Home | Databases | WorldLII | Search | Feedback Supreme Court of Fiji

Ghim Li Fashion (Fiji) Ltd v Commissioner for Inland Revenue [2008] FJSC 15; CBV0008.2007S (23 July 2008)

IN THE SUPREME COURT OF THE FIJI ISLANDS
AT SUVA

CIVIL APPEAL NO. CBV0008 OF 2007S
(Fiji Court of Appeal No. ABU0056 of 2001S)

BETWEEN:

GHIM LI FASHION (FIJI) LIMITED
Petitioner

AND:

COMMISSIONER FOR INLAND REVENUE
Respondent

Coram: The Hon Justice Keith Mason, Judge of the Supreme Court
The Hon Justice Kenneth Handley, Judge of the Supreme Court
The Hon Justice Ronald Sackville, Judge of the Supreme Court

Hearing: Monday 21st July 2008, Suva

Counsel:
Mr I. Fa ] for the Petitioner
Mrs A Tavo ]

Mr B. Solanki ] for the Respondent
Mrs T. Rayawa ]

Date of Judgment: Wednesday, 23rd July 2008, Suva

JUDGMENT OF THE COURT

Introduction and Background

[1] This is an appeal, by leave granted by the Court of Appeal on 20 November 2002, from its decision on 9 August 2002 allowing the Commissioner’s appeal from the decision of Byrne J in favour of the taxpayer. The notice of appeal in this Court pursuant to that leave was not filed until 15 November 2007. The long delay has been fully explained and the Commissioner consented to the notice of appeal being filed out of time.

[2] The appeal arises from the Commissioner’s claim to assess an insurance recovery by the taxpayer to tax at the then rate of 10% pursuant to s.3(8) of the Value Added Tax Decree 1991(Decree) read with s.15.

[3] The insurance recovery was received by the taxpayer following the destruction by fire of its clothing factory at Lautoka in September 1994. The premises were insured against loss by fire and the taxpayer received a payment from its insurers of $4,084,481.74 made up as follows:

[4] The Commissioner assessed this amount to VAT pursuant to s.3(8) of the Decree which provides:

"Where under a contract of insurance, a registered person receives an amount by way of an indemnity payment relating to a loss incurred in respect of goods and services in the course or furtherance of making taxable supplies, that person shall, for the purposes of the application of this Decree to that person but not to the person by whom the payment is made, be deemed to have made a supply of goods and services to which the payment relates in the course or furtherance of the taxable activity, at the time when the payment is received, and the amount of the payment shall be deemed to be the consideration for that supply."

[4] Although the Decree establish a Value Added Tax Tribunal to hear appeals from the disallowance of objections to VAT assessments, this procedure was not followed in this case. Byrne J overruled the Commissioner’s objection to the jurisdiction of the High Court and in the exercise of its original jurisdiction he held that s.3(8) did not make the insurance recovery liable to 10% VAT under section 15(1). The Commissioner did not maintain his objection to jurisdiction in the Court of Appeal and has not renewed his objection in this Court. Beyond noting that the objection was taken in the High Court but overruled, we express no view on the question. However we must not be taken as endorsing the right of a taxpayer in the future to by - pass the Tribunal and proceed directly to the High Court.

[5] On 30 April 1991 the taxpayer was granted Tax Free Zone status pursuant to s.7(1) of the Tax Free Zones Decree 1991. This entitled the taxpayer to exemptions from customs duty on its imports and income tax and income tax withholding taxes, but it did not confer any entitlement to exemption from VAT.

[6] The taxpayer established its business in Fiji for the purposes of manufacturing garments principally for the export trade, and the bulk of its sales were for export. As will be explained later in these reasons the taxpayer is entitled to significant benefits under the Decree. However, it did make sales of garments in the domestic market and was not entitled to those benefits in respect of such sales. It was a registered person for the purposes of the Decree.

Scheme of the Act

[7] Section 15 is the section which imposes the tax. It relevantly provided:

(1) Subject to the provisions of this Decree, the tax shall be charged in accordance with the provisions of this Decree at the rate of 10% on the supply (but not including any exempt supply) in Fiji of goods ... by a registered person in the course or furtherance of the taxable activity carried on by that person, by reference to the value of that supply.

(2) Where, but for this subsection, a supply of goods and services would be charged with tax under subsection (1) of this Section, any such supply shall be charged at the rate of zero percent where that supply is a zero--rated supply."

[8] The expressions "supply," "goods", "taxable activity", "exempt supply", "zero-rated supply", and "taxable supply" are defined by the Decree. The definition of services is not relevant in this case. In normal circumstances one would never describe a permanent factory building as goods but this expression is defined in s.2(1) as meaning "all kinds of personal and real property; but does not include choses in action or money". Accordingly the insurance recovery was in respect of "goods" owned by the taxpayer apart from the $100,000.00 paid for loss of profits. The Commissioner has long accepted that this sum is not chargeable to VAT. This concession was correct, because the loss was in respect of profits which the taxpayer did not receive.

[9] Exempt supply is defined in s.2(1) as meaning a supply described in the First Schedule. It is common ground that the taxpayer’s ordinary activities, and any deemed supply pursuant to s.3(8) were not exempt supplies. Taxable supply is defined in s.2(1), read with subsection (2) as any supply of goods or services "which is charged with tax pursuant to section 15." Zero-rated supply is defined as a supply described in the Second Schedule. The relevant items in that schedule were 1 and 4. Item 1 comprises the supply of goods entered under the Customs Act for export and exported by the supplier. Item 4 comprises the supply of goods which the taxpayer will enter for export "in the course of, or as a condition of making that supply", provided they are exported within 28 days otherwise the supply is taxable under s.15(1).

[10] Section 3(1) defines supply as including "all forms of supply". Later subsections extend its meaning to various transactions which otherwise might not, or would not, be within its ordinary meaning. Section 3(8) is one of those subsections. Two others may be noticed. Section 3(4) and (11) deem a supply to have occurred when a registered person ceases to carry on business, or a "taxable activity" is disposed of as a going concern.

[11] Section 4 (1)(a) relevantly defines taxable activity as meaning:

"(a) any activity which is carried on continuously or regularly by any person, whether or not for pecuniary profit, and involves or is intended to involve in whole or in part the supply of goods... to another person for a consideration; and includes any such activity carried on in the form of a business.... trade, manufacture..."

[12] This definition does not incorporate any requirement that the supply of goods should be taxable. Any business activity carried on continuously or regularly which is intended to involve the supply of goods to another for consideration is within the definition.

[13] Byrne J held, and this has been common ground since, despite the apparent incongruity, that the supply of goods and services is a taxable supply, although that supply is zero-rated, so that no tax is actually payable. This is clearly correct, because of the definition of taxable supply and the terms of s.15 quoted above.

[14] A person who carries on a business limited to making exempt supplies is not required or entitled to be registered (s.(22)). A person who carries on a business limited to making zero-rated, and therefore taxable supplies, is required to be registered (above). An unregistered person who makes exempt supplies bears input tax charged by his suppliers on goods or services supplied to him for the purposes of his business and is not entitled to a refund of that input tax.

[15] A registered person, such as the taxpayer, who was engaged in the business of making zero-rated supplies is not charged output tax on its supplies, and is entitled, under s.39, to a refund of the input tax it has been charged by its suppliers on goods and services supplied for its taxable activity. Thus in the result export sales which are zero-rated do not bear any VAT imposed under the Decree. Although the taxpayer was not exempted by its Tax Free Zone status from the Decree the result in practice was that it was not liable to output tax on its export sales within Schedule 2, and it was exempted, through refunds, for the input tax on goods and services supplied to it in respect of its taxable supplies for export. It remained liable for output tax on its sales on the domestic market, receiving an off set against such tax for the input tax it had borne in respect of such sales.

The indemnity payment for the fixed assets and raw materials

[16] The first issue in the appeal is whether s.3(8) operates on s.15(1) to impose VAT on those parts of the insurance recovery that related to "goods" as defined which were not intended by the taxpayer to be the subject of a taxable supply "in the course or furtherance of the taxable activity", that is the building, plant and equipment, raw materials and motor vehicles.

[17] Byrne J held, and the appellant maintains, that s.3(8) does not bring to tax an insurance recovery in respect of general business assets which the taxpayer did not intend to supply in the course of its activity. The Court of Appeal held otherwise.

[18] The point requires a close analysis of the language of s.3(8). The indemnity payment within the section must be one "relating to a loss incurred in respect of goods ... in the course or furtherance of making taxable supplies." If this condition is satisfied the insured receiving that payment is deemed at that time to have made a supply of the goods to which the payment relates "in the course or furtherance of the taxable activity".

[19] The appellant adopted the reasoning of Byrne J on the distinction between "in the course or furtherance of making taxable supplies " in the first limb of the subsection, and "in the course or furtherance of the taxable activity" in the second. The subsection makes this distinction, and it was submitted, it must be respected.

[20] The distinction was said to be between a particular taxable supply referred to in the first limb and the business as a whole which is referred to in the second. Thus the loss of a particular consignment of goods in transit to a customer would be a "loss in the course or furtherance of making taxable supplies", but not a loss by fire of the physical assets of the whole business. The latter loss was not, so it was submitted, a loss incurred "in the course or furtherance of making taxable supplies."

[21] The submission would have considerable force if the first limb of the subsection was limited to losses "in the course of making taxable supplies" but it fails to adequately deal with losses "in furtherance of making taxable supplies." Moreover, the distinction fastened on by the taxpayer proves on close analysis to be illusory.

[22] The loss of the taxpayer’s factory by fire caused a loss in respect of goods which were "in.. .furtherance of making taxable supplies." The language is clumsy but the meaning is clear. The factory, the plant and equipment, the raw materials, and the motor vehicles were goods as defined which the taxpayer possessed, used and intended to use for the purpose of "making taxable supplies", that is, "in ... furtherance of " doing so.

[23] This construction is confirmed when one reads into s.3(8) the relevant definitions. Taxable supply is defined in s.3(1) as meaning any supply charged with tax pursuant to s.15. This section charges with tax a supply of goods by a registered person "in the course or furtherance of a taxable activity carried on by that person." That expression is defined in s.4(1) as "any activity which is carried on continuously or regularly ... and involves or is intended to involve...the supply of goods ... to another person for a consideration."

[24] Section 3(8) expanded by the incorporation of these definitions reads:

"Where under a contract of insurance, a registered person receives ... an indemnity payment relating to a loss incurred in respect of goods... in the course or furtherance of making taxable supplies... [that is ss.3(1) and 15(1)]... of goods ... in the course or furtherance of a taxable activity that person shall...be deemed to have made a supply of goods... to which the payment relates in the course or furtherance of the taxable activity, [that is s.4(1)] as an activity carried on continuously... which is intended to involve the supply of goods... to another person for a consideration."

[25] The taxpayer’s taxable activity (business) involved and was intended to involve the supply of goods for a consideration, and the loss from the fire was incurred both (in a business conducted)" in ... furtherance of making taxable supplies" and "in the course or furtherance of the taxable activity." The two limbs of s.3(8) therefore end up having the same meaning.

[26] We therefore reject the appellant’s first submission that a loss incurred "in respect of the business", that is the business structure, is not within s.3(8) and hold that VAT was payable on that part of the insurance recovery received for the taxpayer’s building, plant and equipment, raw materials, and motor vehicles.

The Indemnity Payment for the Stock

[27] Counsel for the appellant submitted, as a fall back position, that "the evident purpose of s.3(8)... is to exact VAT in cases where there has been a loss of goods which, if they had not been lost, would have been supplied by the registered person so as to have attracted VAT... where an indemnity is received in respect of that loss." Section 3(8) refers to "the taxable activity" of the registered person, which in this case was principally the supply of goods for export. Accordingly the bulk of its taxable supplies were zero-rated. Since the deemed supply within s.3(8) was for the taxpayer’s taxable activity, it followed, so it was submitted, that the deemed supply was also zero--rated so that VAT was not payable on the insurance recovery for the stock.

[28] These submissions attempt to read words into s.3(8) which are not there. The subsection deems something to have occurred which did not occur in fact, that is it creates a statutory fiction. However that fiction is defined and limited by the language of the subsection. The fiction is that the registered person is deemed to have made a supply of goods "in the course or furtherance of the taxable activity." That is the limit of the fiction.

[29] Accordingly s.15(1) applies to that deemed supply unless that supply is within s.15(2) and zero-rated. However the Second Schedule provisions previously referred to cannot apply because the stock destroyed in the fire was not exported. Since s.15(2) does not apply the deemed supply is within s.15(1) and VAT is payable accordingly.

[30] The appeal fails for these reasons, which are substantially those of the Court of Appeal, and it should be dismissed with costs.

[31] The parties agreed that if the appeal failed judgment should be entered for the Commissioner on his Cross Action for $350,125.59 in accordance with the Notice of Amended Assessment of 14 May 1996 with effect from the date of the publication of our reasons. Judgment is entered accordingly.

Hon Justice Keith Mason
Judge of the Supreme Court

Hon Justice Kenneth Handley
Judge of the Supreme Court

Hon Justice Ronald Sackville
Judge of the Supreme Court

Solicitors:
Fa and Company, Suva for the Petitioner
Legal Officer – Commissioner Inland Revenue, Suva for the Respondent