Table 1

Notwithstanding the absorption of running costs by the related party, the respondent maintained, that, the rentals were outrageously low and unrealistic in comparison with the charges imposed by local cross border hauliers.

It applied the related party's 2013 rate of R22.47 on the distance covered in each year to compute the taxable income set out on page 50.2 of exhibit 1, which formed part of the amended assessments.

It was common cause that the rate was in tandem with the market rates charged by third parties in 2013.

At the appeal hearing, the appellant relied on the evidence of one of its directors and public officer and nephew to its 80 year old founder and Managing Director, who has stood in the position of a General Manager since 1995 and has been a member of the executive committee of the Transport Operators Association of Zimbabwe, one HJR and the 374 paged lever arch file, exhibit 1, and one paged exhibit 4.

The respondent called the evidence of two of its Chief Investigations Officers, one of whom was a purported transfer pricing specialist and relied on the 32 paged exhibit 2 and 6 paged exhibit 3A, 3B and 3C in addition to the Rule 11 documents filed of record.

At the pre-trial hearing of 1 June 2015, the following six issues were referred on appeal for determination:

(i) Did the appellant in fact receive the additional income assessed by the respondent, and, if so, what was the source of the income.

(ii) Whether or not the transactions between the appellant and the related party resulted in the appellant being deemed to have received additional income for tax purposes.

(iii) Whether or not the transactions that were being carried out by the appellant with its related company fall within the ambit of section 98 of the Income Tax Act [Chapter 23:06], and, if not, whether the respondent was entitled, as a matter of law, to utilise section 98 of the Income Tax Act.

(iv) In the event of any such additional income, or deemed income, having been correctly assessed by the respondent, whether the respondent was obligated to deduct from that income the expenses which would have been incurred had the appellant undertaken such transactions; in particular, the cost of the diesel that would have been expended in conducting such transactions.

(v) Whether or not SI163 of 2014 is applicable in casu.

(vi) The appropriate penalty.

At the commencement of the appeal hearing, on 14 September 2015, counsel for the appellant abandoned the fourth issue and persisted with the remaining five issues.

The evidence was mostly common cause.

The appellant was incorporated on 12 June 1960 under a different name and adopted its present name on 10 June 1983. The major shareholders of the appellant were the 80 year old Managing Director and a registered trust.

The Managing Director also held the same position in the related party, a company he promoted in 1978.

It was common cause, that, even though the two entities did not have common shareholders, they were related parties….,.

The appellant operated in the local and regional transport industry with a complement of 24 mechanical horses, 83 trailers, and 11 tankers. A common recurring statement in the Director's report in each of the four tax years under consideration was that it was “engaged in transport and operated principally in Africa.”

The operations were manned by 7 Head Office staff, 10 workshop employees, and 110 local, highly skilled articulated truck and trailer, internationally certified drivers with mostly over 10 years driving experience.

The transport business is dependent on the availability of imported fuel, spare parts, and tyres.

In 1996, the appellant had difficulties in sourcing scarce foreign currency locally to service its cross border operations. In the aftermath of the demise of apartheid in South Africa, in 1994, the South African economy became more integrated with other regional economies.

The appellant alleged, that, it staved off the spectre of liquidation by concluding the 1996 rental agreement with the related party through which the related party used the appellant's equipment to carry goods, by road, between South Africa and the designated countries to the north.

The agreement was executed on 28 October 1996 and renewed for three years on 8 October 2003 and then extended for a further 3 years on 16 August 2006. On 6 July 2009, in deference to the introduction of the multi-currency regime in Zimbabwe, the agreement was infused with an indefinite lifespan.

The 2003 agreement was signed by the uncle and nephew on behalf of the related party and the appellant, respectively. The 2006 and 2009 agreements were signed by other representatives of the related party with the nephew.

The notable terms and conditions of the agreements were that the related party used the appellant's excess fleet based on an agreed fixed fee per leg per trip and not on the distance covered.

With effect from 1 July 2009, the rental was fixed at ZAR1,000 per journey for the use by the related party of any locally registered trailer drawn by a South African registered horse. The rental for a horse, and a horse and trailer, were indicated on pages 15 and 16 of exhibit 1.

These rentals were all increased annually by 10%.

In addition, the related party was responsible, at its own cost, for running maintenance and repairs of the equipment comprising of the cost of insurance, tyres, rims, spare parts and fuel and regulatory requirements such as road toll fees, environmental and port health fees attached to the equipment but not to any damage attributable to the negligence of the appellant's drivers or third parties.

The appellant employed and remunerated the local drivers seconded to the related party and did not receive any compensation from the related party.

However, the appellant invoiced the related party for any maintenance and repairs carried out in Zimbabwe on all equipment used by the related party.

It was the uncontroverted testimony of the nephew, that, a portion of the fee was surrendered to the Reserve Bank of Zimbabwe and another used to purchase the requirements of the appellant's local fleet, while the balance was sold on the inter-bank market to meet local expenses and staff salaries and wages.

This situation continued until hyperinflation adversely affected the viability and pricing of the domestic transport services in 2008.

The appellant, however, deliberately failed to disclose the 2003 agreed rentals in appendices C1, C2 and C3 to that agreement that were adopted by both the 2006 and 2009 agreements and the logistical and rental agreements of 1996 but elected to reveal the escalation clause set out on page 12.29 of exhibit 1.

However, the agreed rentals for the rented horses were indicated on page 15 and 16 of the exhibit 1 for each of the four (4) tax years and for each of the routes covered.

The southbound trip to Harare and Kwekwe in Zimbabwe from Lusaka, the Copperbelt, Blantyre and Lilongwe accrued different rentals, denominated in South African rands from the north bound trips as indicated in the following table 2:

Table 2

Transit rates

The northbound routes to Zimbabwe consisted of the Johannesburg to Harare, Johannesburg to Bulawayo, Johannesburg to Midlands, and Johannesburg to Livingstone routes. The rental was the same for each route in each of the four (4) years, respectively.

In 2009 it was R5,050; in 2010 it was R5,555; in 2011 it was R6,400; and, in 2012 it was R7,300.

The north-bound routes from Zimbabwe were the Harare-Lusaka, Harare-Copperbelt, Kwekwe-Blantyre, Harare-Blantyre and Harare-Lilongwe routes.

The rentals were different on each route and in each year. The cheapest was the Harare to Lusaka route ranging between R2,310 in 2009 and R3,420 in 2012. The most expensive was the Harare to Copperbelt route, which ranged between R3,930 in 2009 and R5,700 in 2012.

The transit routes were the Johannesburg to Livingstone and Johannesburg to Harare destined for Lusaka route, for which the related party paid between R2,950 in 2009 and R4,200 in 2012 and the Johannesburg to Harare destined for Copperbelt for which the related party paid R3,650 in 2009 and R5,200 in 2012 to the appellant.

The last transit route was from Johannesburg to Harare destined for Blantyre and from Johannesburg to Harare destined for Lilongwe. The related party paid the appellant between R3,470 in 2009 and R5,000 in 2012 for the route to Blantyre and between R3,930 in 2009 and R5,600 in 2012 for the route to Lilongwe.

The rental for the trailer only was R1,270 in 2011 and R1,450 in 2012.

The south bound journeys were the exact opposite of the north bound ones.

The rates from the Zimbabwe centres to Johannesburg were the same in each year. The rentals were R2,810 in 2009, and R3,091 in 2010 and R3,560 in 2011 and R4,060 in 2012.

The south bound transit rates were Lusaka to Johannesburg via Harare that ranged between R1,320 in 2009 and R1,900 in 2012 while the Copperbelt to Johannesburg via Harare route ranged between R1,570 in 2009 and R2,280 in 2012; and, lastly, the transit rate between Blantyre and Johannesburg via Harare ranged between R1,560 in 2009 and R2,300 in 2012 while the Lilongwe to Johannesburg via Harare route ranged between R1,740 in 2009 and R2,500 in 2012.

The related party paid R1,270 for the trailer per leg per trip on each of these routes. In 2012, the north bound trailer rental was R1,450.

The journey from Johannesburg to Harare and back consisted of two trips while the journey from Johannesburg to any of the destinations outside Zimbabwe and back consisted of four (4) trips.

The maintenance and running expenses incurred by the related party, in respect of 21 mechanical horses, between 1 January 2009 and 31 December 2012 amounted to R1,854,841 for spares and maintenance…,.; US$436,983 for labour on repairs and maintenance.

In the same period, tyres worth R1,151,777 were purchased by the related party and R536,021=51 was expensed on 69 trailers. The related party also spent the sum of R9,128,122 on fuel, US$1,809,460 on insurance, and US$40,992 on lubricants.

The mechanical horses traversed 1,771,964km…, during the four year period in question. The distance covered by each identified mechanical horse, and the cost of maintenance and running expenses, tyres and fuel in each year was listed on pages 23 to 24.6 of exhibit 1.

The yearly amounts expensed on each line item by the related party on the leased equipment was conveniently summarised by the appellant on pp24 and 42.5 of exhibit 1.

I reproduce the essential costs in Table 3 below.

Table 3: Expenses paid by related party on leased equipment

The respondent derived the gross charges of cross-border transactions from the third party verification exercise that it conducted on three local cross-border hauliers, TCS, CT and CCC.

It wrote exhibits 3A, 3B and 3C between 2 July 2013 and 16 September 2013 seeking the gross rates in both United States dollars and South African rands charged in respect of each tax year under investigation on 19 regional routes traversed by the related party.

The responses…, were received between 5 August and 19 September 2013.

These parties did not offer a separate truck and trailer service. They factored into the freight rates the operational costs of fuel, vehicle inspection, toll and environmental management fees, insurances and driver's allowances, the distance covered, the nature of the cargo, and competition.

The freight rates ranged between US$1.60 per km and US$2.30 per km for both south and north bound routes during the period to the end of the 2012 tax year.

In respect of the 2013 tax year, the average rate was US$2.50 per km.

One of the local hauliers supplied very detailed information on the freight rates. It used the cost plus mark-up model where the mark-up ranged between 7% and 12%. It charged between US$750 and US$1,300 for the south bound routes and between US$1,300 and US$2,500 for the north bound routes. While it charged per trip like the related party, it translated these charges to between US$1.60 and US$2.30 per km.

The nephew listed 11 advantages that accrued to the appellant from the rental agreement.

The appellant was, inter alia, assured of prompt and steady flow of income and a regular foreign currency supply, accounted through the Reserve Bank of Zimbabwe CD3 forms, to meet local expenses from a single client; it's fleet was maintained at no cost to it and prevented from deteriorating from disuse; it was able to offer limited local transport services; it did not incur marketing and clearing and depot expenses in South Africa, Zimbabwe, Zambia and Malawi; it had a guaranteed free source of fuel at its depot in Zimbabwe for local use; and, lastly it was able to retain a pool of experienced internationally certified drivers starving it off liquidation and heavy retrenchment costs.

On the other hand, the related party benefited from the use of authorised equipment on Zambian, Malawian, Batswana and Mozambican public roads and highly skilled drivers who were unable and unwilling to secure work permits in South Africa.

It was common cause, that, the respondent treated the appellant as a cross-border haulier and applied the 2013 freight rate charged by the related party, of R22.47 per km, retrospectively to each of the tax years in dispute. It ignored the aggregate expenses of R21.20 per km incurred in raising this amount.

It computed the gross revenue earned from the leased equipment by multiplying this amount by the number of kilometres travelled in each year and converted the total to United States dollars using the uniform and inaccurate cross rate of 1US$ to R10.

The respondent further calculated the yearly running maintenance and repair costs expensed on the leased trucks and converted it to United States dollars using the inaccurate exchange rate of 1US$ to R10 and added the figure to the transport services income in the annual financial statements derived from the CD3 forms.

It then deducted the aggregate amount from the gross revenue earned from the leased equipment aggregate figure from the CD3 revenue and running maintenance and repair costs. The variance, whether positive or negative, was added to income in the computation of taxable income.

The appellant gave contrary evidence in two respects:

(i) The first was on whether it operated a transport service in Zimbabwe only or whether it also operated across our borders.

(ii) The second was on whether it charged per trip or per km in respect of the local transport services.

The sole witness called by the appellant testified that the appellant operated a transport service in Zimbabwe only.

In each of the tax years in issue the same witness signed the Director's report in which he proclaimed that the appellant operated principally in Africa.

Table 1

Notwithstanding the absorption of running costs by the related party, the respondent maintained, that, the rentals were outrageously low and unrealistic in comparison with the charges imposed by local cross border hauliers.

It applied the related party's 2013 rate of R22.47 on the distance covered in each year to compute the taxable income set out on page 50.2 of exhibit 1, which formed part of the amended assessments.

It was common cause that the rate was in tandem with the market rates charged by third parties in 2013.

At the appeal hearing, the appellant relied on the evidence of one of its directors and public officer and nephew to its 80 year old founder and Managing Director, who has stood in the position of a General Manager since 1995 and has been a member of the executive committee of the Transport Operators Association of Zimbabwe, one HJR and the 374 paged lever arch file, exhibit 1, and one paged exhibit 4.

The respondent called the evidence of two of its Chief Investigations Officers, one of whom was a purported transfer pricing specialist and relied on the 32 paged exhibit 2 and 6 paged exhibit 3A, 3B and 3C in addition to the Rule 11 documents filed of record.

At the pre-trial hearing of 1 June 2015, the following six issues were referred on appeal for determination:

(i) Did the appellant in fact receive the additional income assessed by the respondent, and, if so, what was the source of the income.

(ii) Whether or not the transactions between the appellant and the related party resulted in the appellant being deemed to have received additional income for tax purposes.

(iii) Whether or not the transactions that were being carried out by the appellant with its related company fall within the ambit of section 98 of the Income Tax Act [Chapter 23:06], and, if not, whether the respondent was entitled, as a matter of law, to utilise section 98 of the Income Tax Act.

(iv) In the event of any such additional income, or deemed income, having been correctly assessed by the respondent, whether the respondent was obligated to deduct from that income the expenses which would have been incurred had the appellant undertaken such transactions; in particular, the cost of the diesel that would have been expended in conducting such transactions.

(v) Whether or not SI163 of 2014 is applicable in casu.

(vi) The appropriate penalty.

At the commencement of the appeal hearing, on 14 September 2015, counsel for the appellant abandoned the fourth issue and persisted with the remaining five issues.

The evidence was mostly common cause.

The appellant was incorporated on 12 June 1960 under a different name and adopted its present name on 10 June 1983. The major shareholders of the appellant were the 80 year old Managing Director and a registered trust.

The Managing Director also held the same position in the related party, a company he promoted in 1978.

It was common cause, that, even though the two entities did not have common shareholders, they were related parties….,.

The appellant operated in the local and regional transport industry with a complement of 24 mechanical horses, 83 trailers, and 11 tankers. A common recurring statement in the Director's report in each of the four tax years under consideration was that it was “engaged in transport and operated principally in Africa.”

The operations were manned by 7 Head Office staff, 10 workshop employees, and 110 local, highly skilled articulated truck and trailer, internationally certified drivers with mostly over 10 years driving experience.

The transport business is dependent on the availability of imported fuel, spare parts, and tyres.

In 1996, the appellant had difficulties in sourcing scarce foreign currency locally to service its cross border operations. In the aftermath of the demise of apartheid in South Africa, in 1994, the South African economy became more integrated with other regional economies.

The appellant alleged, that, it staved off the spectre of liquidation by concluding the 1996 rental agreement with the related party through which the related party used the appellant's equipment to carry goods, by road, between South Africa and the designated countries to the north.

The agreement was executed on 28 October 1996 and renewed for three years on 8 October 2003 and then extended for a further 3 years on 16 August 2006. On 6 July 2009, in deference to the introduction of the multi-currency regime in Zimbabwe, the agreement was infused with an indefinite lifespan.

The 2003 agreement was signed by the uncle and nephew on behalf of the related party and the appellant, respectively. The 2006 and 2009 agreements were signed by other representatives of the related party with the nephew.

The notable terms and conditions of the agreements were that the related party used the appellant's excess fleet based on an agreed fixed fee per leg per trip and not on the distance covered.

With effect from 1 July 2009, the rental was fixed at ZAR1,000 per journey for the use by the related party of any locally registered trailer drawn by a South African registered horse. The rental for a horse, and a horse and trailer, were indicated on pages 15 and 16 of exhibit 1.

These rentals were all increased annually by 10%.

In addition, the related party was responsible, at its own cost, for running maintenance and repairs of the equipment comprising of the cost of insurance, tyres, rims, spare parts and fuel and regulatory requirements such as road toll fees, environmental and port health fees attached to the equipment but not to any damage attributable to the negligence of the appellant's drivers or third parties.

The appellant employed and remunerated the local drivers seconded to the related party and did not receive any compensation from the related party.

However, the appellant invoiced the related party for any maintenance and repairs carried out in Zimbabwe on all equipment used by the related party.

It was the uncontroverted testimony of the nephew, that, a portion of the fee was surrendered to the Reserve Bank of Zimbabwe and another used to purchase the requirements of the appellant's local fleet, while the balance was sold on the inter-bank market to meet local expenses and staff salaries and wages.

This situation continued until hyperinflation adversely affected the viability and pricing of the domestic transport services in 2008.

The appellant, however, deliberately failed to disclose the 2003 agreed rentals in appendices C1, C2 and C3 to that agreement that were adopted by both the 2006 and 2009 agreements and the logistical and rental agreements of 1996 but elected to reveal the escalation clause set out on page 12.29 of exhibit 1.

However, the agreed rentals for the rented horses were indicated on page 15 and 16 of the exhibit 1 for each of the four (4) tax years and for each of the routes covered.

The southbound trip to Harare and Kwekwe in Zimbabwe from Lusaka, the Copperbelt, Blantyre and Lilongwe accrued different rentals, denominated in South African rands from the north bound trips as indicated in the following table 2:

Table 2

Transit rates

The northbound routes to Zimbabwe consisted of the Johannesburg to Harare, Johannesburg to Bulawayo, Johannesburg to Midlands, and Johannesburg to Livingstone routes. The rental was the same for each route in each of the four (4) years, respectively.

In 2009 it was R5,050; in 2010 it was R5,555; in 2011 it was R6,400; and, in 2012 it was R7,300.

The north-bound routes from Zimbabwe were the Harare-Lusaka, Harare-Copperbelt, Kwekwe-Blantyre, Harare-Blantyre and Harare-Lilongwe routes.

The rentals were different on each route and in each year. The cheapest was the Harare to Lusaka route ranging between R2,310 in 2009 and R3,420 in 2012. The most expensive was the Harare to Copperbelt route, which ranged between R3,930 in 2009 and R5,700 in 2012.

The transit routes were the Johannesburg to Livingstone and Johannesburg to Harare destined for Lusaka route, for which the related party paid between R2,950 in 2009 and R4,200 in 2012 and the Johannesburg to Harare destined for Copperbelt for which the related party paid R3,650 in 2009 and R5,200 in 2012 to the appellant.

The last transit route was from Johannesburg to Harare destined for Blantyre and from Johannesburg to Harare destined for Lilongwe. The related party paid the appellant between R3,470 in 2009 and R5,000 in 2012 for the route to Blantyre and between R3,930 in 2009 and R5,600 in 2012 for the route to Lilongwe.

The rental for the trailer only was R1,270 in 2011 and R1,450 in 2012.

The south bound journeys were the exact opposite of the north bound ones.

The rates from the Zimbabwe centres to Johannesburg were the same in each year. The rentals were R2,810 in 2009, and R3,091 in 2010 and R3,560 in 2011 and R4,060 in 2012.

The south bound transit rates were Lusaka to Johannesburg via Harare that ranged between R1,320 in 2009 and R1,900 in 2012 while the Copperbelt to Johannesburg via Harare route ranged between R1,570 in 2009 and R2,280 in 2012; and, lastly, the transit rate between Blantyre and Johannesburg via Harare ranged between R1,560 in 2009 and R2,300 in 2012 while the Lilongwe to Johannesburg via Harare route ranged between R1,740 in 2009 and R2,500 in 2012.

The related party paid R1,270 for the trailer per leg per trip on each of these routes. In 2012, the north bound trailer rental was R1,450.

The journey from Johannesburg to Harare and back consisted of two trips while the journey from Johannesburg to any of the destinations outside Zimbabwe and back consisted of four (4) trips.

The maintenance and running expenses incurred by the related party, in respect of 21 mechanical horses, between 1 January 2009 and 31 December 2012 amounted to R1,854,841 for spares and maintenance…,.; US$436,983 for labour on repairs and maintenance.

In the same period, tyres worth R1,151,777 were purchased by the related party and R536,021=51 was expensed on 69 trailers. The related party also spent the sum of R9,128,122 on fuel, US$1,809,460 on insurance, and US$40,992 on lubricants.

The mechanical horses traversed 1,771,964km…, during the four year period in question. The distance covered by each identified mechanical horse, and the cost of maintenance and running expenses, tyres and fuel in each year was listed on pages 23 to 24.6 of exhibit 1.

The yearly amounts expensed on each line item by the related party on the leased equipment was conveniently summarised by the appellant on pp24 and 42.5 of exhibit 1.

I reproduce the essential costs in Table 3 below.

Table 3: Expenses paid by related party on leased equipment

The respondent derived the gross charges of cross-border transactions from the third party verification exercise that it conducted on three local cross-border hauliers, TCS, CT and CCC.

It wrote exhibits 3A, 3B and 3C between 2 July 2013 and 16 September 2013 seeking the gross rates in both United States dollars and South African rands charged in respect of each tax year under investigation on 19 regional routes traversed by the related party.

The responses…, were received between 5 August and 19 September 2013.

These parties did not offer a separate truck and trailer service. They factored into the freight rates the operational costs of fuel, vehicle inspection, toll and environmental management fees, insurances and driver's allowances, the distance covered, the nature of the cargo, and competition.

The freight rates ranged between US$1.60 per km and US$2.30 per km for both south and north bound routes during the period to the end of the 2012 tax year.

In respect of the 2013 tax year, the average rate was US$2.50 per km.

One of the local hauliers supplied very detailed information on the freight rates. It used the cost plus mark-up model where the mark-up ranged between 7% and 12%. It charged between US$750 and US$1,300 for the south bound routes and between US$1,300 and US$2,500 for the north bound routes. While it charged per trip like the related party, it translated these charges to between US$1.60 and US$2.30 per km.

The nephew listed 11 advantages that accrued to the appellant from the rental agreement.

The appellant was, inter alia, assured of prompt and steady flow of income and a regular foreign currency supply, accounted through the Reserve Bank of Zimbabwe CD3 forms, to meet local expenses from a single client; it's fleet was maintained at no cost to it and prevented from deteriorating from disuse; it was able to offer limited local transport services; it did not incur marketing and clearing and depot expenses in South Africa, Zimbabwe, Zambia and Malawi; it had a guaranteed free source of fuel at its depot in Zimbabwe for local use; and, lastly it was able to retain a pool of experienced internationally certified drivers starving it off liquidation and heavy retrenchment costs.

On the other hand, the related party benefited from the use of authorised equipment on Zambian, Malawian, Batswana and Mozambican public roads and highly skilled drivers who were unable and unwilling to secure work permits in South Africa.

It was common cause, that, the respondent treated the appellant as a cross-border haulier and applied the 2013 freight rate charged by the related party, of R22.47 per km, retrospectively to each of the tax years in dispute. It ignored the aggregate expenses of R21.20 per km incurred in raising this amount.

It computed the gross revenue earned from the leased equipment by multiplying this amount by the number of kilometres travelled in each year and converted the total to United States dollars using the uniform and inaccurate cross rate of 1US$ to R10.

The respondent further calculated the yearly running maintenance and repair costs expensed on the leased trucks and converted it to United States dollars using the inaccurate exchange rate of 1US$ to R10 and added the figure to the transport services income in the annual financial statements derived from the CD3 forms.

It then deducted the aggregate amount from the gross revenue earned from the leased equipment aggregate figure from the CD3 revenue and running maintenance and repair costs. The variance, whether positive or negative, was added to income in the computation of taxable income.

The appellant gave contrary evidence in two respects:

(i) The first was on whether it operated a transport service in Zimbabwe only or whether it also operated across our borders.

(ii) The second was on whether it charged per trip or per km in respect of the local transport services.

The sole witness called by the appellant testified that the appellant operated a transport service in Zimbabwe only.

In each of the tax years in issue the same witness signed the Director's report in which he proclaimed that the appellant operated principally in Africa.

Table 1

Notwithstanding the absorption of running costs by the related party, the respondent maintained, that, the rentals were outrageously low and unrealistic in comparison with the charges imposed by local cross border hauliers.

It applied the related party's 2013 rate of R22.47 on the distance covered in each year to compute the taxable income set out on page 50.2 of exhibit 1, which formed part of the amended assessments.

It was common cause that the rate was in tandem with the market rates charged by third parties in 2013.

At the appeal hearing, the appellant relied on the evidence of one of its directors and public officer and nephew to its 80 year old founder and Managing Director, who has stood in the position of a General Manager since 1995 and has been a member of the executive committee of the Transport Operators Association of Zimbabwe, one HJR and the 374 paged lever arch file, exhibit 1, and one paged exhibit 4.

The respondent called the evidence of two of its Chief Investigations Officers, one of whom was a purported transfer pricing specialist and relied on the 32 paged exhibit 2 and 6 paged exhibit 3A, 3B and 3C in addition to the Rule 11 documents filed of record.

At the pre-trial hearing of 1 June 2015, the following six issues were referred on appeal for determination:

(i) Did the appellant in fact receive the additional income assessed by the respondent, and, if so, what was the source of the income.

(ii) Whether or not the transactions between the appellant and the related party resulted in the appellant being deemed to have received additional income for tax purposes.

(iii) Whether or not the transactions that were being carried out by the appellant with its related company fall within the ambit of section 98 of the Income Tax Act [Chapter 23:06], and, if not, whether the respondent was entitled, as a matter of law, to utilise section 98 of the Income Tax Act.

(iv) In the event of any such additional income, or deemed income, having been correctly assessed by the respondent, whether the respondent was obligated to deduct from that income the expenses which would have been incurred had the appellant undertaken such transactions; in particular, the cost of the diesel that would have been expended in conducting such transactions.

(v) Whether or not SI163 of 2014 is applicable in casu.

(vi) The appropriate penalty.

At the commencement of the appeal hearing, on 14 September 2015, counsel for the appellant abandoned the fourth issue and persisted with the remaining five issues.

The evidence was mostly common cause.

The appellant was incorporated on 12 June 1960 under a different name and adopted its present name on 10 June 1983. The major shareholders of the appellant were the 80 year old Managing Director and a registered trust.

The Managing Director also held the same position in the related party, a company he promoted in 1978.

It was common cause, that, even though the two entities did not have common shareholders, they were related parties….,.

The appellant operated in the local and regional transport industry with a complement of 24 mechanical horses, 83 trailers, and 11 tankers. A common recurring statement in the Director's report in each of the four tax years under consideration was that it was “engaged in transport and operated principally in Africa.”

The operations were manned by 7 Head Office staff, 10 workshop employees, and 110 local, highly skilled articulated truck and trailer, internationally certified drivers with mostly over 10 years driving experience.

The transport business is dependent on the availability of imported fuel, spare parts, and tyres.

In 1996, the appellant had difficulties in sourcing scarce foreign currency locally to service its cross border operations. In the aftermath of the demise of apartheid in South Africa, in 1994, the South African economy became more integrated with other regional economies.

The appellant alleged, that, it staved off the spectre of liquidation by concluding the 1996 rental agreement with the related party through which the related party used the appellant's equipment to carry goods, by road, between South Africa and the designated countries to the north.

The agreement was executed on 28 October 1996 and renewed for three years on 8 October 2003 and then extended for a further 3 years on 16 August 2006. On 6 July 2009, in deference to the introduction of the multi-currency regime in Zimbabwe, the agreement was infused with an indefinite lifespan.

The 2003 agreement was signed by the uncle and nephew on behalf of the related party and the appellant, respectively. The 2006 and 2009 agreements were signed by other representatives of the related party with the nephew.

The notable terms and conditions of the agreements were that the related party used the appellant's excess fleet based on an agreed fixed fee per leg per trip and not on the distance covered.

With effect from 1 July 2009, the rental was fixed at ZAR1,000 per journey for the use by the related party of any locally registered trailer drawn by a South African registered horse. The rental for a horse, and a horse and trailer, were indicated on pages 15 and 16 of exhibit 1.

These rentals were all increased annually by 10%.

In addition, the related party was responsible, at its own cost, for running maintenance and repairs of the equipment comprising of the cost of insurance, tyres, rims, spare parts and fuel and regulatory requirements such as road toll fees, environmental and port health fees attached to the equipment but not to any damage attributable to the negligence of the appellant's drivers or third parties.

The appellant employed and remunerated the local drivers seconded to the related party and did not receive any compensation from the related party.

However, the appellant invoiced the related party for any maintenance and repairs carried out in Zimbabwe on all equipment used by the related party.

It was the uncontroverted testimony of the nephew, that, a portion of the fee was surrendered to the Reserve Bank of Zimbabwe and another used to purchase the requirements of the appellant's local fleet, while the balance was sold on the inter-bank market to meet local expenses and staff salaries and wages.

This situation continued until hyperinflation adversely affected the viability and pricing of the domestic transport services in 2008.

The appellant, however, deliberately failed to disclose the 2003 agreed rentals in appendices C1, C2 and C3 to that agreement that were adopted by both the 2006 and 2009 agreements and the logistical and rental agreements of 1996 but elected to reveal the escalation clause set out on page 12.29 of exhibit 1.

However, the agreed rentals for the rented horses were indicated on page 15 and 16 of the exhibit 1 for each of the four (4) tax years and for each of the routes covered.

The southbound trip to Harare and Kwekwe in Zimbabwe from Lusaka, the Copperbelt, Blantyre and Lilongwe accrued different rentals, denominated in South African rands from the north bound trips as indicated in the following table 2:

Table 2

Transit rates

The northbound routes to Zimbabwe consisted of the Johannesburg to Harare, Johannesburg to Bulawayo, Johannesburg to Midlands, and Johannesburg to Livingstone routes. The rental was the same for each route in each of the four (4) years, respectively.

In 2009 it was R5,050; in 2010 it was R5,555; in 2011 it was R6,400; and, in 2012 it was R7,300.

The north-bound routes from Zimbabwe were the Harare-Lusaka, Harare-Copperbelt, Kwekwe-Blantyre, Harare-Blantyre and Harare-Lilongwe routes.

The rentals were different on each route and in each year. The cheapest was the Harare to Lusaka route ranging between R2,310 in 2009 and R3,420 in 2012. The most expensive was the Harare to Copperbelt route, which ranged between R3,930 in 2009 and R5,700 in 2012.

The transit routes were the Johannesburg to Livingstone and Johannesburg to Harare destined for Lusaka route, for which the related party paid between R2,950 in 2009 and R4,200 in 2012 and the Johannesburg to Harare destined for Copperbelt for which the related party paid R3,650 in 2009 and R5,200 in 2012 to the appellant.

The last transit route was from Johannesburg to Harare destined for Blantyre and from Johannesburg to Harare destined for Lilongwe. The related party paid the appellant between R3,470 in 2009 and R5,000 in 2012 for the route to Blantyre and between R3,930 in 2009 and R5,600 in 2012 for the route to Lilongwe.

The rental for the trailer only was R1,270 in 2011 and R1,450 in 2012.

The south bound journeys were the exact opposite of the north bound ones.

The rates from the Zimbabwe centres to Johannesburg were the same in each year. The rentals were R2,810 in 2009, and R3,091 in 2010 and R3,560 in 2011 and R4,060 in 2012.

The south bound transit rates were Lusaka to Johannesburg via Harare that ranged between R1,320 in 2009 and R1,900 in 2012 while the Copperbelt to Johannesburg via Harare route ranged between R1,570 in 2009 and R2,280 in 2012; and, lastly, the transit rate between Blantyre and Johannesburg via Harare ranged between R1,560 in 2009 and R2,300 in 2012 while the Lilongwe to Johannesburg via Harare route ranged between R1,740 in 2009 and R2,500 in 2012.

The related party paid R1,270 for the trailer per leg per trip on each of these routes. In 2012, the north bound trailer rental was R1,450.

The journey from Johannesburg to Harare and back consisted of two trips while the journey from Johannesburg to any of the destinations outside Zimbabwe and back consisted of four (4) trips.

The maintenance and running expenses incurred by the related party, in respect of 21 mechanical horses, between 1 January 2009 and 31 December 2012 amounted to R1,854,841 for spares and maintenance…,.; US$436,983 for labour on repairs and maintenance.

In the same period, tyres worth R1,151,777 were purchased by the related party and R536,021=51 was expensed on 69 trailers. The related party also spent the sum of R9,128,122 on fuel, US$1,809,460 on insurance, and US$40,992 on lubricants.

The mechanical horses traversed 1,771,964km…, during the four year period in question. The distance covered by each identified mechanical horse, and the cost of maintenance and running expenses, tyres and fuel in each year was listed on pages 23 to 24.6 of exhibit 1.

The yearly amounts expensed on each line item by the related party on the leased equipment was conveniently summarised by the appellant on pp24 and 42.5 of exhibit 1.

I reproduce the essential costs in Table 3 below.

Table 3: Expenses paid by related party on leased equipment

The respondent derived the gross charges of cross-border transactions from the third party verification exercise that it conducted on three local cross-border hauliers, TCS, CT and CCC.

It wrote exhibits 3A, 3B and 3C between 2 July 2013 and 16 September 2013 seeking the gross rates in both United States dollars and South African rands charged in respect of each tax year under investigation on 19 regional routes traversed by the related party.

The responses…, were received between 5 August and 19 September 2013.

These parties did not offer a separate truck and trailer service. They factored into the freight rates the operational costs of fuel, vehicle inspection, toll and environmental management fees, insurances and driver's allowances, the distance covered, the nature of the cargo, and competition.

The freight rates ranged between US$1.60 per km and US$2.30 per km for both south and north bound routes during the period to the end of the 2012 tax year.

In respect of the 2013 tax year, the average rate was US$2.50 per km.

One of the local hauliers supplied very detailed information on the freight rates. It used the cost plus mark-up model where the mark-up ranged between 7% and 12%. It charged between US$750 and US$1,300 for the south bound routes and between US$1,300 and US$2,500 for the north bound routes. While it charged per trip like the related party, it translated these charges to between US$1.60 and US$2.30 per km.

The nephew listed 11 advantages that accrued to the appellant from the rental agreement.

The appellant was, inter alia, assured of prompt and steady flow of income and a regular foreign currency supply, accounted through the Reserve Bank of Zimbabwe CD3 forms, to meet local expenses from a single client; it's fleet was maintained at no cost to it and prevented from deteriorating from disuse; it was able to offer limited local transport services; it did not incur marketing and clearing and depot expenses in South Africa, Zimbabwe, Zambia and Malawi; it had a guaranteed free source of fuel at its depot in Zimbabwe for local use; and, lastly it was able to retain a pool of experienced internationally certified drivers starving it off liquidation and heavy retrenchment costs.

On the other hand, the related party benefited from the use of authorised equipment on Zambian, Malawian, Batswana and Mozambican public roads and highly skilled drivers who were unable and unwilling to secure work permits in South Africa.

It was common cause, that, the respondent treated the appellant as a cross-border haulier and applied the 2013 freight rate charged by the related party, of R22.47 per km, retrospectively to each of the tax years in dispute. It ignored the aggregate expenses of R21.20 per km incurred in raising this amount.

It computed the gross revenue earned from the leased equipment by multiplying this amount by the number of kilometres travelled in each year and converted the total to United States dollars using the uniform and inaccurate cross rate of 1US$ to R10.

The respondent further calculated the yearly running maintenance and repair costs expensed on the leased trucks and converted it to United States dollars using the inaccurate exchange rate of 1US$ to R10 and added the figure to the transport services income in the annual financial statements derived from the CD3 forms.

It then deducted the aggregate amount from the gross revenue earned from the leased equipment aggregate figure from the CD3 revenue and running maintenance and repair costs. The variance, whether positive or negative, was added to income in the computation of taxable income.

The appellant gave contrary evidence in two respects:

(i) The first was on whether it operated a transport service in Zimbabwe only or whether it also operated across our borders.

(ii) The second was on whether it charged per trip or per km in respect of the local transport services.

The sole witness called by the appellant testified that the appellant operated a transport service in Zimbabwe only.

In each of the tax years in issue the same witness signed the Director's report in which he proclaimed that the appellant operated principally in Africa.

Table 1

Notwithstanding the absorption of running costs by the related party, the respondent maintained, that, the rentals were outrageously low and unrealistic in comparison with the charges imposed by local cross border hauliers.

It applied the related party's 2013 rate of R22.47 on the distance covered in each year to compute the taxable income set out on page 50.2 of exhibit 1, which formed part of the amended assessments.

It was common cause that the rate was in tandem with the market rates charged by third parties in 2013.

At the appeal hearing, the appellant relied on the evidence of one of its directors and public officer and nephew to its 80 year old founder and Managing Director, who has stood in the position of a General Manager since 1995 and has been a member of the executive committee of the Transport Operators Association of Zimbabwe, one HJR and the 374 paged lever arch file, exhibit 1, and one paged exhibit 4.

The respondent called the evidence of two of its Chief Investigations Officers, one of whom was a purported transfer pricing specialist and relied on the 32 paged exhibit 2 and 6 paged exhibit 3A, 3B and 3C in addition to the Rule 11 documents filed of record.

At the pre-trial hearing of 1 June 2015, the following six issues were referred on appeal for determination:

(i) Did the appellant in fact receive the additional income assessed by the respondent, and, if so, what was the source of the income.

(ii) Whether or not the transactions between the appellant and the related party resulted in the appellant being deemed to have received additional income for tax purposes.

(iii) Whether or not the transactions that were being carried out by the appellant with its related company fall within the ambit of section 98 of the Income Tax Act [Chapter 23:06], and, if not, whether the respondent was entitled, as a matter of law, to utilise section 98 of the Income Tax Act.

(iv) In the event of any such additional income, or deemed income, having been correctly assessed by the respondent, whether the respondent was obligated to deduct from that income the expenses which would have been incurred had the appellant undertaken such transactions; in particular, the cost of the diesel that would have been expended in conducting such transactions.

(v) Whether or not SI163 of 2014 is applicable in casu.

(vi) The appropriate penalty.

At the commencement of the appeal hearing, on 14 September 2015, counsel for the appellant abandoned the fourth issue and persisted with the remaining five issues.

The evidence was mostly common cause.

The appellant was incorporated on 12 June 1960 under a different name and adopted its present name on 10 June 1983. The major shareholders of the appellant were the 80 year old Managing Director and a registered trust.

The Managing Director also held the same position in the related party, a company he promoted in 1978.

It was common cause, that, even though the two entities did not have common shareholders, they were related parties….,.

The appellant operated in the local and regional transport industry with a complement of 24 mechanical horses, 83 trailers, and 11 tankers. A common recurring statement in the Director's report in each of the four tax years under consideration was that it was “engaged in transport and operated principally in Africa.”

The operations were manned by 7 Head Office staff, 10 workshop employees, and 110 local, highly skilled articulated truck and trailer, internationally certified drivers with mostly over 10 years driving experience.

The transport business is dependent on the availability of imported fuel, spare parts, and tyres.

In 1996, the appellant had difficulties in sourcing scarce foreign currency locally to service its cross border operations. In the aftermath of the demise of apartheid in South Africa, in 1994, the South African economy became more integrated with other regional economies.

The appellant alleged, that, it staved off the spectre of liquidation by concluding the 1996 rental agreement with the related party through which the related party used the appellant's equipment to carry goods, by road, between South Africa and the designated countries to the north.

The agreement was executed on 28 October 1996 and renewed for three years on 8 October 2003 and then extended for a further 3 years on 16 August 2006. On 6 July 2009, in deference to the introduction of the multi-currency regime in Zimbabwe, the agreement was infused with an indefinite lifespan.

The 2003 agreement was signed by the uncle and nephew on behalf of the related party and the appellant, respectively. The 2006 and 2009 agreements were signed by other representatives of the related party with the nephew.

The notable terms and conditions of the agreements were that the related party used the appellant's excess fleet based on an agreed fixed fee per leg per trip and not on the distance covered.

With effect from 1 July 2009, the rental was fixed at ZAR1,000 per journey for the use by the related party of any locally registered trailer drawn by a South African registered horse. The rental for a horse, and a horse and trailer, were indicated on pages 15 and 16 of exhibit 1.

These rentals were all increased annually by 10%.

In addition, the related party was responsible, at its own cost, for running maintenance and repairs of the equipment comprising of the cost of insurance, tyres, rims, spare parts and fuel and regulatory requirements such as road toll fees, environmental and port health fees attached to the equipment but not to any damage attributable to the negligence of the appellant's drivers or third parties.

The appellant employed and remunerated the local drivers seconded to the related party and did not receive any compensation from the related party.

However, the appellant invoiced the related party for any maintenance and repairs carried out in Zimbabwe on all equipment used by the related party.

It was the uncontroverted testimony of the nephew, that, a portion of the fee was surrendered to the Reserve Bank of Zimbabwe and another used to purchase the requirements of the appellant's local fleet, while the balance was sold on the inter-bank market to meet local expenses and staff salaries and wages.

This situation continued until hyperinflation adversely affected the viability and pricing of the domestic transport services in 2008.

The appellant, however, deliberately failed to disclose the 2003 agreed rentals in appendices C1, C2 and C3 to that agreement that were adopted by both the 2006 and 2009 agreements and the logistical and rental agreements of 1996 but elected to reveal the escalation clause set out on page 12.29 of exhibit 1.

However, the agreed rentals for the rented horses were indicated on page 15 and 16 of the exhibit 1 for each of the four (4) tax years and for each of the routes covered.

The southbound trip to Harare and Kwekwe in Zimbabwe from Lusaka, the Copperbelt, Blantyre and Lilongwe accrued different rentals, denominated in South African rands from the north bound trips as indicated in the following table 2:

Table 2

Transit rates

The northbound routes to Zimbabwe consisted of the Johannesburg to Harare, Johannesburg to Bulawayo, Johannesburg to Midlands, and Johannesburg to Livingstone routes. The rental was the same for each route in each of the four (4) years, respectively.

In 2009 it was R5,050; in 2010 it was R5,555; in 2011 it was R6,400; and, in 2012 it was R7,300.

The north-bound routes from Zimbabwe were the Harare-Lusaka, Harare-Copperbelt, Kwekwe-Blantyre, Harare-Blantyre and Harare-Lilongwe routes.

The rentals were different on each route and in each year. The cheapest was the Harare to Lusaka route ranging between R2,310 in 2009 and R3,420 in 2012. The most expensive was the Harare to Copperbelt route, which ranged between R3,930 in 2009 and R5,700 in 2012.

The transit routes were the Johannesburg to Livingstone and Johannesburg to Harare destined for Lusaka route, for which the related party paid between R2,950 in 2009 and R4,200 in 2012 and the Johannesburg to Harare destined for Copperbelt for which the related party paid R3,650 in 2009 and R5,200 in 2012 to the appellant.

The last transit route was from Johannesburg to Harare destined for Blantyre and from Johannesburg to Harare destined for Lilongwe. The related party paid the appellant between R3,470 in 2009 and R5,000 in 2012 for the route to Blantyre and between R3,930 in 2009 and R5,600 in 2012 for the route to Lilongwe.

The rental for the trailer only was R1,270 in 2011 and R1,450 in 2012.

The south bound journeys were the exact opposite of the north bound ones.

The rates from the Zimbabwe centres to Johannesburg were the same in each year. The rentals were R2,810 in 2009, and R3,091 in 2010 and R3,560 in 2011 and R4,060 in 2012.

The south bound transit rates were Lusaka to Johannesburg via Harare that ranged between R1,320 in 2009 and R1,900 in 2012 while the Copperbelt to Johannesburg via Harare route ranged between R1,570 in 2009 and R2,280 in 2012; and, lastly, the transit rate between Blantyre and Johannesburg via Harare ranged between R1,560 in 2009 and R2,300 in 2012 while the Lilongwe to Johannesburg via Harare route ranged between R1,740 in 2009 and R2,500 in 2012.

The related party paid R1,270 for the trailer per leg per trip on each of these routes. In 2012, the north bound trailer rental was R1,450.

The journey from Johannesburg to Harare and back consisted of two trips while the journey from Johannesburg to any of the destinations outside Zimbabwe and back consisted of four (4) trips.

The maintenance and running expenses incurred by the related party, in respect of 21 mechanical horses, between 1 January 2009 and 31 December 2012 amounted to R1,854,841 for spares and maintenance…,.; US$436,983 for labour on repairs and maintenance.

In the same period, tyres worth R1,151,777 were purchased by the related party and R536,021=51 was expensed on 69 trailers. The related party also spent the sum of R9,128,122 on fuel, US$1,809,460 on insurance, and US$40,992 on lubricants.

The mechanical horses traversed 1,771,964km…, during the four year period in question. The distance covered by each identified mechanical horse, and the cost of maintenance and running expenses, tyres and fuel in each year was listed on pages 23 to 24.6 of exhibit 1.

The yearly amounts expensed on each line item by the related party on the leased equipment was conveniently summarised by the appellant on pp24 and 42.5 of exhibit 1.

I reproduce the essential costs in Table 3 below.

Table 3: Expenses paid by related party on leased equipment

The respondent derived the gross charges of cross-border transactions from the third party verification exercise that it conducted on three local cross-border hauliers, TCS, CT and CCC.

It wrote exhibits 3A, 3B and 3C between 2 July 2013 and 16 September 2013 seeking the gross rates in both United States dollars and South African rands charged in respect of each tax year under investigation on 19 regional routes traversed by the related party.

The responses…, were received between 5 August and 19 September 2013.

These parties did not offer a separate truck and trailer service. They factored into the freight rates the operational costs of fuel, vehicle inspection, toll and environmental management fees, insurances and driver's allowances, the distance covered, the nature of the cargo, and competition.

The freight rates ranged between US$1.60 per km and US$2.30 per km for both south and north bound routes during the period to the end of the 2012 tax year.

In respect of the 2013 tax year, the average rate was US$2.50 per km.

One of the local hauliers supplied very detailed information on the freight rates. It used the cost plus mark-up model where the mark-up ranged between 7% and 12%. It charged between US$750 and US$1,300 for the south bound routes and between US$1,300 and US$2,500 for the north bound routes. While it charged per trip like the related party, it translated these charges to between US$1.60 and US$2.30 per km.

The nephew listed 11 advantages that accrued to the appellant from the rental agreement.

The appellant was, inter alia, assured of prompt and steady flow of income and a regular foreign currency supply, accounted through the Reserve Bank of Zimbabwe CD3 forms, to meet local expenses from a single client; it's fleet was maintained at no cost to it and prevented from deteriorating from disuse; it was able to offer limited local transport services; it did not incur marketing and clearing and depot expenses in South Africa, Zimbabwe, Zambia and Malawi; it had a guaranteed free source of fuel at its depot in Zimbabwe for local use; and, lastly it was able to retain a pool of experienced internationally certified drivers starving it off liquidation and heavy retrenchment costs.

On the other hand, the related party benefited from the use of authorised equipment on Zambian, Malawian, Batswana and Mozambican public roads and highly skilled drivers who were unable and unwilling to secure work permits in South Africa.

It was common cause, that, the respondent treated the appellant as a cross-border haulier and applied the 2013 freight rate charged by the related party, of R22.47 per km, retrospectively to each of the tax years in dispute. It ignored the aggregate expenses of R21.20 per km incurred in raising this amount.

It computed the gross revenue earned from the leased equipment by multiplying this amount by the number of kilometres travelled in each year and converted the total to United States dollars using the uniform and inaccurate cross rate of 1US$ to R10.

The respondent further calculated the yearly running maintenance and repair costs expensed on the leased trucks and converted it to United States dollars using the inaccurate exchange rate of 1US$ to R10 and added the figure to the transport services income in the annual financial statements derived from the CD3 forms.

It then deducted the aggregate amount from the gross revenue earned from the leased equipment aggregate figure from the CD3 revenue and running maintenance and repair costs. The variance, whether positive or negative, was added to income in the computation of taxable income.

The appellant gave contrary evidence in two respects:

(i) The first was on whether it operated a transport service in Zimbabwe only or whether it also operated across our borders.

(ii) The second was on whether it charged per trip or per km in respect of the local transport services.

The sole witness called by the appellant testified that the appellant operated a transport service in Zimbabwe only.

In each of the tax years in issue the same witness signed the Director's report in which he proclaimed that the appellant operated principally in Africa.

In regards to the second aspect, he averred, in paragraph 39 of his statement, which he adopted in his evidence in chief, that, the appellant charged a United States dollar denominated daily rate.

At p50.1 paragraph 12 of exhibit 1, the appellant's South African based external accountants wrote that “the appellant does operate its own vehicles locally within Zimbabwe and in those instances it charges a US$ rate per km.”

In fact, under cross-examination, the witness maintained, that, the local expenses were based on operational overheads comprised of running costs, lubricants, fuels, salaries and wages, and not on the distance or the nature of the load.

He maintained, that, the dominant intention behind these charges was to cover overheads and remain viable and not the avoidance or reduction of tax. He was adamant, that, even though the appellant was a perpetual loss maker before, during, and after the tax years in question, the rentals were market based.

He sought to demonstrate, by reference to a random selection of charges on p31.3 to 31.5 of exhibit 1 that the CD3 income constituted 42% of the related party's Group profit….,.

It was common cause, that, the fees charged on north bound routes were higher than those on south bound routes because the former carried finished products while the latter conveyed raw materials. It was common cause, that, the exchange rate used in the computation of the disputed income tax of 1US$ to R10 was inaccurate in respect of each of the tax years under consideration.

The sole witness applied the “correct rates” used by the related party in each of these tax years to the formula invoked by the respondent including the use of the wrong exchange rate and produced different results in exhibit 4.

The correct gross revenue rates per km were ZAR16.55 in 2009; ZAR17.52 in 2010; ZAR19.45 in 2011; and ZAR20.04 in 2012.

The appellant would have incurred a loss of US$129,377 instead of a profit of US$65,433=97 in 2009; a loss of US$33,160 instead of a profit of US$217,185=16 in 2010; a loss of US$64,793 instead of a profit of US$73,119=91 in 2011 and a loss of US$53,304 and not a profit of US$56,063=46 in 2012….,.

The respondent did not use these comparative rates but the 2013 figure suggested by the appellant's South African based external accountants as acknowledged by the Commissioner-General in her determination of 14 November 2014…,. She wrote that:

“The basis or rate of R22.47 that was used to determine the taxable income on estimated assessments was the rate that was used by yourselves in the tax year 2013. In the absence of information on other companies that could be compared with the appellant dealings when they were determining taxable income, this rate becomes the only basis for estimating income. Please note that if you have information pertaining to the actual and correct rates that were used in the tax years under contention, you are free to submit it for consideration.”

I turn to determine the issues that were referred on appeal.

Determination of the issues

Did the appellant in fact receive the additional income assessed by the respondent, and, if so, what was the source of the income?

It was common cause, that, the appellant did not receive the additional income that was assessed by the respondent. Rather, the respondent imputed notional income to the appellant by invoking the provisions of section 98 of the Income Tax Act.

I hold, as a matter of hard fact, that, the appellant did not receive the assessed income.

Whether or not the transactions between the appellant and the related party resulted in the appellant being deemed to have received additional income for tax purposes?

It seems to me, that, the second issue requires some recasting to reflect the real dispute between the parties.

The issue contemplated by the parties was whether or not the respondent was entitled to deem additional income from the nature of the transactions between the two related parties.

The respondent did not in any way suggest that these undertakings constituted simulated transactions.

Accordingly, the sentiments pronounced in Inland Revenue Commissioners v Duke of Westminister [1936] AC 1 (HL)…, and adopted by the Federal Supreme Court in The Master v Thompson's Estate 1961 (2) SA 20 (FSC)…, and Barnett v Commissioner of Taxes 1959 (2) SA 713 (FSC)…, and the South African cases of Commissioner for Inland Revenue v Estate Kohler 1953 (2) SA 584 (A)…, and MacKay v Fey NO and Anor 2006 (3) SA 182 (SCA)…, have no application in the present matter.

While the respondent did not challenge the genuineness of the agreements. it compared the rates charged by the appellant with the charges imposed by the related party to its own clients, and the charges of some of the local trans-border hauliers and determined, that, the charges were deliberately designed to avoid the payment of income tax from the leased equipment.

The respondent accordingly invoked the provisions of section 98 of the Income Tax Act to bring the appellant to book....,.

Counsel for the appellant submitted, that, the provisions of section 98 of the Income Tax Act were not applicable to the transactions between the appellant and the related party, both from a factual and legal perspective, while counsel for the respondent made contrary submissions....,.

Section 98 of the Income Tax Act states:

“98 Tax avoidance generally

Where any transaction, operation or scheme (including a transaction, operation or scheme involving the alienation of property) has been entered into or carried out, which has the effect of avoiding or postponing liability for any tax or of reducing the amount of such liability, and which, in the opinion of the Commissioner, having regard to the circumstances under which the transaction, operation or scheme was entered into or carried out —

(a) Was entered into or carried out by means or in a manner which would not normally be employed in the entering into or carrying out of a transaction, operation or scheme of the nature of the transaction, operation or scheme in question; or

(b) Has created rights or obligations which would not normally be created between persons dealing at arm's length under a transaction, operation or scheme of the nature of the transaction, operation or scheme in question; and the Commissioner is of the opinion, that, the avoidance or postponement of such liability or the reduction of the amount of such liability was the sole purpose or one of the main purposes of the transaction, operation or scheme, the Commissioner shall determine the liability for any tax and the amount thereof as if the transaction, operation or scheme had not been entered into or carried out, or in such manner as in the circumstances of the case he considers appropriate for the prevention or diminution of such avoidance, postponement, or reduction.”

The requisite elements that must all be fulfilled before the Commissioner can invoke the section were set out in Secretary for Inland Revenue v Geustyn, Forsyth and Joubert 1971 (3) SA 567 (A)…, thus:

(a) A transaction, operation or scheme entered into or carried out;

(b) Which has the effect of avoiding or postponing liability for tax on income or reducing the amount thereof, and which;

(c) In the opinion of the Secretary, having regard of the circumstances under which the transaction, operation or scheme was entered into or carried out was entered into or carried out;

(i) Was entered into or carried out by means or in a manner which would not normally be employed in the entering into or carrying out of a transaction, operation or scheme of the nature of the transaction, operation or scheme in question;

(ii) Has created rights or obligations which would not normally be created between persons dealing at arm's length under a transaction, operation or scheme of the nature of the transaction, operation or scheme in question; and that

(d) The avoidance, postponement, or reduction of the amount of such liability was, in the opinion of the Secretary, the sole or one of the main purposes of the transaction, operation or scheme.

See ITC 1631 (1997) 60 SATC 63 (Z)…,.; Commissioner of Taxes v F 1976 (1) RLR 106 (A)…,.; A v Commissioner of Taxes 1985 (2) ZLR 223 (H)…,.; G Bank Zimbabwe Ltd v Zimbabwe Revenue Authority 2015 (1) ZLR 348 (H)…,.; H Bank Zimbabwe Ltd v Zimbabwe Revenue Authority HH575-15.

Whether or not the agreement constituted a transaction, operation or scheme?

It was common ground that the agreements between the related parties fell into the category of a transaction, operation or scheme.

Whether the agreement had the effect of avoiding, postponing, or reducing the income tax liability of the appellant?

Counsel for the appellant contended, that, the transactions were conceived in circumstances that
precluded the contemplated effect of avoiding, postponing, or reducing the appellant's taxable income.

Counsel for the respondent argued that they had such an effect.

In Commissioner of Taxes v F 1976 (1) RLR 106 (A)…, MACDONALD JP described it as the “stipulated effect” and held that the Commissioner was obliged to exercise his powers under the section if the transaction, operation or scheme had the stipulated effect.

The practical results of the agreements were captured in the unaudited financial statements of the appellant in respect of each tax year.

It made losses of US$41,675 in 2009; US$115,920 in 2010; US$138,663 in 2011; and US$94,535 in 2012. It was common cause that the appellant made assessed losses before, during, and after the period covered by the assessments.

The appellant never declared dividends despite the bullish going concern Annual Reports.

In 2010, 2011 and 2012 it procured loans from the related party of US$36,412, US$82,559 and US$114,346, respectively.

That Zimbabwe taxes were in the related parties contemplation when they executed the 2003 agreement was apparent from the note on p12.29 of exhibit 1 which reads:

“The rates set out above may be adjusted from time to time to provide for any taxes or other charges levied by Central Government or any local authority in Zimbabwe, as the case may be, which may directly or indirectly effect the said rates, provided such increase will only be effective on the first day of the calendar month following the month in which the related party has received written notice thereof from the appellant.”

Accordingly, I agree with counsel for the respondent, that, the agreements had the stipulated effect of avoiding or reducing the appellant's liability for income tax.

Table 1

Notwithstanding the absorption of running costs by the related party, the respondent maintained, that, the rentals were outrageously low and unrealistic in comparison with the charges imposed by local cross border hauliers.

It applied the related party's 2013 rate of R22.47 on the distance covered in each year to compute the taxable income set out on page 50.2 of exhibit 1, which formed part of the amended assessments.

It was common cause that the rate was in tandem with the market rates charged by third parties in 2013.

At the appeal hearing, the appellant relied on the evidence of one of its directors and public officer and nephew to its 80 year old founder and Managing Director, who has stood in the position of a General Manager since 1995 and has been a member of the executive committee of the Transport Operators Association of Zimbabwe, one HJR and the 374 paged lever arch file, exhibit 1, and one paged exhibit 4.

The respondent called the evidence of two of its Chief Investigations Officers, one of whom was a purported transfer pricing specialist and relied on the 32 paged exhibit 2 and 6 paged exhibit 3A, 3B and 3C in addition to the Rule 11 documents filed of record.

At the pre-trial hearing of 1 June 2015, the following six issues were referred on appeal for determination:

(i) Did the appellant in fact receive the additional income assessed by the respondent, and, if so, what was the source of the income.

(ii) Whether or not the transactions between the appellant and the related party resulted in the appellant being deemed to have received additional income for tax purposes.

(iii) Whether or not the transactions that were being carried out by the appellant with its related company fall within the ambit of section 98 of the Income Tax Act [Chapter 23:06], and, if not, whether the respondent was entitled, as a matter of law, to utilise section 98 of the Income Tax Act.

(iv) In the event of any such additional income, or deemed income, having been correctly assessed by the respondent, whether the respondent was obligated to deduct from that income the expenses which would have been incurred had the appellant undertaken such transactions; in particular, the cost of the diesel that would have been expended in conducting such transactions.

(v) Whether or not SI163 of 2014 is applicable in casu.

(vi) The appropriate penalty.

At the commencement of the appeal hearing, on 14 September 2015, counsel for the appellant abandoned the fourth issue and persisted with the remaining five issues.

The evidence was mostly common cause.

The appellant was incorporated on 12 June 1960 under a different name and adopted its present name on 10 June 1983. The major shareholders of the appellant were the 80 year old Managing Director and a registered trust.

The Managing Director also held the same position in the related party, a company he promoted in 1978.

It was common cause, that, even though the two entities did not have common shareholders, they were related parties….,.

The appellant operated in the local and regional transport industry with a complement of 24 mechanical horses, 83 trailers, and 11 tankers. A common recurring statement in the Director's report in each of the four tax years under consideration was that it was “engaged in transport and operated principally in Africa.”

The operations were manned by 7 Head Office staff, 10 workshop employees, and 110 local, highly skilled articulated truck and trailer, internationally certified drivers with mostly over 10 years driving experience.

The transport business is dependent on the availability of imported fuel, spare parts, and tyres.

In 1996, the appellant had difficulties in sourcing scarce foreign currency locally to service its cross border operations. In the aftermath of the demise of apartheid in South Africa, in 1994, the South African economy became more integrated with other regional economies.

The appellant alleged, that, it staved off the spectre of liquidation by concluding the 1996 rental agreement with the related party through which the related party used the appellant's equipment to carry goods, by road, between South Africa and the designated countries to the north.

The agreement was executed on 28 October 1996 and renewed for three years on 8 October 2003 and then extended for a further 3 years on 16 August 2006. On 6 July 2009, in deference to the introduction of the multi-currency regime in Zimbabwe, the agreement was infused with an indefinite lifespan.

The 2003 agreement was signed by the uncle and nephew on behalf of the related party and the appellant, respectively. The 2006 and 2009 agreements were signed by other representatives of the related party with the nephew.

The notable terms and conditions of the agreements were that the related party used the appellant's excess fleet based on an agreed fixed fee per leg per trip and not on the distance covered.

With effect from 1 July 2009, the rental was fixed at ZAR1,000 per journey for the use by the related party of any locally registered trailer drawn by a South African registered horse. The rental for a horse, and a horse and trailer, were indicated on pages 15 and 16 of exhibit 1.

These rentals were all increased annually by 10%.

In addition, the related party was responsible, at its own cost, for running maintenance and repairs of the equipment comprising of the cost of insurance, tyres, rims, spare parts and fuel and regulatory requirements such as road toll fees, environmental and port health fees attached to the equipment but not to any damage attributable to the negligence of the appellant's drivers or third parties.

The appellant employed and remunerated the local drivers seconded to the related party and did not receive any compensation from the related party.

However, the appellant invoiced the related party for any maintenance and repairs carried out in Zimbabwe on all equipment used by the related party.

It was the uncontroverted testimony of the nephew, that, a portion of the fee was surrendered to the Reserve Bank of Zimbabwe and another used to purchase the requirements of the appellant's local fleet, while the balance was sold on the inter-bank market to meet local expenses and staff salaries and wages.

This situation continued until hyperinflation adversely affected the viability and pricing of the domestic transport services in 2008.

The appellant, however, deliberately failed to disclose the 2003 agreed rentals in appendices C1, C2 and C3 to that agreement that were adopted by both the 2006 and 2009 agreements and the logistical and rental agreements of 1996 but elected to reveal the escalation clause set out on page 12.29 of exhibit 1.

However, the agreed rentals for the rented horses were indicated on page 15 and 16 of the exhibit 1 for each of the four (4) tax years and for each of the routes covered.

The southbound trip to Harare and Kwekwe in Zimbabwe from Lusaka, the Copperbelt, Blantyre and Lilongwe accrued different rentals, denominated in South African rands from the north bound trips as indicated in the following table 2:

Table 2

Transit rates

The northbound routes to Zimbabwe consisted of the Johannesburg to Harare, Johannesburg to Bulawayo, Johannesburg to Midlands, and Johannesburg to Livingstone routes. The rental was the same for each route in each of the four (4) years, respectively.

In 2009 it was R5,050; in 2010 it was R5,555; in 2011 it was R6,400; and, in 2012 it was R7,300.

The north-bound routes from Zimbabwe were the Harare-Lusaka, Harare-Copperbelt, Kwekwe-Blantyre, Harare-Blantyre and Harare-Lilongwe routes.

The rentals were different on each route and in each year. The cheapest was the Harare to Lusaka route ranging between R2,310 in 2009 and R3,420 in 2012. The most expensive was the Harare to Copperbelt route, which ranged between R3,930 in 2009 and R5,700 in 2012.

The transit routes were the Johannesburg to Livingstone and Johannesburg to Harare destined for Lusaka route, for which the related party paid between R2,950 in 2009 and R4,200 in 2012 and the Johannesburg to Harare destined for Copperbelt for which the related party paid R3,650 in 2009 and R5,200 in 2012 to the appellant.

The last transit route was from Johannesburg to Harare destined for Blantyre and from Johannesburg to Harare destined for Lilongwe. The related party paid the appellant between R3,470 in 2009 and R5,000 in 2012 for the route to Blantyre and between R3,930 in 2009 and R5,600 in 2012 for the route to Lilongwe.

The rental for the trailer only was R1,270 in 2011 and R1,450 in 2012.

The south bound journeys were the exact opposite of the north bound ones.

The rates from the Zimbabwe centres to Johannesburg were the same in each year. The rentals were R2,810 in 2009, and R3,091 in 2010 and R3,560 in 2011 and R4,060 in 2012.

The south bound transit rates were Lusaka to Johannesburg via Harare that ranged between R1,320 in 2009 and R1,900 in 2012 while the Copperbelt to Johannesburg via Harare route ranged between R1,570 in 2009 and R2,280 in 2012; and, lastly, the transit rate between Blantyre and Johannesburg via Harare ranged between R1,560 in 2009 and R2,300 in 2012 while the Lilongwe to Johannesburg via Harare route ranged between R1,740 in 2009 and R2,500 in 2012.

The related party paid R1,270 for the trailer per leg per trip on each of these routes. In 2012, the north bound trailer rental was R1,450.

The journey from Johannesburg to Harare and back consisted of two trips while the journey from Johannesburg to any of the destinations outside Zimbabwe and back consisted of four (4) trips.

The maintenance and running expenses incurred by the related party, in respect of 21 mechanical horses, between 1 January 2009 and 31 December 2012 amounted to R1,854,841 for spares and maintenance…,.; US$436,983 for labour on repairs and maintenance.

In the same period, tyres worth R1,151,777 were purchased by the related party and R536,021=51 was expensed on 69 trailers. The related party also spent the sum of R9,128,122 on fuel, US$1,809,460 on insurance, and US$40,992 on lubricants.

The mechanical horses traversed 1,771,964km…, during the four year period in question. The distance covered by each identified mechanical horse, and the cost of maintenance and running expenses, tyres and fuel in each year was listed on pages 23 to 24.6 of exhibit 1.

The yearly amounts expensed on each line item by the related party on the leased equipment was conveniently summarised by the appellant on pp24 and 42.5 of exhibit 1.

I reproduce the essential costs in Table 3 below.

Table 3: Expenses paid by related party on leased equipment

The respondent derived the gross charges of cross-border transactions from the third party verification exercise that it conducted on three local cross-border hauliers, TCS, CT and CCC.

It wrote exhibits 3A, 3B and 3C between 2 July 2013 and 16 September 2013 seeking the gross rates in both United States dollars and South African rands charged in respect of each tax year under investigation on 19 regional routes traversed by the related party.

The responses…, were received between 5 August and 19 September 2013.

These parties did not offer a separate truck and trailer service. They factored into the freight rates the operational costs of fuel, vehicle inspection, toll and environmental management fees, insurances and driver's allowances, the distance covered, the nature of the cargo, and competition.

The freight rates ranged between US$1.60 per km and US$2.30 per km for both south and north bound routes during the period to the end of the 2012 tax year.

In respect of the 2013 tax year, the average rate was US$2.50 per km.

One of the local hauliers supplied very detailed information on the freight rates. It used the cost plus mark-up model where the mark-up ranged between 7% and 12%. It charged between US$750 and US$1,300 for the south bound routes and between US$1,300 and US$2,500 for the north bound routes. While it charged per trip like the related party, it translated these charges to between US$1.60 and US$2.30 per km.

The nephew listed 11 advantages that accrued to the appellant from the rental agreement.

The appellant was, inter alia, assured of prompt and steady flow of income and a regular foreign currency supply, accounted through the Reserve Bank of Zimbabwe CD3 forms, to meet local expenses from a single client; it's fleet was maintained at no cost to it and prevented from deteriorating from disuse; it was able to offer limited local transport services; it did not incur marketing and clearing and depot expenses in South Africa, Zimbabwe, Zambia and Malawi; it had a guaranteed free source of fuel at its depot in Zimbabwe for local use; and, lastly it was able to retain a pool of experienced internationally certified drivers starving it off liquidation and heavy retrenchment costs.

On the other hand, the related party benefited from the use of authorised equipment on Zambian, Malawian, Batswana and Mozambican public roads and highly skilled drivers who were unable and unwilling to secure work permits in South Africa.

It was common cause, that, the respondent treated the appellant as a cross-border haulier and applied the 2013 freight rate charged by the related party, of R22.47 per km, retrospectively to each of the tax years in dispute. It ignored the aggregate expenses of R21.20 per km incurred in raising this amount.

It computed the gross revenue earned from the leased equipment by multiplying this amount by the number of kilometres travelled in each year and converted the total to United States dollars using the uniform and inaccurate cross rate of 1US$ to R10.

The respondent further calculated the yearly running maintenance and repair costs expensed on the leased trucks and converted it to United States dollars using the inaccurate exchange rate of 1US$ to R10 and added the figure to the transport services income in the annual financial statements derived from the CD3 forms.

It then deducted the aggregate amount from the gross revenue earned from the leased equipment aggregate figure from the CD3 revenue and running maintenance and repair costs. The variance, whether positive or negative, was added to income in the computation of taxable income.

The appellant gave contrary evidence in two respects:

(i) The first was on whether it operated a transport service in Zimbabwe only or whether it also operated across our borders.

(ii) The second was on whether it charged per trip or per km in respect of the local transport services.

The sole witness called by the appellant testified that the appellant operated a transport service in Zimbabwe only.

In each of the tax years in issue the same witness signed the Director's report in which he proclaimed that the appellant operated principally in Africa.

In regards to the second aspect, he averred, in paragraph 39 of his statement, which he adopted in his evidence in chief, that, the appellant charged a United States dollar denominated daily rate.

At p50.1 paragraph 12 of exhibit 1, the appellant's South African based external accountants wrote that “the appellant does operate its own vehicles locally within Zimbabwe and in those instances it charges a US$ rate per km.”

In fact, under cross-examination, the witness maintained, that, the local expenses were based on operational overheads comprised of running costs, lubricants, fuels, salaries and wages, and not on the distance or the nature of the load.

He maintained, that, the dominant intention behind these charges was to cover overheads and remain viable and not the avoidance or reduction of tax. He was adamant, that, even though the appellant was a perpetual loss maker before, during, and after the tax years in question, the rentals were market based.

He sought to demonstrate, by reference to a random selection of charges on p31.3 to 31.5 of exhibit 1 that the CD3 income constituted 42% of the related party's Group profit….,.

It was common cause, that, the fees charged on north bound routes were higher than those on south bound routes because the former carried finished products while the latter conveyed raw materials. It was common cause, that, the exchange rate used in the computation of the disputed income tax of 1US$ to R10 was inaccurate in respect of each of the tax years under consideration.

The sole witness applied the “correct rates” used by the related party in each of these tax years to the formula invoked by the respondent including the use of the wrong exchange rate and produced different results in exhibit 4.

The correct gross revenue rates per km were ZAR16.55 in 2009; ZAR17.52 in 2010; ZAR19.45 in 2011; and ZAR20.04 in 2012.

The appellant would have incurred a loss of US$129,377 instead of a profit of US$65,433=97 in 2009; a loss of US$33,160 instead of a profit of US$217,185=16 in 2010; a loss of US$64,793 instead of a profit of US$73,119=91 in 2011 and a loss of US$53,304 and not a profit of US$56,063=46 in 2012….,.

The respondent did not use these comparative rates but the 2013 figure suggested by the appellant's South African based external accountants as acknowledged by the Commissioner-General in her determination of 14 November 2014…,. She wrote that:

“The basis or rate of R22.47 that was used to determine the taxable income on estimated assessments was the rate that was used by yourselves in the tax year 2013. In the absence of information on other companies that could be compared with the appellant dealings when they were determining taxable income, this rate becomes the only basis for estimating income. Please note that if you have information pertaining to the actual and correct rates that were used in the tax years under contention, you are free to submit it for consideration.”

I turn to determine the issues that were referred on appeal.

Determination of the issues

Did the appellant in fact receive the additional income assessed by the respondent, and, if so, what was the source of the income?

It was common cause, that, the appellant did not receive the additional income that was assessed by the respondent. Rather, the respondent imputed notional income to the appellant by invoking the provisions of section 98 of the Income Tax Act.

I hold, as a matter of hard fact, that, the appellant did not receive the assessed income.

Whether or not the transactions between the appellant and the related party resulted in the appellant being deemed to have received additional income for tax purposes?

It seems to me, that, the second issue requires some recasting to reflect the real dispute between the parties.

The issue contemplated by the parties was whether or not the respondent was entitled to deem additional income from the nature of the transactions between the two related parties.

The respondent did not in any way suggest that these undertakings constituted simulated transactions.

Accordingly, the sentiments pronounced in Inland Revenue Commissioners v Duke of Westminister [1936] AC 1 (HL)…, and adopted by the Federal Supreme Court in The Master v Thompson's Estate 1961 (2) SA 20 (FSC)…, and Barnett v Commissioner of Taxes 1959 (2) SA 713 (FSC)…, and the South African cases of Commissioner for Inland Revenue v Estate Kohler 1953 (2) SA 584 (A)…, and MacKay v Fey NO and Anor 2006 (3) SA 182 (SCA)…, have no application in the present matter.

While the respondent did not challenge the genuineness of the agreements. it compared the rates charged by the appellant with the charges imposed by the related party to its own clients, and the charges of some of the local trans-border hauliers and determined, that, the charges were deliberately designed to avoid the payment of income tax from the leased equipment.

The respondent accordingly invoked the provisions of section 98 of the Income Tax Act to bring the appellant to book....,.

Counsel for the appellant submitted, that, the provisions of section 98 of the Income Tax Act were not applicable to the transactions between the appellant and the related party, both from a factual and legal perspective, while counsel for the respondent made contrary submissions....,.

Section 98 of the Income Tax Act states:

“98 Tax avoidance generally

Where any transaction, operation or scheme (including a transaction, operation or scheme involving the alienation of property) has been entered into or carried out, which has the effect of avoiding or postponing liability for any tax or of reducing the amount of such liability, and which, in the opinion of the Commissioner, having regard to the circumstances under which the transaction, operation or scheme was entered into or carried out —

(a) Was entered into or carried out by means or in a manner which would not normally be employed in the entering into or carrying out of a transaction, operation or scheme of the nature of the transaction, operation or scheme in question; or

(b) Has created rights or obligations which would not normally be created between persons dealing at arm's length under a transaction, operation or scheme of the nature of the transaction, operation or scheme in question; and the Commissioner is of the opinion, that, the avoidance or postponement of such liability or the reduction of the amount of such liability was the sole purpose or one of the main purposes of the transaction, operation or scheme, the Commissioner shall determine the liability for any tax and the amount thereof as if the transaction, operation or scheme had not been entered into or carried out, or in such manner as in the circumstances of the case he considers appropriate for the prevention or diminution of such avoidance, postponement, or reduction.”

The requisite elements that must all be fulfilled before the Commissioner can invoke the section were set out in Secretary for Inland Revenue v Geustyn, Forsyth and Joubert 1971 (3) SA 567 (A)…, thus:

(a) A transaction, operation or scheme entered into or carried out;

(b) Which has the effect of avoiding or postponing liability for tax on income or reducing the amount thereof, and which;

(c) In the opinion of the Secretary, having regard of the circumstances under which the transaction, operation or scheme was entered into or carried out was entered into or carried out;

(i) Was entered into or carried out by means or in a manner which would not normally be employed in the entering into or carrying out of a transaction, operation or scheme of the nature of the transaction, operation or scheme in question;

(ii) Has created rights or obligations which would not normally be created between persons dealing at arm's length under a transaction, operation or scheme of the nature of the transaction, operation or scheme in question; and that

(d) The avoidance, postponement, or reduction of the amount of such liability was, in the opinion of the Secretary, the sole or one of the main purposes of the transaction, operation or scheme.

See ITC 1631 (1997) 60 SATC 63 (Z)…,.; Commissioner of Taxes v F 1976 (1) RLR 106 (A)…,.; A v Commissioner of Taxes 1985 (2) ZLR 223 (H)…,.; G Bank Zimbabwe Ltd v Zimbabwe Revenue Authority 2015 (1) ZLR 348 (H)…,.; H Bank Zimbabwe Ltd v Zimbabwe Revenue Authority HH575-15.

Whether or not the agreement constituted a transaction, operation or scheme?

It was common ground that the agreements between the related parties fell into the category of a transaction, operation or scheme.

Whether the agreement had the effect of avoiding, postponing, or reducing the income tax liability of the appellant?

Counsel for the appellant contended, that, the transactions were conceived in circumstances that
precluded the contemplated effect of avoiding, postponing, or reducing the appellant's taxable income.

Counsel for the respondent argued that they had such an effect.

In Commissioner of Taxes v F 1976 (1) RLR 106 (A)…, MACDONALD JP described it as the “stipulated effect” and held that the Commissioner was obliged to exercise his powers under the section if the transaction, operation or scheme had the stipulated effect.

The practical results of the agreements were captured in the unaudited financial statements of the appellant in respect of each tax year.

It made losses of US$41,675 in 2009; US$115,920 in 2010; US$138,663 in 2011; and US$94,535 in 2012. It was common cause that the appellant made assessed losses before, during, and after the period covered by the assessments.

The appellant never declared dividends despite the bullish going concern Annual Reports.

In 2010, 2011 and 2012 it procured loans from the related party of US$36,412, US$82,559 and US$114,346, respectively.

That Zimbabwe taxes were in the related parties contemplation when they executed the 2003 agreement was apparent from the note on p12.29 of exhibit 1 which reads:

“The rates set out above may be adjusted from time to time to provide for any taxes or other charges levied by Central Government or any local authority in Zimbabwe, as the case may be, which may directly or indirectly effect the said rates, provided such increase will only be effective on the first day of the calendar month following the month in which the related party has received written notice thereof from the appellant.”

Accordingly, I agree with counsel for the respondent, that, the agreements had the stipulated effect of avoiding or reducing the appellant's liability for income tax....,.

The offence of tax avoidance was described by MACDONALD JP in Commissioner of Taxes v F 1976 (1) RLR 106 (A), in rather strong language, as an evil.

Of course, taxpayers are allowed to employ legitimate means to lessen their tax burden and these do not invite public opprobrium. Tax avoidance certainly places the burden of taxation on other taxpayers to the exclusion of the offender.

Courts emphasize both personal and general deterrence in imposing suitable penalties....,.

The interests of society require that taxpayers abide by the law and pay their fair share of taxes. Those who deliberately break the law must feel the pinch.

Table 1

Notwithstanding the absorption of running costs by the related party, the respondent maintained, that, the rentals were outrageously low and unrealistic in comparison with the charges imposed by local cross border hauliers.

It applied the related party's 2013 rate of R22.47 on the distance covered in each year to compute the taxable income set out on page 50.2 of exhibit 1, which formed part of the amended assessments.

It was common cause that the rate was in tandem with the market rates charged by third parties in 2013.

At the appeal hearing, the appellant relied on the evidence of one of its directors and public officer and nephew to its 80 year old founder and Managing Director, who has stood in the position of a General Manager since 1995 and has been a member of the executive committee of the Transport Operators Association of Zimbabwe, one HJR and the 374 paged lever arch file, exhibit 1, and one paged exhibit 4.

The respondent called the evidence of two of its Chief Investigations Officers, one of whom was a purported transfer pricing specialist and relied on the 32 paged exhibit 2 and 6 paged exhibit 3A, 3B and 3C in addition to the Rule 11 documents filed of record.

At the pre-trial hearing of 1 June 2015, the following six issues were referred on appeal for determination:

(i) Did the appellant in fact receive the additional income assessed by the respondent, and, if so, what was the source of the income.

(ii) Whether or not the transactions between the appellant and the related party resulted in the appellant being deemed to have received additional income for tax purposes.

(iii) Whether or not the transactions that were being carried out by the appellant with its related company fall within the ambit of section 98 of the Income Tax Act [Chapter 23:06], and, if not, whether the respondent was entitled, as a matter of law, to utilise section 98 of the Income Tax Act.

(iv) In the event of any such additional income, or deemed income, having been correctly assessed by the respondent, whether the respondent was obligated to deduct from that income the expenses which would have been incurred had the appellant undertaken such transactions; in particular, the cost of the diesel that would have been expended in conducting such transactions.

(v) Whether or not SI163 of 2014 is applicable in casu.

(vi) The appropriate penalty.

At the commencement of the appeal hearing, on 14 September 2015, counsel for the appellant abandoned the fourth issue and persisted with the remaining five issues.

The evidence was mostly common cause.

The appellant was incorporated on 12 June 1960 under a different name and adopted its present name on 10 June 1983. The major shareholders of the appellant were the 80 year old Managing Director and a registered trust.

The Managing Director also held the same position in the related party, a company he promoted in 1978.

It was common cause, that, even though the two entities did not have common shareholders, they were related parties….,.

The appellant operated in the local and regional transport industry with a complement of 24 mechanical horses, 83 trailers, and 11 tankers. A common recurring statement in the Director's report in each of the four tax years under consideration was that it was “engaged in transport and operated principally in Africa.”

The operations were manned by 7 Head Office staff, 10 workshop employees, and 110 local, highly skilled articulated truck and trailer, internationally certified drivers with mostly over 10 years driving experience.

The transport business is dependent on the availability of imported fuel, spare parts, and tyres.

In 1996, the appellant had difficulties in sourcing scarce foreign currency locally to service its cross border operations. In the aftermath of the demise of apartheid in South Africa, in 1994, the South African economy became more integrated with other regional economies.

The appellant alleged, that, it staved off the spectre of liquidation by concluding the 1996 rental agreement with the related party through which the related party used the appellant's equipment to carry goods, by road, between South Africa and the designated countries to the north.

The agreement was executed on 28 October 1996 and renewed for three years on 8 October 2003 and then extended for a further 3 years on 16 August 2006. On 6 July 2009, in deference to the introduction of the multi-currency regime in Zimbabwe, the agreement was infused with an indefinite lifespan.

The 2003 agreement was signed by the uncle and nephew on behalf of the related party and the appellant, respectively. The 2006 and 2009 agreements were signed by other representatives of the related party with the nephew.

The notable terms and conditions of the agreements were that the related party used the appellant's excess fleet based on an agreed fixed fee per leg per trip and not on the distance covered.

With effect from 1 July 2009, the rental was fixed at ZAR1,000 per journey for the use by the related party of any locally registered trailer drawn by a South African registered horse. The rental for a horse, and a horse and trailer, were indicated on pages 15 and 16 of exhibit 1.

These rentals were all increased annually by 10%.

In addition, the related party was responsible, at its own cost, for running maintenance and repairs of the equipment comprising of the cost of insurance, tyres, rims, spare parts and fuel and regulatory requirements such as road toll fees, environmental and port health fees attached to the equipment but not to any damage attributable to the negligence of the appellant's drivers or third parties.

The appellant employed and remunerated the local drivers seconded to the related party and did not receive any compensation from the related party.

However, the appellant invoiced the related party for any maintenance and repairs carried out in Zimbabwe on all equipment used by the related party.

It was the uncontroverted testimony of the nephew, that, a portion of the fee was surrendered to the Reserve Bank of Zimbabwe and another used to purchase the requirements of the appellant's local fleet, while the balance was sold on the inter-bank market to meet local expenses and staff salaries and wages.

This situation continued until hyperinflation adversely affected the viability and pricing of the domestic transport services in 2008.

The appellant, however, deliberately failed to disclose the 2003 agreed rentals in appendices C1, C2 and C3 to that agreement that were adopted by both the 2006 and 2009 agreements and the logistical and rental agreements of 1996 but elected to reveal the escalation clause set out on page 12.29 of exhibit 1.

However, the agreed rentals for the rented horses were indicated on page 15 and 16 of the exhibit 1 for each of the four (4) tax years and for each of the routes covered.

The southbound trip to Harare and Kwekwe in Zimbabwe from Lusaka, the Copperbelt, Blantyre and Lilongwe accrued different rentals, denominated in South African rands from the north bound trips as indicated in the following table 2:

Table 2

Transit rates

The northbound routes to Zimbabwe consisted of the Johannesburg to Harare, Johannesburg to Bulawayo, Johannesburg to Midlands, and Johannesburg to Livingstone routes. The rental was the same for each route in each of the four (4) years, respectively.

In 2009 it was R5,050; in 2010 it was R5,555; in 2011 it was R6,400; and, in 2012 it was R7,300.

The north-bound routes from Zimbabwe were the Harare-Lusaka, Harare-Copperbelt, Kwekwe-Blantyre, Harare-Blantyre and Harare-Lilongwe routes.

The rentals were different on each route and in each year. The cheapest was the Harare to Lusaka route ranging between R2,310 in 2009 and R3,420 in 2012. The most expensive was the Harare to Copperbelt route, which ranged between R3,930 in 2009 and R5,700 in 2012.

The transit routes were the Johannesburg to Livingstone and Johannesburg to Harare destined for Lusaka route, for which the related party paid between R2,950 in 2009 and R4,200 in 2012 and the Johannesburg to Harare destined for Copperbelt for which the related party paid R3,650 in 2009 and R5,200 in 2012 to the appellant.

The last transit route was from Johannesburg to Harare destined for Blantyre and from Johannesburg to Harare destined for Lilongwe. The related party paid the appellant between R3,470 in 2009 and R5,000 in 2012 for the route to Blantyre and between R3,930 in 2009 and R5,600 in 2012 for the route to Lilongwe.

The rental for the trailer only was R1,270 in 2011 and R1,450 in 2012.

The south bound journeys were the exact opposite of the north bound ones.

The rates from the Zimbabwe centres to Johannesburg were the same in each year. The rentals were R2,810 in 2009, and R3,091 in 2010 and R3,560 in 2011 and R4,060 in 2012.

The south bound transit rates were Lusaka to Johannesburg via Harare that ranged between R1,320 in 2009 and R1,900 in 2012 while the Copperbelt to Johannesburg via Harare route ranged between R1,570 in 2009 and R2,280 in 2012; and, lastly, the transit rate between Blantyre and Johannesburg via Harare ranged between R1,560 in 2009 and R2,300 in 2012 while the Lilongwe to Johannesburg via Harare route ranged between R1,740 in 2009 and R2,500 in 2012.

The related party paid R1,270 for the trailer per leg per trip on each of these routes. In 2012, the north bound trailer rental was R1,450.

The journey from Johannesburg to Harare and back consisted of two trips while the journey from Johannesburg to any of the destinations outside Zimbabwe and back consisted of four (4) trips.

The maintenance and running expenses incurred by the related party, in respect of 21 mechanical horses, between 1 January 2009 and 31 December 2012 amounted to R1,854,841 for spares and maintenance…,.; US$436,983 for labour on repairs and maintenance.

In the same period, tyres worth R1,151,777 were purchased by the related party and R536,021=51 was expensed on 69 trailers. The related party also spent the sum of R9,128,122 on fuel, US$1,809,460 on insurance, and US$40,992 on lubricants.

The mechanical horses traversed 1,771,964km…, during the four year period in question. The distance covered by each identified mechanical horse, and the cost of maintenance and running expenses, tyres and fuel in each year was listed on pages 23 to 24.6 of exhibit 1.

The yearly amounts expensed on each line item by the related party on the leased equipment was conveniently summarised by the appellant on pp24 and 42.5 of exhibit 1.

I reproduce the essential costs in Table 3 below.

Table 3: Expenses paid by related party on leased equipment

The respondent derived the gross charges of cross-border transactions from the third party verification exercise that it conducted on three local cross-border hauliers, TCS, CT and CCC.

It wrote exhibits 3A, 3B and 3C between 2 July 2013 and 16 September 2013 seeking the gross rates in both United States dollars and South African rands charged in respect of each tax year under investigation on 19 regional routes traversed by the related party.

The responses…, were received between 5 August and 19 September 2013.

These parties did not offer a separate truck and trailer service. They factored into the freight rates the operational costs of fuel, vehicle inspection, toll and environmental management fees, insurances and driver's allowances, the distance covered, the nature of the cargo, and competition.

The freight rates ranged between US$1.60 per km and US$2.30 per km for both south and north bound routes during the period to the end of the 2012 tax year.

In respect of the 2013 tax year, the average rate was US$2.50 per km.

One of the local hauliers supplied very detailed information on the freight rates. It used the cost plus mark-up model where the mark-up ranged between 7% and 12%. It charged between US$750 and US$1,300 for the south bound routes and between US$1,300 and US$2,500 for the north bound routes. While it charged per trip like the related party, it translated these charges to between US$1.60 and US$2.30 per km.

The nephew listed 11 advantages that accrued to the appellant from the rental agreement.

The appellant was, inter alia, assured of prompt and steady flow of income and a regular foreign currency supply, accounted through the Reserve Bank of Zimbabwe CD3 forms, to meet local expenses from a single client; it's fleet was maintained at no cost to it and prevented from deteriorating from disuse; it was able to offer limited local transport services; it did not incur marketing and clearing and depot expenses in South Africa, Zimbabwe, Zambia and Malawi; it had a guaranteed free source of fuel at its depot in Zimbabwe for local use; and, lastly it was able to retain a pool of experienced internationally certified drivers starving it off liquidation and heavy retrenchment costs.

On the other hand, the related party benefited from the use of authorised equipment on Zambian, Malawian, Batswana and Mozambican public roads and highly skilled drivers who were unable and unwilling to secure work permits in South Africa.

It was common cause, that, the respondent treated the appellant as a cross-border haulier and applied the 2013 freight rate charged by the related party, of R22.47 per km, retrospectively to each of the tax years in dispute. It ignored the aggregate expenses of R21.20 per km incurred in raising this amount.

It computed the gross revenue earned from the leased equipment by multiplying this amount by the number of kilometres travelled in each year and converted the total to United States dollars using the uniform and inaccurate cross rate of 1US$ to R10.

The respondent further calculated the yearly running maintenance and repair costs expensed on the leased trucks and converted it to United States dollars using the inaccurate exchange rate of 1US$ to R10 and added the figure to the transport services income in the annual financial statements derived from the CD3 forms.

It then deducted the aggregate amount from the gross revenue earned from the leased equipment aggregate figure from the CD3 revenue and running maintenance and repair costs. The variance, whether positive or negative, was added to income in the computation of taxable income.

The appellant gave contrary evidence in two respects:

(i) The first was on whether it operated a transport service in Zimbabwe only or whether it also operated across our borders.

(ii) The second was on whether it charged per trip or per km in respect of the local transport services.

The sole witness called by the appellant testified that the appellant operated a transport service in Zimbabwe only.

In each of the tax years in issue the same witness signed the Director's report in which he proclaimed that the appellant operated principally in Africa.

In regards to the second aspect, he averred, in paragraph 39 of his statement, which he adopted in his evidence in chief, that, the appellant charged a United States dollar denominated daily rate.

At p50.1 paragraph 12 of exhibit 1, the appellant's South African based external accountants wrote that “the appellant does operate its own vehicles locally within Zimbabwe and in those instances it charges a US$ rate per km.”

In fact, under cross-examination, the witness maintained, that, the local expenses were based on operational overheads comprised of running costs, lubricants, fuels, salaries and wages, and not on the distance or the nature of the load.

He maintained, that, the dominant intention behind these charges was to cover overheads and remain viable and not the avoidance or reduction of tax. He was adamant, that, even though the appellant was a perpetual loss maker before, during, and after the tax years in question, the rentals were market based.

He sought to demonstrate, by reference to a random selection of charges on p31.3 to 31.5 of exhibit 1 that the CD3 income constituted 42% of the related party's Group profit….,.

It was common cause, that, the fees charged on north bound routes were higher than those on south bound routes because the former carried finished products while the latter conveyed raw materials. It was common cause, that, the exchange rate used in the computation of the disputed income tax of 1US$ to R10 was inaccurate in respect of each of the tax years under consideration.

The sole witness applied the “correct rates” used by the related party in each of these tax years to the formula invoked by the respondent including the use of the wrong exchange rate and produced different results in exhibit 4.

The correct gross revenue rates per km were ZAR16.55 in 2009; ZAR17.52 in 2010; ZAR19.45 in 2011; and ZAR20.04 in 2012.

The appellant would have incurred a loss of US$129,377 instead of a profit of US$65,433=97 in 2009; a loss of US$33,160 instead of a profit of US$217,185=16 in 2010; a loss of US$64,793 instead of a profit of US$73,119=91 in 2011 and a loss of US$53,304 and not a profit of US$56,063=46 in 2012….,.

The respondent did not use these comparative rates but the 2013 figure suggested by the appellant's South African based external accountants as acknowledged by the Commissioner-General in her determination of 14 November 2014…,. She wrote that:

“The basis or rate of R22.47 that was used to determine the taxable income on estimated assessments was the rate that was used by yourselves in the tax year 2013. In the absence of information on other companies that could be compared with the appellant dealings when they were determining taxable income, this rate becomes the only basis for estimating income. Please note that if you have information pertaining to the actual and correct rates that were used in the tax years under contention, you are free to submit it for consideration.”

I turn to determine the issues that were referred on appeal.

Determination of the issues

Did the appellant in fact receive the additional income assessed by the respondent, and, if so, what was the source of the income?

It was common cause, that, the appellant did not receive the additional income that was assessed by the respondent. Rather, the respondent imputed notional income to the appellant by invoking the provisions of section 98 of the Income Tax Act.

I hold, as a matter of hard fact, that, the appellant did not receive the assessed income.

Whether or not the transactions between the appellant and the related party resulted in the appellant being deemed to have received additional income for tax purposes?

It seems to me, that, the second issue requires some recasting to reflect the real dispute between the parties.

The issue contemplated by the parties was whether or not the respondent was entitled to deem additional income from the nature of the transactions between the two related parties.

The respondent did not in any way suggest that these undertakings constituted simulated transactions.

Accordingly, the sentiments pronounced in Inland Revenue Commissioners v Duke of Westminister [1936] AC 1 (HL)…, and adopted by the Federal Supreme Court in The Master v Thompson's Estate 1961 (2) SA 20 (FSC)…, and Barnett v Commissioner of Taxes 1959 (2) SA 713 (FSC)…, and the South African cases of Commissioner for Inland Revenue v Estate Kohler 1953 (2) SA 584 (A)…, and MacKay v Fey NO and Anor 2006 (3) SA 182 (SCA)…, have no application in the present matter.

While the respondent did not challenge the genuineness of the agreements. it compared the rates charged by the appellant with the charges imposed by the related party to its own clients, and the charges of some of the local trans-border hauliers and determined, that, the charges were deliberately designed to avoid the payment of income tax from the leased equipment.

The respondent accordingly invoked the provisions of section 98 of the Income Tax Act to bring the appellant to book....,.

Counsel for the appellant submitted, that, the provisions of section 98 of the Income Tax Act were not applicable to the transactions between the appellant and the related party, both from a factual and legal perspective, while counsel for the respondent made contrary submissions....,.

Section 98 of the Income Tax Act states:

“98 Tax avoidance generally

Where any transaction, operation or scheme (including a transaction, operation or scheme involving the alienation of property) has been entered into or carried out, which has the effect of avoiding or postponing liability for any tax or of reducing the amount of such liability, and which, in the opinion of the Commissioner, having regard to the circumstances under which the transaction, operation or scheme was entered into or carried out —

(a) Was entered into or carried out by means or in a manner which would not normally be employed in the entering into or carrying out of a transaction, operation or scheme of the nature of the transaction, operation or scheme in question; or

(b) Has created rights or obligations which would not normally be created between persons dealing at arm's length under a transaction, operation or scheme of the nature of the transaction, operation or scheme in question; and the Commissioner is of the opinion, that, the avoidance or postponement of such liability or the reduction of the amount of such liability was the sole purpose or one of the main purposes of the transaction, operation or scheme, the Commissioner shall determine the liability for any tax and the amount thereof as if the transaction, operation or scheme had not been entered into or carried out, or in such manner as in the circumstances of the case he considers appropriate for the prevention or diminution of such avoidance, postponement, or reduction.”

The requisite elements that must all be fulfilled before the Commissioner can invoke the section were set out in Secretary for Inland Revenue v Geustyn, Forsyth and Joubert 1971 (3) SA 567 (A)…, thus:

(a) A transaction, operation or scheme entered into or carried out;

(b) Which has the effect of avoiding or postponing liability for tax on income or reducing the amount thereof, and which;

(c) In the opinion of the Secretary, having regard of the circumstances under which the transaction, operation or scheme was entered into or carried out was entered into or carried out;

(i) Was entered into or carried out by means or in a manner which would not normally be employed in the entering into or carrying out of a transaction, operation or scheme of the nature of the transaction, operation or scheme in question;

(ii) Has created rights or obligations which would not normally be created between persons dealing at arm's length under a transaction, operation or scheme of the nature of the transaction, operation or scheme in question; and that

(d) The avoidance, postponement, or reduction of the amount of such liability was, in the opinion of the Secretary, the sole or one of the main purposes of the transaction, operation or scheme....,.

Whether or not the agreement constituted a transaction, operation or scheme?

It was common ground that the agreements between the related parties fell into the category of a transaction, operation or scheme....,.

The circumstances prevailing at the time the agreement was entered into or carried out?

In the hyper-inflationary era, the appellant averred, that, it could not secure local contracts that would enable it to fully utilize all its assets. The local currency lost value at an alarming rate. The pricing of transport services became a nightmare. The income derived from transport services could not sustain the local operations.

It was faced with the spectre of liquidation and staff retrenchments.

The effect of which was that its loyal and skilled manpower, mainly consisting of approximately 110 drivers, would lose their only source of livelihood for themselves and their families while the company mechanical horses and trailers would deteriorate through disuse.

The appellant could not access the foreign currency required to purchase spare parts and fuel necessary to keep the local operations running. Hyperinflation had a negative effect on its ability to meet local overheads such as salaries and wages and repairs and maintenance of the vehicles.

It was saved from this predicament by the related party, an international haulier operating from South Africa to an array of destinations in sub-Saharan Africa. It required the excess capacity held by the appellant to meet its own contracts, and the experienced, skilled, and responsible pool of drivers in the employ of the appellant who could not secure work permits in South Africa. The appellant held road permits for the use of these assets on the routes desired by the related party.

The comparative advantages for the appellant were listed by the General Manager in charge of local operations.

The appellant was, inter alia, assured of prompt and steady flow of income and a regular foreign currency supply, accounted through the Reserve Bank of Zimbabwe CD3 forms, to meet local expenses from a single client; its fleet was maintained at no cost to it and prevented from deteriorating from disuse; it was able to offer limited local transport services; it did not incur marketing and clearing and depot expenses in South Africa, Zimbabwe, Zambia and Malawi; it had a guaranteed free source of fuel at its depot in Zimbabwe for local use; and, lastly, it was able to retain the pool of experienced, internationally certified drivers starving it off from liquidation and heavy retrenchment costs.

The parties agreed on charges per route rather than per kilometre....,.

The appellant established, that, other economic considerations informed its decision to enter into this agreement. It sought to avoid liquidation and attendant costly retrenchments. These purposes were achieved....,.

With the introduction of the multi currency economic regime in Zimbabwe in 2009, hyperinflation vanished.

The parties re-negotiated the original agreement and introduced a 10% annual escalation clause of the charge per route.