than the one they in fact made.
The inevitable point of departure is the language of the provision itself, read in context and having regard to the purpose of the provision and the background to the preparation and production of the document."…,.
Again, the same learned judge of appeal emphasised, in Firstrand Bank Ltd v Land and Agricultural Development Bank of South Africa 2015 (1) SA 38 (SCA)…, that:
"The process of interpretation is no longer one in which we seek out a notional plain meaning of the words used, ignoring context and the circumstances in which the document being interpreted, whether a contract or a statute or a patent specification, came into being. Nonetheless, it must start with the actual words used."
It seems to me, that, barring the semantics used, the formulation advanced by WALLIS JA is not different from the approach followed in Zimbabwe. A court is not concerned with the notional meaning but with the practical application of the principles that emerge from the formulation.
I proceed to deal with the essential requirements of fees as defined.
Before I do so, I emphasize, that, what constitutes fees is defined; therefore, all reference by counsel for the appellant, in oral argument, to the perceived notional meanings of 'fees' with reference to advocates and 'commissions' by reference to commodity brokers is of no significance.
The meaning of fees, in the present case, is delineated by the definition in the Seventeenth Schedule of the Income Tax Act.
Any amount from a source within Zimbabwe
The first amount is defined in section 2 of the Income Tax Act, in relation to the determination of gross income, income, and taxable income in terms of section 8(1) as "money or any other property, corporeal or incorporeal property having an ascertainable money value".
The commissions would constitute part of the gross income of the agents.
It was common cause that the amount was received by or accrued to or was in favour of the agents from a source deemed to be within Zimbabwe by virtue of paragraph 1(2)(a) of the Seventeenth Schedule of the Income Tax Act. It reads:
"(2) For the purposes of this Schedule —
(a) Fees shall be deemed to be from a source within Zimbabwe if the payer is a person who…, is ordinarily resident in Zimbabwe;"
The appellant was, at all material times, ordinarily resident in Zimbabwe.
Counsel for the appellant made a conditional concession, that, if the commissions were found to constitute fees, then, they would be deemed to have been from a source within Zimbabwe. He contended that the agent, and not the appellant, was the payer.
Payable
The word payable connotes a payment that is due, which ordinarily arises from an unconditional obligation on the payer to pay: see Edgar Stores Ltd v Commissioner for Inland Revenue 1988 (3) SA 876 (A) at 889A-C; 50 SATC 81 (A) and ITC 1587 (1994) SATC 197 at 103-104.
The sales commission and marketing agreements, in clause 2, imposed such an unconditional obligation to pay on the appellant. The responsibility of paying the commissions was imposed on the appellant by the agreements and by the Exchange Control Authority.
Payer is defined as "any person who pays…, or is responsible for the payment of fees."
In my view, a payer could be one of two persons, between the one who actually pays and the one who has the unconditional obligation to pay.
Thus, while on the contention of the appellant, that the agent paid itself, I would find that the person who was responsible for the payment of the fees was the appellant. If the commissions constitute fees, I would therefore find the appellant to have been the payer.
Any services of a Technical, Managerial, Administrative or Consultative nature
The starting point is that the four categories of services are disjunctive rather than conjunctive.
A finding that the physical activities of the agents fell into any one of these categories would suffice to found liability for the payment of non-residents tax on each category.
It was common cause that the agents supplied a service to the appellant. The appellant and the agents termed the service a sales and marketing of export leaf tobacco service.
The physical activities carried out by the agents, on behalf of the appellant, were first outlined in the minutes of 18 July 2013 whose accuracy was confirmed by the signatures of both parties on 6 and 7 August 2013. These activities were further listed in the letter of the appellant to the respondent of 30 July 2013.
The sales and marketing of export leaf tobacco involved negotiating prices with foreign purchasers. There were two types of foreign purchasers:
(i) The first was the major purchaser from the Far East, which accounted for between 40 and 50% by volume and between 50 and 60% by value of the appellant's exports.
The purchaser in question negotiated with the appellant in Zimbabwe. The tone of the minutes indicated that these meetings were facilitated and co-ordinated by the agent. While the directors of the appellant had the final say on the prices and volumes allocated to the major purchaser, the agent played a prominent role in the negotiations. In terms of the sales and marketing agreement the agent assisted the appellant by exerting its best efforts and demonstrated expertise in international marketing and trading of the export leaf tobacco.
(ii) The second type of buyer was the one who did not come to Zimbabwe to negotiate and assess the packed tobacco.
This type of buyer requested a sample of the tobacco on sale. The "price negotiations and other marketing logistics" for this buyer were done by the agent.
The four adjectives that describe the nature of fees are not defined in the Income Tax Act.
WALLIS JA recognised, in both Natal Joint Municipal Pension v Endumeni Municipality 2012 (4) SA 593 (SCA) and Firstrand Bank Ltd v Land and Agricultural Development Bank of South Africa 2015 (1) SA 38 (SCA), the primacy of the actual words used in the statute.
The appellant did not refer to any dictionary for the meanings of each of these four words. The respondent referred to the Oxford Advanced Learner's Dictionary. I relied on the Shorter Oxford English Dictionary.
The Definition of Technical
Counsel for the appellant, without reference to any dictionary, suggested that the word "technical" was a term of art which referred to manufacturing, engineering or architectural activities.
The Selling Dictionary renders the word as 'connected with the skills needed for a particular job'; 'an adjective relating to a particular subject, art or craft or its techniques'.
The Shorter Oxford English Dictionary defines the word as follows: "of a person; skilled in or practically conversant with some particular art or subject, belonging to or relating to an art or arts; appropriate or peculiar to or characteristic of a particular art, science profession, occupation; also pertaining to the mechanical arts and applied sciences generally;"
I am unable to agree with counsel for the appellant, that, there exists, in the context of the Income Tax Act, any limitation for this meaning of the word to applied sciences only, when, by definition, it also applies to the mechanical arts.
Thus, whether one considers the skills needed in selling tobacco as mechanical arts or applied sciences, the "best efforts" and "demonstrated expertise" of the agent is covered in the definition of technical.
The practical application of the knowledge possessed by the agent of the climatic and soil conditions, the style and smoking characteristics of the export leaf necessary for determination of the appropriate blend required by the customers fell into the ambit of technical services provided by the agent to the customer on behalf of the appellant.
But, even if the narrow definition advocated by counsel for the appellant were adopted, the appellant did not establish, on a balance of probabilities, that, the agent did not require knowledge of the type of export blending leaf required in the manufacture of cigarettes in order to make a sale.
The averment made, that knowledge of these characteristics was not a requirement to effect a sale, were contrary to the averment in the letter of 30 July that the appellant used such technical knowledge to purchase the appropriate blend on the auction floors and from contract farmers for export.
This technical knowledge was the expertise that the appellant required in making local purchases from both auction floors and contract farmers, and, in negotiating suitable prices with the major purchaser.
The appellant also relied on this technical knowledge to purchase the tobacco that met these specifications from both auction floors and contract farmers in order to satisfy the ultimate manufacturing requirements of the end customers.
The Bill of Lading…, indicates the expertise of the agents in regards to the shipping of export tobacco.
The six documents required were Bills of Lading, EUR 1 certificates, fumigation certificates, detailed weight lists, container packing lists, and invoices. These were all distributed to the agent. The agent gave special instructions on the time frames for dispatching documents and the type of containers used for carrying export tobacco and the manner of storage and fumigation standards applicable to the tobacco.
I would find, that, the agent supplied technical services to the appellant.
Definition of Managerial
In paragraph 19 of his written submissions, counsel for the appellant contended, that, the word managerial was synonymous with directing the activities of the appellant.
In paragraph 1.3 of the minutes on p5 of the Rule 11 documents, the appellant indicated the agent was responsible for "price negations and other marketing logistics."
In my view, these activities were carried out on behalf of the appellant by the agent. The agent was directing the activities of the appellant in these foreign markets and was required to even advise the local authorities that it was acting for the appellant.
I find that the practical activities of the agents fell into the ambit of the definition of managerial advocated by counsel for the appellant.
Again, applying the definition of "manage" derived from the Shorter Oxford English Dictionary; the agents were running the affairs of the appellant in those markets. The agents exercised actual authority on behalf of the appellant.
Indeed, the letter of 30 July established that the eight functions of the appellant that were managed by Sales Administration Director in Zimbabwe were mirrored by the eight functions run by the agents outside Zimbabwe on behalf of the appellant.
I agree with counsel for the respondent, that, some of the functions constituted both managerial and administrative services.
The Definition of Administrative
The word is defined in the Oxford Advanced Learner's Dictionary as "relating to the running of a business, organisation, etc."
The synonyms accorded to the word include 'managerial'.
In both his oral and written submissions, counsel for the appellant was unable to make any practical distinction between administrative and managerial services. He conceded, that, filling forms, rendering reports, filing documentation, and making payments constituted administrative functions.
These administrative services were, in my view, inseparable from managerial services.
These were carried out by the agent on behalf of its principal - the appellant.
The documentation consisted of sales confirmation invoices, orders, shipping instructions, bills of lading, EUR 1 certificates, fumigation certificates, detailed weight lists, container packing lists, and customs clearance invoices which were dispatched to the agent for processing exports in the countries of destination.
I find that the practical activities of the agents administrative services.
Definition of Consultative
In the Shorter Oxford English Dictionary, consultative means “pertaining to consultation, deliberative, advisory, take counsel, deliberate, confer, to plan, advise, have recourse to professional advice."
The preamble to the agreements proclaim the purpose for selecting the agents was based on their professionalism and ability to promote, supply, safeguard, and maintain personnel and materials required to make a sale.
In paragraph 19 of his written submissions, counsel for the appellant contended, that, the word 'consultative' connoted the offering of expert professional services and not "simply speaking to the appellant."
The suggestion, that, the agents were engaged for their expertise in "simply speaking" to the appellant is devoid of merit.
The very fact that the agents accompanied an accomplished and major international buyer of export tobacco demonstrates the high pedigree of the professional services rendered to the appellant by these agents.
Again, I find, as a matter of hard fact, that, the agents provided consultative services to the appellant.
The four words appear in the context of section 30 of the Income Tax Act.
That section is designed to tax fees that are payable or paid to an agent who is based outside Zimbabwe but from a source in Zimbabwe.
In my view, the words 'payable' and 'paid' as used in the definition of 'payee' in paragraph 1(1) to the Seventeenth Schedule of the Income Tax Act are synonymous with 'received by' or 'accrued to' or 'in favour of' that are used in section 8(1) of the Income Tax Act.
The overall purpose of the Income Tax Act is to tax taxable income "received by or accrued to or in favour of” the targeted taxpayer - including the non-resident in question.
The objective and sensible application of the meaning of each of these words is one which discards the notional plain meaning of the words in favour of the contextual meaning.
It seems to me, that, the real test of the pudding prepared by WALLIS JA is in the actual application of the facts found in each matter to the principles that he outlined.
The narrow meaning contended by counsel for the appellant does violence to the context and purpose of enacting the provision.
The true essence of a sale involves technical, managerial, administrative, and consultative competencies of the agent. That is why I maintain, that, there are hardly any activities of a taxpayer that can escape the wide embrace of the definition of fees that is found in the Seventeenth Schedule.
Accordingly, I am satisfied, that, the commissions in question constitute the type of fees contemplated by section 30 and paragraph 1 of the Seventeenth Schedule of the Income Tax Act.
Counsel for the appellant submitted, that, paragraph 6(1) merely imposed a penalty and not a tax on the payer or agent who failed to deduct and keep back or pay the appropriate non-resident tax on fees to the Commissioner in the stipulated period.
He argued, that, the personal obligation did not extend to a payer who could not physically deduct the non-resident tax on fees in Zimbabwe retained outside Zimbabwe. He contended, that, as the appellant did deduct and keep back the fees from the gross FCA value of the legal obligation to remit any non-residents tax on fees to the Commission.
The Seventeenth Schedule of the Income Tax Act reads:
“Penalty for non-payment of tax
"6. Subject to subparagraph (2), a payer or an agent in Zimbabwe who fails to withhold or pay to the Commissioner any amount of non-residents tax on fees as provided in paragraph 2 or 3 shall be personally liable for the payment to the Commissioner, not later than the date on which payment should have been made in terms of paragraph 2 or 3, as the case may be, of —
(a) The amount of non-residents tax on fees which the payer or the agent, as the case may be, failed to pay to the Commissioner; and
(h) A further amount equal to one hundred per centum of such non-residents tax on fees.
(2) The Commissioner, if he is satisfied in any particular case, that, the failure to pay to him non-residents tax on fees was not due to any intent to evade the provisions of this Schedule, may waive the payment of the whole or such part as he thinks fit or repay the whole or such part as he thinks fit of the amount referred to in subparagraph (b) of subparagraph (1).
(3) If a defaulting payer or agent referred to in subparagraph (1) does not pay the penalty in full on the date on which the default has ceased, interest, calculated at a rate to be fixed by the Minister by statutory instrument, shall be payable on so much of the penalty as remains unpaid by the payer or agent during the period beginning on the date the default has ceased and ending on the date the penalty is paid in full, and, such interest shall be recoverable by the Commissioner by action in any court of competent jurisdiction; provided, that, in special circumstances, the Commissioner may extend the time for payment of the penalty without charging interest."
In my view, whether the above cited paragraph is regarded as a penalty or non-residents tax on fees charging provision, it creates a legal liability for the holder or agent who fails to withhold or pay this type of tax to the Commissioner.
I have already found, that, the commissions in question constituted fees as contemplated by both section 30 and the Seventeenth Schedule of the Income Tax Act.
The next sub-issue to determine is: whether the appellant was the payer of the fees.
It was agreed, that, the appellant was required, by Exchange Control Authority, to pay the fees from its local foreign currency account.
In terms of clause 5 of the Sales and Marketing Commission Agreements these agreements were negotiated and executed within the laws of Zimbabwe. The validity, interpretation and enforcement of the agreements were, also in terms of the same clause, governed by the laws of Zimbabwe.
That the Exchange Control Authority had the force of the laws of Zimbabwe is beyond dispute.
The powerful influence of this Exchange Control Authority was highlighted by the reduction of the commission payable for the first agent from 8.5% to the 7.5% in compliance with the requirements of the Foreign Exchange Control Authority.
The appellant did not disclose the basis on which the offshore payment arrangements of the commission were made. They were certainly made outside the order of the Exchange Control Authority, and were, to that extent, illegal.
If seems to me, that, the illegality conducted by the appellant would obviously impact the decision on whether or not to waive the penalty equivalent to the unpaid non-residents tax on fees under paragraph 6(2) to the Schedule. If adjudged illegal, then, it would not qualify for waiver as the intention on the part of the appellant would be to evade withholding such tax arising from any payments from its local foreign currency account.
The appellant averred, that, it made no payments to the agents. The agents simply deducted the fees due to them offshore before making telegraphic transfers into the evidence accounts at the appellant's local bankers.
Counsel for the appellant submitted, that, in those circumstances, there was no amount against which tax could be withheld.
Like in G Bank Zimbabwe Ltd v Zimbabwe Revenue Authority HH207-15, counsel for the appellant relied on the decision of this Court in Sunfresh Enterprises (Pvt) Ltd t/a Bulembi Safaris v Zimbabwe Revenue Authority 2004 (1) ZLR 506 (H) which appeared to suggest, that, the local safari operator was not a payer of the commission that was deducted offshore from the overall fees due to him in Zimbabwe.
The facts in that case are unclear.
They appear in the recitation of the taxman's arguments on pp508G and 509G of the report. It would appear, that, the safari operator provided the foreign independent operators with the gross value of its hunting services. Foreign prospective hunters paid this amount to the foreign independent operators who, in turn, deducted some agreed amounts as commission before remitting the balance to the account of the safari operator.
CHEDA J held, that, the source of the payment was from outside Zimbabwe, and, for that reason, the payment did not constitute fees. He also held, that, as the payment had been made to the agent by the prospective hunter and not by the safari operator, the safari operator was not the type of payer contemplated by the Seventeenth Schedule to the Income Tax Act.
In G Bank Zimbabwe Ltd v Zimbabwe Revenue Authority HH207-15 …, I said of Sunfresh Enterprises (Pvt) Ltd t/a Bulembi Safaris v Zimbabwe Revenue Authority 2004 (1) ZLR 506 (H)…,:
"If the commission in the Sunfresh case was deducted from the overall hunting fee remitted to the safari operator, as submitted by Mr de Bourbon, I would, with respect, differ from the finding of CHEDA J. The payment by the foreign client to the foreign based agent, in my view, would simply constitute a prepayment on behalf of the safari operator. It would have been subject to withholding tax."
I remain of the view, that, if the deduction of the commission was made from the total package charged by safari hunting services from Zimbabwe, then, it would constitute an the safari operator to the independent agent from moneys due to the I could have found that the source of the payment was from the originating cause of the payment was from the hunting services in Zimbabwe.
The words "from a source in Zimbabwe" denote the originating cause.
In K v Commissioner 1990 (1) ZLR (H)…, SMITH J stated that:
"I accept, that, it is settled law that the source of any payment means the originating cause thereof, and, prima facie, that would be where the work was performed - see Commissioner of Taxes v Shein 1958 R&N 384 (FSC) at 387E; 1958 (3) SA 14 (SC) at 16H (also (1958) 22 SATC 12) where TREDGOLD CJ said:
'It may be accepted, that, prima facie, the test of the source of a payment for services rendered is the place where those services are rendered.'
The learned CHIEF JUSTICE went on, however, to say, that, the ultimate test of source is the originating cause."
I would, for these reasons, disagree with the decision in Sunfresh Enterprises (Pvt) Ltd t/a Bulembi Safaris v Zimbabwe Revenue Authority 2004 (1) ZLR 506 (H) and would therefore decline to follow it.
There is also a more fundamental reason for rejecting Sunfresh Enterprises (Pvt) Ltd t/a Bulembi Safaris v Zimbabwe Revenue Authority 2004 (1) ZLR 506 (H) and the argument advocated by counsel for the appellant.
The provisions of paragraph 1(2)(c) to the Seventeenth Schedule of the Income Tax Act provide that "fees shall be deemed to be paid to the payee if they are credited to his account or so dealt with that the conditions under which he is entitled to them are fulfilled, whichever occurs first."
I understand this provision to mean, that, even though the actual payment is pending, if the payer, in this case the appellant, has credited the account of the payee, the agent, with the fees, the payer is deemed to have paid the fees.
This first rung does not apply to the facts of this case.
The second rung deems the fees paid where such fees are due and payable and the payer makes prior arrangements for their payment. The payer thus incurs an unconditional liability to pay and arranges for the payment of such fees.
In the present case, the fees became due and payable to the agent and the appellant incurred an unconditional liability to pay each time a sale was made.
The arrangements that were made, in respect of payment, before the payment took place were that the agent would retain the fees from the gross FCA value of the exports receipts.
It seems to me, that, the making of the sale, together with these prior arrangements, is deemed to constitute payment of the fees by the second rung of paragraph 1(2)(c) to the Seventeenth Schedule.
The argument advanced by counsel for the appellant, that liability for the appellant was based on actual payment, flounders on the provisions of the second rung of paragraph 1(2)(c) to the Seventeenth Schedule of the Income Tax Act.
In any event, the agreements in the present case, in terms of clause 5, are governed by the is inter alia applicable to this case. CHRISTIE, in Business Law in Zimbabwe (Juta 1998 reprinted 2014)…, provides the working definition of agency in these words:
"Agency may be defined as a contract whereby one person (the principal) employs another to enter into contractual relationships binding between him and third parties.”
LEE and HONORE in The South African Law of Obligations (Butterworths 1950) are to the same effect. In para 606 the learned authors write:
"A contract of agency is a contract whereby one person (termed the agent) agrees to represent another (termed the principal) in dealings with third parties."
The learned authors go on to explain, in para 658, that:
"An agent contracting as agent, whether for a named or unnamed principal, does not generally render himself personally liable or acquire rights under a contract made with third parties, but, he may contract in such terms as to do so."
Again, SILKE, in The Law of Agency in South Africa 3rd ed…, provides a more illuminating definition of agency in these words:
"The essence of the modern view of agency is that there must be a third party in contemplation and the agent acts purely as a channel bringing the principal into legal relations of a contractual nature with the third party. The acts of the agent are done in the name of the principal and are deemed to be the acts of the principal himself, ensuring to his benefit or rendering him liable, without any benefit accruing or liability attaching to the agent."
The academic writers make the self-evident point, that, an agent acts for the principal and its actions are ascribed to the principal.
The deduction of the commission from the gross FCA value of the exports by the agent, by operation of law, are attributed to the appellant, who, it is common cause, is resident within Zimbabwe.
It cannot lie in the mouth of the appellant to protest that it made no payment to the agents.
I find that it did.
It was obliged, by paragraph 2(1) of the Schedule, to withhold non-residents tax on fees. It failed to do so. It was therefore legally liable to pay such fees under the provisions of paragraph 6 of the same Schedule.
I therefore find, that, the Commissioner correctly fostered liability on the appellant.
The appeal, based on the decision of the Commissioner, is dismissed.
I do not find the grounds of appeal to have been frivolous. In accordance with the provisions of section 65(12) of the Income Tax Act, I therefore make no order as to costs.
Accordingly, the appeal is dismissed.
