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A Distibuting Company v Fiji Revenue and Customs Authority [2012] FJTT 15; VAT Action3.2010 (4 December 2012)

IN THE STATUTORY TRIBUNAL, FIJI ISLANDS
SITTING AS THE TAX TRIBUNAL

VAT Action No 3 of 2010

BETWEEN:

A DISTRIBUTING COMPANY
Applicant

AND:

FIJI REVENUE & CUSTOMS AUTHORITY
Respondent

Counsel: Ms D Gandhi, Neel Shivam Lawyers for the Applicant
Mr S Vukica, FRCA Legal Unit for the Respondent

Date of Hearing: Friday 24 August 2012
Thursday 20 September 2012

Date of Judgment: Tuesday 4 December 2012

JUDGMENT

VALUE ADDED TAX DECREE 1991 - Section 15(2); Section 16 -Place of Supply in Case of Overseas Warranty; Second Schedule – Zero Rated Supplies

Background

1. This an application for review against the decision of the Respondent Authority dated 5 May 2010, disallowing the Applicant's objection to the value added taxation assessments for the Financial Years December 2004 to 31 December 2008.
   
2. The parties have prepared an Agreed Statement of Facts as follows:
   
   • The Applicant is a locally incorporated company and the local agent and sole distributor of Brand X computers and peripheral products in Fiji.
     
   • The Applicant provides repair and maintenance services under warranty cover to owners and users of the HP brand computers and peripheral products in Fiji on behalf of Brand X Australia Pty Ltd, a company based in Australia.
     
   • The Respondent assessed the Applicant for VAT in the sum of $240,143.95 for tax arrears for the period July 2004 to August 2009.
     
   • The Respondent assessed the Applicant to pay 25% of the arrears in late payment penalties in the sum of $81,515.69.
     
   • The Applicant objects to the assessment of tax arrears and penalties.
     

Issue before the Tribunal

3. The issue before the tribunal can be described in this way. Are warranty services provided by the Applicant taxable, when the payment for the possible provision of that service, is contained within the initial payment of the good or product?
   
4. In essence, Section 15 of the Decree imposes a tax on the supply of goods and services on or after 1 July 1992, by a registered person in the course or furtherance of a taxable activity.
   
5. The definition of supply is contained at Section 3 of the Decree, it "includes all forms of supply" and has the same meaning as provided for within Section 2 of the Sale of Goods Act (Cap230), that is:
   

supply when used as a verb, includes-

(a) In relation to goods – the supply by way of sale, exchange,lease, hire or hire purchase; and

(b) In relation to services – provide, render, grant or confer and when used as a noun has a corresponding meaning.

6. Section 4 of the Decree, sets out the definition of taxable activity and relevantly at subsection (a) means:
   

Any activity which is carried on continuously or regularly by any person, whether or not for percuniary .

profit, and involves or is intended to involve, in whole or in part, the supply of goods and services to another person for a consideration; and includes any such activity carried out in the form of a business, services, trade, manufacture, profession, vocation, association or club.

The Case of the Applicant

7. The case of the Applicant is a simple one. The Applicant acts as the distributor for a major international computer company.
   
8. As part of the Distribution Agreement between that company and the Applicant, the Applicant is reimbursed for providing after sales warranty services.
   
9. The reimbursement arrangement provides for parts and labour.
   
10. At the commencement of the proceedings, Counsel for the Applicant advised the Tribunal that the Applicant did not have a copy of the Distribution Agreement.[1]
    
11. During the course of proceedings it became abundantly clear that the Agreement, together with evidence of the type of warranties and the cost and reimbursement cycle, were critical to the analysis.
    
12. Directions were issued to the Applicant to secure these documents and the matter adjourned for that to occur.
    
13. When the matter was resumed, the Applicant advised that the witness for the Taxpayer was no longer available, as she was unwell and the matter proceeded without any additional evidence in that regard.
    
14. The submissions of the Taxpayer are basically these:-
    
    • The warranty services provided by the Applicant are not a taxable activity as it is carried out free of charge to customers and there is no consideration passing from the customers to the Taxpayers.
      
    • The manufacturer's warranty is included in the retail selling prices of the Brand X products, hence no additional charge is made to the customers in providing warranty services.
      
    • The value added tax is levied on supplies and not turnover or receipts.
      
    • That the services are supplied outside of Australia
      
    • That the New Zealand GST legislation also provides that goods under warranty may be subject to 0% tax rates and as the Fiji legislation is derived from the New Zealand law, then it may be implied that the same situation should apply.
      
    • That the assessment of the taxation during the period 2004 to 2008, as a consequence of the VAT Decree (Budget Amendment) Promulgation 2008, is a retrospective application of that law of which there is an ordinary presumption against such retrospectivity.
      

The Service Agreement Between Brand X Australia and the Taxpayer

15. Only after the issuing of directions for the Taxpayer to do so, the Tribunal was provided with a copy of an undated service agreement [ An Authorised Alliance Support Organisation (AASO) Agency Agreement] between Brand X Australia and the Taxpayer. (Exhibit A1)
    
16. A critical aspect of that agreement is Clause 5.1 that reads:
    

Payment

Brand X will pay the AASO for repairs in accordance with clause 10 of this Agreement.

17. Clause 10 thereafter prescribes the manner in which the Taxpayer is to invoice Brand X for warranty work performed and refers to an attachment 3 to that Agreement, providing a price schedule for the various Brand X products. Those products include laser jet and ink jet printers, scanners, consumer personal computers. Business computers, net servers and multivendor products.[2]
    

Imposition of Tax on Supply

18. During the relevant periods of assessment, Section 15 of the Value Added Tax Decree 1991 was as follows:
    
    • (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 twelve and a half percent on the supply (but not including an exempt supply) in Fiji of goods and services on or after the 1st day of July 1992, by a registered person in the course or furtherance of a 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.
      
19. According to the Respondent and by virtue of the total value of supplies in the relevant period, the Taxpayer would be a registered person for the purposes of Section 22 of the Decree. At issue, is whether or not the supply of services, is zero rated supply. There is no contention that the supply of services would be 'exempt supply' for the purposes of Schedule 1 of the Decree.
    

Zero Rated Supplies

20. The Second Schedule to the Decree is headed 'Zero-rated supplies'.
    
21. It is noted that within the Notice of Appeal, that the Taxpayer alleges that the Respondent has retrospectively sought to apply amendments introduced into Schedule 2 to the Decree, when they came into effect on 30 December 2008.[3]
    
22. In particular, the amendment to that Schedule, saw the introduction of Paragraph 14(2) that deems such supply of services to be zero rated (that is void of the need to pay value added tax)
    

Where and to the extent that these services are supplied for and to a person who is not resident in Fiji and who is outside Fiji at the time the services are performed for use and benefit outside Fiji and the supply is directly connected with goods or real property situated outside Fiji or with the rights that are for use outside Fiji

23. The Notice of Appeal, seems to suggest that in some way that the Respondent sought to rely on this provision retrospectively. There is no evidence of that fact.
    
24. In any event, these are services that are performed in Fiji for the use of goods and property situated within Fiji. It is hard to comprehend how and why the Respondent would have wanted to apply this provision in any event.
    

Is the Taxpayer Engaged in a Taxable Activity?

25. Section 4 of the Decree sets out the meaning of "taxable activity".
    
26. Specifically Section 4(a) provides:
    

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 and services to another person for a consideration; and includes any such activity carried out in the form of a business, services, trade, manufacture, profession, vocation, association or club.

27. Here again, Counsel argues that no consideration passes between the Taxpayer and the consumer. That is, that Brand X only reimburses the Taxpayer for providing the warranty service. It is claimed that the consumer of the computer and related product, pays for that warranty protection as part of the total sales price.
    
28. Again as optimistic as such an argument may be, I find that it is not sustainable. Firstly, there is no evidence of the nominal value of the warranty arrangements before the Tribunal.
    
29. Secondly, the pricing of the services and the reimbursement methodology set out within the Authorised Alliance Support Organisation Agency Agreement[4] leads me to conclude that the service support provided by the Taxpayer remains a profit making venture, that is undertaken continuously by the Taxpayer.
    
30. The invoicing illustrations provided by the Taxpayer (See Exhibits A2 to A4) are all evidence of consideration that passes to the Taxpayer for its provision of services. There is no reason and perhaps more importantly, no evidence of any restriction that is imposed on the Taxpayer in the negotiation of its pricing structure.
    
31. The Taxpayer would be free to negotiate any price in providing such services. Whether it can, is not a taxation matter. The fact that a consumer may be provided with some warranty protection arising out of the sale price of a computer product or in addition to that price, does not change anything in my view.
    
32. The Decree does not differentiate from whom the consideration is to pass when such services are supplied. To that extent, the language of Schedule 2 is markedly different from the exclusion provision that forms part of Section 11 AA of the Goods and Services Tax Act (NZ) 1985.[5]
    
33. Finally, the Applicant raises the case of Ghim Li Fashion (Fiji) Pte Ltd v Commissioner of Inland Revenue[6], to supports its contention, that no taxation should apply.
    
34. I do not regard the restraint payments made in the case of Ghim Li as being analogous to the matter before me.
    

Other Issues

35. The Notice of Appeal also contained allegations that the Respondent's decision in relation to the imposition of late payment penalties, should be disturbed. That being said, there is no reason that justifies the taking of that stance. It is also the case, that Counsel did not press these submissions during proceedings.
    
36. In light of that fact and for the reasons that I have already found in determining that the substantive application of the Taxpayer must fail, I see no reason in disturbing the Respondent's findings in relation to penalties.
    
37. The Application is dismissed.
    

DECISION

(i) That the Application be dismissed.
(ii) That the Respondent be free to make application for costs within 28 days.

The Tribunal orders accordingly.

Mr Andrew J See
Resident Magistrate

^[1] I find that extraordinary; given it was the central commercial arrangement at issue.

^[2] See Attachment 1 to the Agreement.

^[3] See Value Added Tax Decree (Budget Amendment) Promulgation 2008

^[4] EXHIBIT A1

^[5] The Applicant argued that this provision should somehow by implication, be interpreted to apply in the case of Fijian law.

^[6] [2001]FJHC 346