South Africa: Western Cape High Court, Cape Town

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Metropolitan Life Limited v Commissioner for the South African Revenue Services (A 232/2007) [2008] ZAWCHC 105; 2009 (3) SA 484 (C); [2008] 4 All SA 558 (C) (16 May 2008)

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[16] Mr. Emslie further contended that section 11(2) could apply to section 7(1) (c) in the event of an overlap between section 7(l)(c) and section 7(1) (a). Hence, there was no conceivable reason as to why the provision could not apply in the absence of an overlap between sections 7(1) (a) and (c). So viewed, the purpose of 14 (5)(b) which provided "the tax chargeable in terms of section 7(1 )(c) shall not be payable" was that it suspended the levying of tax on imported services but did not render an imported service either exempt or zero rated.

[17] Appellants' case can thus be understood best in counter position to the central finding of the court a quo. The court a quo held that section 14(5)(6) applied for the following reasons: "Imported services that are made by registered vendors and which can stand to fall under Section 14(5)(6) is a self contained provision which exclusively governs the zero-rating and exemption of those "imported services" which fall under section 7(1)(c) while not at the same time falling under s 7(1)(a). As such, s 14(5)(b) is exhaustive of the circumstances in which "imported service" falling under s 7(1)(c) qualify for zero-rating and exemption. Section 14(5) (a) and (b) have formed part of the Act since its inception. Section \4(5)(b) was plainly intended to be the exclusive source of zero-rating and exemption for imported services otherwise chargeable under s 7(1)(c), since s 11(2) in its original form referred explicitly to services under s 7(l)(a), i.e. services rendered by registered vendors; the removal of "(a)" from "s 7(1)(a)" in s 11(2) does not alter the role of s 14 (5)(b) as the exclusive governing clause in respect of zero-rating and exemption of imported goods which fall under s 7(1)(c)."

[18] By contrast, appellant's case can be summarized thus: Where supplies of services are zero rated, these supplies do not stand to be taxed at the rate of 14 percent in terms of section 7. Accordingly section 14 (5)00 is inapplicable in that, on its own wording, once the transaction does not stand to be charged at the rate provided for in section 7, section 14(5)(b) is inapplicable to such transactions. The role of section 14 (5)(b) can be summarized thus: where tax is to be charged in terms of section 7(1)(c) and the provisions of section 14(5)(6) are applicable, there is a suspension of the levying of the tax on such imported services; that is the tax to be charged shall not be payable. Further, as 14 (5)(b) cannot be definitively read to conclude that it is exhaustive of the circumstances in which the imported services are zero rated or exempt, the plain wording of section 11(2)(k) should prevail and be applied to the present dispute

Respondent's argument

[19] Mr Rogers, who appeared together with Mr Masuku on behalf of the respondent, referred to the amendment effected to section 11 of the Act in terms of Act 27 of 1997. Prior to this amendment, section 11(2) of the Act was limited in its ambit to supplies of services referred to in section 7(1)00 of the Act. That provision clearly provided that imported services would only be subject to zero rated tax if the supply was made by a vendor. The amendment to section 11(2) replaced an earlier reference to section 7(1)(a) with the present phrase: "the tax at the rate referred to in section 7 (1)". Prior to the amendment, Mr Rogers correctly submitted that section 7(1)00 referred to the supplier of goods and services by a vendor. Hence imported services with which the present case was concerned, not having been supplied by a vendor, would not otherwise be chargeable with VAT under section 7(1)(a).

[20] Mr Rogers submitted that, since section 11(2) was concerned with the zero rating of VAT, the 1997 amendment made, in effect, a cosmetic change to the legislation in that it made better sense to refer to the rate of VAT specified in section 7 (1); in particular because the rate of 14 percent was not referred to in either sub paragraphs (a), (b) and (c) of section 7 but only in the concluding part of the subsection. Accordingly, it was textually more accurate to refer to section 7(1), rather than to any of its sub paragraphs as had been the case prior to the 1997 amendment.

[21] Mr Rogers submitted further that it was clear that section 11 was intended to

remain applicable only to goods and services supplied by vendors, otherwise chargeable under section 7(1)(a), notwithstanding the textual amendment. This conclusion became apparent when section 11(3) was examined in relation to the issue of imported services. This provision provides, inter alia, that where a rate of zero percent 'has been applied by any vendor under the provisions of this section', the vendor, 'shall obtain and retain such documentary proof substantiating the vendors entitlement to apply the said rate under those provisions as is acceptable to Commissioner'. Mr. Rogers thus contended that section 11(3) provided support for his submission that it was only where goods or services are supplied by vendor that section 11 comes into operation. If it had been intended to apply to "imported services" rendered by a non vendor as in the present dispute, it would have been necessary to stipulate that the recipient of the service would have had to obtain and retain the necessary documentation, a circumstance not provided for by section 11(3).

[22] Mr Rogers correctly contended that the overall solution to the meaning of the 1997 amendment, in particular, and the general scope of section 14(5)(b) of the Act in general, required an analysis of the overall scheme of the Act in order to fully grasp the implications of respondent's arguments. It is to his argument about the scheme of the Act that I now turn.

[23] Briefly stated, section 7 provides for the imposition of VAT Section 11 provides for the zero rating of the supply of certain goods and services which otherwise would be charged with tax at the rate referred to in section 7 (1). Section 12 covers a range of suppliers of goods or services which are exempt from the rate of tax imposed in terms of section 7 (l)(a). Section 13 deals with the collection of tax on the importation of goods and section 14 with the collection of tax an imported services.

[24] Mr Rogers submitted that section 11(2) did not apply to imported services nor did it deal with transactions canvassed in section 7(1)(c) of the Act. On this basis, the Act would appear to provide for the imposition of VAT at a zero rate upon various services specified within section 11 which would otherwise fall within section 7 (l)(a); that is the supply of services by a vendor in the course or furtherance of any enterprise carried by him or her. Where there is a supply of imported services by any person, that is services which are covered by section 7 (l)(c), then any relief from the imposition of the normal rate of tax of 14 percent must be found in section 14 (5)(b); that is the provision which provides tax relief for imported services and which section accordingly does all the regulatory work. In brief, section 14(5)(b) provides for zero-rating and exemption mutatis mutandis in accordance with ss11 and 12. In terms of sl4(5)(b) the prerequisite for the application of these provisions is that the supply must be one which "if made in the Republic" would have qualified for zero-rating or exemption under sll and s12. Expressed differently, the essential question is whether section 11(2) applies to all services or only vendor related services in terms of section 7 (l)(a). For section 11(2) to apply to a service rendered by a non vendor which can be categorized as an imported service, section 14 (5) would then appear to be redundant.

[25] Section l{\){a) imposes a tax upon the supplier of a service, that is a

tax on his or her act of supply. By contrast, the tax imposed in section 7(1)(c) is imposed on the receipt of the service; that is it is imposed on the recipient.

[26] Without the provisions of section 14(5)(a), a situation may arise, albeit rare, where an imported service is supplied by a vendor who would then be taxed in terms of section 7 (l)(a). The recipient, being the customer, could find herself taxed in terms of section 7(l)(c). Accordingly, section 14(5)(a) would appear to prevent the commisioner from recovering the tax, both from the supplier in respect of the supply of the service, and from the recipient, being the recipient of the imported services.

Evaluation

[27] The amendment brought about in 1997 may not, as sadly is often the case with tax legislation, have been an exemplary illustration of clarity of legislative drafting. However, if all imported services stood to be zero rated in terms of section 11(2)(k) as it applied after the 1997 amendment, it would have been unnecessary for section 14(5)(b) to continue to make provision for zero rating of services on the basis of a hypothetical enquiry as to the position of a supply in question having been made in the Republic. In short, there would have been no need for further grounds of zero rating, if the very fact that the service had been rendered outside South Africa was sufficient to qualify that supply for zero rating in terms of section 11(2)(k).

[28] The respondent seeks to reconcile section 11(2) with section 14(5). By contrast the appellant argues that section 11(2) applies, given its plain meaning but it then fails to put up a plausible illustration of where section 11(2)(A) may apply without an application of section 14 (5)(b) or vice versa. As a counter to the redundary argument, Mr Emslie offered an example of services not physically rendered which fall within the scope of the definition of service in terms of section 1. The service could be zero rated in terms of section 14(5)(b) of the Act even though, as they were not physically rendered section 11(2)(k) would be inapplicable. The problem with this example is that it fails to provide an answer as to when zero rating does apply in terms of section 11(2)(k) and thus it fails to adequately explain the role of section 14(5)(b) of the Act.

[29] Significantly, appellant's accountants in a letter of 10 January 2003 conceded that, on the line of argument adopted by appellant, section 14(5) would be redundant in that, after the 1997 amendment, section 14 (5)(b) should logically have been amended to withdraw all the references to services which would have been zero rated if supplied in the Republic so that the subsection only referred to the exemption applying to services which would had been exempt if supplied in the Republic.

[30 Tautologous legislation is not unknown but it is preferable to seek to construe a statute so as to make sense of it in its entirety. In my view, section \4(5)(b) can be construed so as to be exhaustive of the cases of imported services which may well otherwise have been charged under section 7(1)(c). This will allow section 11(2) to govern those services rendered by a vendor which would otherwise be taxed in terms of section 7(l)(a). Not only does this conclusion give a coherence to the Act as a whole but it also gives far greater sense to the effect of the 1997 amendment, described in the Explanatory Memorandum as 'textual', than would be the case urged upon this court by appellant, namely an amendment which would have changed the very nature of the relationship between section 14(5)(b) and section 11(2).

[31] Faced with competing meanings to both sections 11(2) and 14(5), a court should follow the approach of Hurt AJA in SARS v Airworld CC and another [2007] SCA 147 at para 25: In recent years courts have placed emphasis on the purpose with which the Legislature has enacted the relevant provision. The interpreter must endeavor to arrive at an interpretation which gives effect to such purpose. The purpose (which is usually clear or easily discernible) is used, in conjunction with the appropriate meaning of the language of the provision, as a guide in order to ascertain the legislator's intention. Thus, In Standard General Insurance Co Ltd v Commissioner for Customs and Excise 2005 (2) SA 168 (SCA) para 25, Nugent and Lewis JJA said: 'Rather than attempting to draw interference as to the drafter's intention from an uncertain premise we have found greater assistance in reaching our conclusion from considering the extent to which the meaning that is given to the words achieves or defeats the apparent scope and purpose of the legislation. As pointed out by Nienaber JA in De Beers Marine when dealing with the meaning of "export" for the purpose of s 20(4) - which draws a distinction between export and home consumption — the word must "take its colour, like a chameleon, from its setting and surrounds in the Act".'

[32] This dictum supports the approach that the Act and the 1997 amendment should be interpreted purposively and holistically and that provisions should be given a clear meaning whenever plausible. Thus, in both sections 1l(2)(k) and 14(5)(b) can be made to do work within the scheme of the Act, that must constitute the preferred interpretative approach.

Conclusion

[33] For these reasons, the imported services rendered in the present case were assessed correctly as charged to VAT in terms of section 7(1 )(c) of the Act. The basis for taxation at a zero rate, which appellant sought to invoke in terms of section 11 (2)(k), is inapplicable to this kind of service. Accordingly, the appeal is dismissed with costs, including the costs of two counsel.

DAVIS, J

I agree

ZONDI, J

I agree

Schippers, A J