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 PRELIMINARY OBJECTION
The respondent took the point, that, as it did not issue any assessment on the appellant on 5 December 2013 or any other date, the objection of 10 December 2013, and the subsequent notice of appeal of 25 March 2014, was invalid and of no force or effect.
The appellant contended, inter alia, that the appeal was validated by paragraph (y) of the Eleventh Schedule to the Income Tax Act.
Both counsel correctly submitted, that, the 2007 appeal was abandoned by the appellant.
The effect was that the appellant accepted liability for the non-residents tax on fees, which it failed to withhold and remit to the respondent. In addition, it also accepted that the commissions paid during the period prior to August 2007 constituted fees for services of a technical, administrative, managerial or consultative nature.
It was common cause that the 2007 matter was not pending and could not preclude the appellant from objecting, as it did, to liability for failing to remit non-residents tax on fees for the period from January 2009 to October 2013.
The suggestion, in the respondent's pleadings and minutes of meetings, that the present matter could not be objected to on the basis of the 2007 appeal was clearly devoid of any merit.
The Objection of 10 December 2013 (p12 of Rule 11 documents)
The basis for the objection was set out in paragraph 2 of the letter of 10 December 2013. It reads:
"We wish to object to the imposition of withholding tax on sales commissions. The 17th Schedule of the Income Tax Act defines fees as any amount from a source within Zimbabwe payable in respect of any services of a technical, managerial, administrative or consultative nature. The sales commissions paid to agents were for facilitating the sale of tobacco as a result of the sales and marketing services provided by the agent. It is clear that the commission was based on making a sale. Where there was no resultant sale, no commission was paid to the agent. It is therefore our contention that the sales commissions were not in any way technical, managerial, administrative or consultative in nature."
A reading of the whole letter clearly demonstrates that the appellant did not object to an assessment.
The averments in paragraph 3 and 4 of the appellant's case, to the extent that they declare that the appellant "duly objected to the said assessment" were not based on the letter of objection. In my view, the appellant merely objected to the decision of the Commissioner that the commissions constituted the type of fees contemplated by section 30 and the Seventeenth Schedule of the Income Tax Act.
The Legislative Provisions
In terms of section 65(4) of the Income Tax Act, both the High Court and Special Court are obliged to confine their decision to the grounds stated in the notice of objection unless leave, based on good cause shown, or agreement of the parties, has been granted to the appellant to rely on other grounds.
In the present matter, no such leave was sought nor granted.
It is therefore unnecessary for me to decide the issues that were raised and ventilated concerning assessments, notices of assessment, and estoppel.
A taxpayer is entitled to object, inter alia, to any written decision of the Commissioner mentioned in the Eleventh Schedule in terms of section 62(1)(b) of the Income Tax Act, which states:
"(1) Any taxpayer who is aggrieved by -
(b) Any decision of the Commissioner mentioned in the Eleventh Schedule;
"may, unless it is otherwise provided in this Act, object to such…, decision…, within thirty days after the date of the…, written notification of the decision…, in the manner and under the terms prescribed by this Act:"
The Eleventh Schedule
Paragraph (y) of the Eleventh Schedule prescribes the decisions of the Commissioner that may be subjected to objection and appeal. In relevant, it reads:
"The decisions of the Commissioner to which any person may object under paragraph (b) of subsection (1) of section sixty-two are those made in terms of —
(y) The provisions of the Seventeenth Schedule, where the determination relates to —
(i) Whether or not any amounts are fees for the purposes of that Schedule;"
In the present matter, neither the appellant in its bundle of documents, nor the respondent in the Rule 11 documents, produced the written notification of the decision on which the letter of objection was based. The letter of objection does not indicate when the letter referenced 600/109/108/13 was written and what its contents were. The letter does not indicate whether the decision was verbal or in writing.
I am therefore unable to determine whether the letter of objection complied with the requirements of section 62(1)(b) of the Income Tax Act.
I would be inclined to strike the appeal off the roll for these reasons.
While I acknowledge that the appellant's case was predicated on "an assessment" and not on "any decision" it seems to me that the respondent should have been alerted by the letter of objection that the appellant was appealing against the decision.
I will, for that reason, assume that the requirements of section 62(1)(b) of the Income Tax Act were met.
Counsel for the appellant correctly submitted, that, the appeal could be heard on the basis of paragraph (y) to the Eleventh Schedule of the Income Tax Act.
I did not hear counsel for the respondent make any contrary submissions.
Accordingly, I agree with counsel for the appellant, that, the appeal, to the extent that it is confined to the determination of whether the commissions constituted fees as defined in section 30 and the Seventeenth Schedule of the Income Tax Act is properly before me.
