Minister of Finance v De Beers Marine (Pty) Ltd (SA 4 of 2006) [2006] NASC 8 (08 December 2006);
REPORTABLE
CASE |
IN
THE SUPREME COURT OF NAMIBIA
In
the matter between:
THE | APPELLANT |
And
DE | RESPONDENT |
CORAM: Maritz,
J.A., Strydom, A.J.A. et Chomba, A.J.A.
HEARD
ON: 9/10/2006
DELIVERED
ON: 8/12/2006
APPEAL
JUDGMENT
STRYDOM. A.J.A.: [1] This
is an appeal from the Special Tax Court of Appeal. The respondent (
i.e. the appellant in the Court a quo), objected to a tax
assessment by the Receiver of Revenue in terms whereof it was
assessed at a rate of 55% of the money recouped in respect of the
sale of five of its vessels after they had ceased rendering services
in connection with the mining for diamonds to Namdeb Diamond Mining
Corporation (Pty) Ltd (“Namdeb”). The respondent maintained
that the taxable income, derived from the sale of the vessels, was
subject to tax at a rate of 35%.
[2] The respondent’s
objection was disallowed by the Commissioner for Inland Revenue. The
respondent then launched an appeal to the Special Tax Court where it
was successful and where that Court ordered that the assessment of
that income be reduced in accordance with the rate of normal tax of
35%.
[3] The appellant (i.e.
the respondent, in the Court a quo) was not satisfied with the
outcome of the matter in the Special Tax Court and thereupon appealed
to this Court. According to sec. 76(9) of the Income Tax Act, Act
24 of 1981 (as amended), an appeal lies directly to this Court.
[4] The grounds of appeal
centre on the findings by the Court a quo that the recoupments
made by the respondent when it sold its vessels did not constitute
income derived from mining of diamonds and/or from services rendered
by the Respondent in connection with mining for diamonds on behalf of
any person licensed to conduct such mining operations. The appellant
was represented in this appeal by Mr. G. Narib and the respondent by
Mr. T.S. Emslie, SC. The Court is indebted to Counsel for their
full and helpful arguments.
[5] The facts relevant to
the appeal were set out in a Statement of Agreed Facts and were part
of the record before the Special Tax Court of Appeal. These are as
follows:
“STATEMENT OF AGREED
FACTS
In tax year ending 31
December 2000, Appellant (“DBM”) declared a taxable income of
N$636,877,240, 00.
Appellant as at 31st
of December 2000 sold 5 of its diamond mining vessels, 4 to a newly
formed company De Beers Marine Namibia (Pty) Ltd.
The 5 vessels, and the
values at which they were sold, were:
Louis G
Murray N$211,157.00
Grand
Banks N$7,920,533.00
Debmar
Atlantic N$6,851,743.00
Debmar
Pacific N$75,479,188.00
!Garieb N$195,277,453.00
Capital allowances were
claimed in respect of vessels in previous years.
Appellant conducted
business as a marine, prospecting and mining contractor to Namdeb
Diamond Mining Corporation (a company in which De Beers and the GRN
are shareholders). As such it was engaged in rendering services in
connection with the mining for diamonds on behalf of Namdeb. The
vessels in issue were utilised for this purpose.
The following facts are
relevant in regard to the sale of the vessels by the appellant to De
Beers Marine Namibia (Pty) Ltd:
The 5 vessels were sold
for a total amount of N$285,740,074.00.
The taxable recoupment
is N$250,639,697.00.
The 5 vessels were sold
with effect from 1st day of the new 2001 financial year.
De Beers Marine Namibia
(Pty) Ltd received a loan from appellant to purchase the 4 vessels
from appellant.
De Beers Marine Namibia
(Pty) Ltd stepped into the shoes of appellant and replaced appellant
as the marine prospecting and mining contractor to Namdeb as its
exclusive contractor until 2020.
Appellant carries out
prospecting services and production services for De Beers Marine
Namibia (Pty) Ltd. from 1 January 2001.
Appellant and De Beers
Marine Namibia (Pty) Ltd are part of the same group of companies.
The allowances in
question were claimed by the appellant in terms of section 17(1)(e)
of the Act.
The respondent has now
informed the appellant that he granted the allowances claimed in
terms of section 18(1)(a) of the Act, but never communicated this
fact to the appellant, which was under the impression that the
allowances had been granted in terms section 17(1)(e).
It is agreed that the
business of the appellant was at all material times the rendering of
services, whether to Namdeb in connection with mining and
prospecting for diamonds or to other companies in connection with
mining and prospecting elsewhere. The appellant did not conduct
mining and prospecting operations on its own behalf, and did not
itself have a licence to mine.
In respect of the
aforesaid mining activities appellant was taxed at a rate of 55% on
income.”
[6] Although the matter
is not free from complexity, the ambit within which the Court must
decide the issue is a fairly narrow one, namely whether the money
recouped by the sale of the 5 vessels could be brought under mining
of diamonds or services rendered in connection with the mining for
diamonds, as contended for by Counsel for the appellant, or whether
such money was not directly linked to either of the two activities,
as was submitted by Counsel for the Respondent. In the first
instance the rate of taxation would be 55% whereas in the latter
instance the rate would be 35%. The relevant rates of taxation are
set out in para. 3(1) of Schedule 4 to the Act which are as follows:
“3(1) Subject to
subparagraph (2), the rates of normal tax to be levied in respect of
the taxable income derived by a company shall be as follows:
On each N$ of taxable
income derived from a source other than mining, 35 cents;
On each N$ of taxable
income derived from mining of a mineral or substance other than
diamonds, 37,5 cents;
On each N$ of the
taxable income derived from the mining of diamonds, or from services
rendered by such company in connection with the mining for diamonds
on behalf of any person licensed to conduct such mining operations,
50 cents: Provided that there shall be added to the amount of tax
determined in accordance with this paragraph a surcharge equal to
10% of that amount.”
(Subparagraph 2 has no
relevance to the issue.)
[7] It is significant
that para. 3(1)(c) previously only related to income derived from the
mining of diamonds. (See sec. 21 of Act 25 of 1992), By sec. 13(c)
of Act 22 of 1995 the words “or from services rendered by such
company in connection with the mining for diamonds on behalf of any
person licensed to conduct such mining operations,” were inserted
in the section. As a result of this amendment services rendered to
a company licensed to mine diamonds were also taxed at 55%.
[8] In regard to the
above amendment Mr. Narib submitted that it was only brought about to
clarify that services rendered in connection with the mining for
diamonds were taxable in terms of sec. 3(1)(c), because such services
fall squarely within the definition of mining, set out in sec. 1 of
the Act. If I understood Counsel correctly such amendment was not
really necessary as the activity was already covered by the
definition of mining. This point was further illustrated by Counsel
by reference to secs 18(1)(a) and 36 of the Act. More particularly
it was submitted that the activities undertaken by the respondent
such as exploration and prospecting necessitated the respondent to
acquire vessels capable of doing this work in order to claim the
deductions in terms of sec 18(1)(a).
[9] With reference to
secs. 5 and 6 of the Act read with sec 1(h) Mr. Narib submitted that
the recoupment made on the sale of the vessels was income and once
the deductions allowed for by the Act, in terms of sec. 18(1)(a) read
with sec 36, were made, what remained would be taxable income. The
source of this income was mining of diamonds or from services so
rendered. That is the scheme of the Act and there is no need to
differentiate because the scheme determined what is taxable, and in
this case, applying schedule 4 of the Act, the tax payable is 55%.
[10] Mr. Emslie’s
answer to the submissions of the appellant was that the recoupment of
the vessels did not amount to income derived from mining of diamonds
or rendering services in connection therewith. Counsel submitted
that whether the respondent might have been either mining or
rendering services was not decisive of the answer to the question
whether the recoupment constituted taxable income derived from either
of those sources. Counsel therefore submitted that the recoupment by
the sale of the vessels could not be brought under “mining” or
“mining operations” nor could it be brought under ‘services
rendered in connection with the mining for diamonds”.
[11] The argument by
Counsel for the appellant necessitates a consideration of some of the
definitions of the Act as well as some of its provisions.
[12] According to sec. 1
of the Act “mining operations” and “mining”
include every method or process by which any mineral (excluding
petroleum) is won from the soil or from any substance or constituent.
Other definitions relevant were the following:
(i) “ 'gross
income', in relation to any year or period of assessment, means,
in the case of any person, the total amount, in cash or otherwise,
received by or accrued to or in favour of such person during such
year or period of assessment from a source within or deemed to be
within Namibia, excluding receipts or accruals of a capital nature,
but including without in any way limiting the scope of this
definition, such amounts whether of a capital nature or not so
received or accrued as are described hereunder, namely – …"
This provision then, by
sub. para. (h), includes into the definition of “gross income”
recoupments of a capital nature to which the provisions of sec
18(1)(a) applied. In regard to deductions made in terms of sec. 17
of the Act, sec 14(4) included "in the taxpayer’s income all
amounts allowed to be deducted or set off under the provisions of
sub.sec. (1) of this section and of sections 17 to 21, inclusive…”
(ii) “ 'income'
means the amount remaining of the gross income of any person
for any year or period of assessment after deducting therefrom any
amounts exempt from normal tax under Part 1 of Chapter II;” and
“ 'taxable income'
means the amount remaining after deducting from the income of a
person all the amounts allowed under Part 1 of Chapter II to be
deducted from or set off against such income.”
[13] Various other
sections of the Act were also referred to by Counsel to support his
submission. These provisions are no doubt important and they provide
for a number of issues. Section 5 provides for the payment of tax by
persons and by companies and sec. 6 states that the tax payable in
terms of sec. 5(1) shall be as set out in Schedule 4. Sec. 15 is a
deeming provision which sets out certain instances whereby it shall
be deemed that money received was so received or has accrued from a
source within Namibia.
Section 16 deals with
exemptions and the section determines what revenue shall not be
subject to taxation. Section 17 contains allowable deductions.
Respondent maintains that the deductions made by it were in terms of
sec. 17(e) which provides for deductions in regard to expenditure
incurred for "sea-going craft, machinery and implements"
used by the tax-payer to do its trade. Section 18(1) allows for
deductions from the income derived from mining operations and is the
section under which the appellant said it allowed deductions by the
respondent.
Strong reliance was
placed by Mr. Narib on sec. 36. Section 36 provides that the
capital expenditure to be deducted under sec. 18(1)(a) may consist
of either exploration expenditure or development expenditure or
both. Sub-section (2) and (3) provides how such expenditure should
be deducted. Sub-sections (4), (5) and (6) determine what is
included in the various types of expenditure. Mr. Narib said that
what was done by the respondent falls squarely within what is
described as exploration and development operations.
It seems to me that the
fallacy in Mr. Narib's argument lies in his acceptance that the
various sections of the Act, referred to by him, create a scheme
which determines what the taxable rate must be. These sections do
no more than define income, to state what allowable deductions there
are and determine how taxable income should be calculated. None of
the sections, referred to, deal with or determine what the rate of
tax must be. In terms of the Act the rate of tax payable by
companies is determined with reference to the income derived from a
particular source and this is set out in para. 3(1) of Schedule 4 of
the Act. Once the taxable income is determined the rate of tax
payable is established by application of para. 3(1) and can be
either from a source other than mining (a), or from a source derived
from mining, other than the mining of diamonds (b), or it can be
derived from the mining of diamonds or services rendered in
connection therewith (c). Para. 4 also makes it clear that the rate
of tax payable may differ depending on whether the taxable income is
derived from different sources as set out in para. 3(1). It follows
therefore that in terms of the same assessment different rates of
tax may be payable.
There can be no quarrel
with the submission by Mr. Narib that what is taxable in a specific
instance is the taxable income as defined above after the deductions
provided for in Part I of Chapter II have been made. However, as I
understood Counsel he argued that once the deductions were made in
terms of Chapter II what remained constitute, in terms of the scheme
of the Act, the taxable income. That is correct. I, however, do
not agree with Counsel that there is then only one rate of tax
applicable, namely that determined by para. 3(1)(c). The sections
of the Act relied upon by Mr. Narib do not support his submission.
The rate of tax payable by a company is determined by Schedule 4 of
the Act and not the other provisions. That is also made clear by
sec. 6 of the Act.
I therefore do not agree
with Mr. Narib that the scheme of the Act inevitably leads to a
finding that the activities of the respondent were covered by the
definition of “mining” or “mining operations” which would be
taxable in terms of para 3(1)(c) of Schedule 4. Mr. Narib referred
to the cases of Grootvlei Proprietary Mines Ltd v C.I.R., 1952
(4) SA 440 (AD) and Commissioner for Inland Revenue v Wolf, 1928
AD 177. In the Grootvlei-case the Court had to
decide whether the whole amount received for the sale of a winder,
which was 4 times more than what was paid for it, must be regarded
as the recoupment for purposes of the Act. The Court concluded
that the whole amount was a recoupment. The question in the Wolf-
case was whether recoupments made by a mine when it ceased
operations were part of “gross income” and therefore taxable in
terms of that Act. The Court found that such recoupments were
“gross income”.
In the present case the
question is different, namely whether vessels sold by a company
which rendered services in connection with the mining for diamonds
constituted a recoupment which would render the respondent liable to
pay tax in terms of para. 3(1)(c) of Schedule 4, therefore as mining
of diamonds or services rendered in connection therewith, or para.
3(1)(a), as being income derived from a source other than mining.
The two cases referred to by Mr. Narib do not assist in finding an
answer to the question. They, in effect, constitute authority for
propositions which are common cause in this case.
It is common cause, as
pointed out before, that the recoupment of the sale of the 5 vessels
constitute, according to the provisions of the Act, income in the
hands of the respondent which is taxable.
Because of the
submission of Mr. Narib that the rendering of services by the
respondent is covered by the definition of “mining” and
“mining operations” it is necessary to determine what the
respondent’s source of income was and to establish under which of
the categories, set out in para. 3(1) to the Schedule, tax must be
payable for the recoupment of the vessels.
In the Income Tax Act of
the Republic of South Africa, Act 58 of 1962, the definition of
“mining” and “mining operations”, as far as
minerals are concerned, is identical to our Act 24 of 1981.
Various cases in that jurisdiction considered the meaning of the
definition and concluded that the definition does not only mean the
physical extraction of minerals from the soil.
In Income Tax Case No
1572, Zulman, J, who was the President of the Special Income Tax
Court, remarked as follows at p. 184:
“I am in agreement with
Mr. Du Plooy’s proposition to the effect that the mere physical act
of extracting minerals considered apart from the other steps
necessary to bring income into existence, is, to use his phrase ‘a
barren act that is not in itself capable of being an income source’.
That physical act cannot, so it was argued, be what is contemplated
by the legislature when it uses the words ‘mining’ or ‘mining
operations’. I accordingly agree with the submission that when the
Act refers to ‘income derived from mining/mining operations’,
this is a reference to income derived from a business of mining and
not merely a physical act.”
A similar conclusion was
reached by Friedman, JP, in the case of Commissioner for Inland
Revenue v BP Southern Africa (Pty) Ltd, 1997 (1) SA 375 at B –D.
In the decision of the
Supreme Court of Appeal of South Africa, namely Western Platinum
Ltd. v The Commissioner for South African Revenue Service,
unreported judgment of the Supreme Court of Appeal of South
Africa dated 27 December 2004, Case No. 294/03, Conradie, JA, who
delivered the unanimous decision of the Court, said the following
on p. 4 of the unreported judgment:
“Mining operations by
themselves cannot produce income. However, the definition of
‘mining’ and ‘mining operations’, being context-dependent, is
capable of accommodating commercial transactions. Since there can
be no derivation of income without commercial activity we are
entitled to read that into the definition. In the case of minerals
or metals from a mine such an income-producing transaction would
commonly be a sale. One would therefore, at least, have to
interpose a sale (and the associated delivery and payment) between
the extraction of the minerals and the income, thus postulating a
business.”
The Court, p 5, cited
with approval the finding by Friedman, JP, in the BP Southern
Africa-case, supra, as to the meaning of the words
"income derived from mining operations".
According to the
Agreement of Facts it is common cause that the business conducted by
the respondent was at all material times the rendering of services,
whether to Namdeb in connection with mining and prospecting for
diamonds or to other companies in connection with mining and
prospecting elsewhere. The appellant did not conduct mining and
prospecting operations on its own behalf, and did not itself have a
license to mine.
As such the source of
the respondent’s income was not derived from the business of
mining or mining operations but from services rendered in connection
therewith. From the agreed facts, and this was also conceded by
Mr. Narib, the respondent was not involved in the sale of diamonds
extracted from the soil. As it was put by Mr. Narib, on a question
by the Court, "that would not be their business, (i.e. the sale
of diamonds) their business would be to render the particular
service of extracting and giving it to the owner to deal with it in
the manner it sees fit". I agree with Counsel that that is
the distinction to be drawn and, bearing in mind the meaning
ascribed to the words “mining” and “mining
operations”, set out above, it follows in my opinion that it
cannot be said that the activity of rendering services in connection
with mining is covered by those definitions. That, so it seems to
me, is so even if the respondent was involved in the physical act of
extracting diamonds from the soil. Its source of income remained
the rendering of services. In my opinion when para. 3(1)(c) refers
to “taxable income derived from the mining of diamonds” it means
“income derived from the business of extracting minerals from the
soil”. (The BP Southern Africa-case, supra, p 379
C-D.)
What also militates
against the submission that mining and services rendered in
connection therewith is one and the same thing is in my opinion the
fact that the Legislature thought it necessary to amend sec 3(1)(c)
to include the latter activity. This, so it seems to me, was
necessary because services rendered in connection with mining is
something different from mining or mining operations. As set out
before the source of income from mining is the business of dealing
with any mineral won from the soil. The source of income in the
second instance was the services rendered in connection with mining,
in this case, of diamonds. The interpretation submitted by Counsel
for the appellant would render the entire amendment redundant,
something which is not easily accepted in the interpretation of
statutes. (See in this regard Commissioner for Inland Revenue v
Golden Dumps (Pty) Ltd., 1993(4) SA 110 (A) at 116F - 177A.)
The question remains
whether the recoupment by the sale of the vessels is connected to
the rendering of services in connection with the mining for diamonds
and the tax payable therefore in terms of paragraph 3(1)(c) of
Schedule 4 of the Act. In this regard it was stated that such
connection must be direct. An indirect connection or a remote one
will not suffice. (See Commissioner for Inland Revenue v D &
N Promotions (Pty) Ltd, 1995 (2) SA 296 at 306C-D and the
Western Platinum-case, supra, at p 5).
In order to determine
whether there is such a connection the Court must, on the one hand,
not apply too narrow a construction on the business of rendering
services in connection with diamond mining. On the other hand it
must also guard against a construction which is too generous. (See
the Western Platinum-case, supra, p8).
A direct connection was
found to exist in cases where loss of money was of a ‘revenue
nature’. (Western Platinum-case). Thus, insurance paid
to compensate loss of revenue when mining equipment became defective
was found to be income derived from mining of gold. ( See Income
Tax Case 1572). Money earned by delivery of sugar cane but
which was retained for a period and interest on that amount was
found to be derived from farming operations. (See D & N
Promotions-case). Interest earned from foreign banks for
receipts held by them as part of the security for loans to enable
the mine to operate was found to be directly linked to mining
operations. (Western Platinum-case). See also Burmah
Steam Ship Company Ltd v Commissioner for Inland Revenue, 16 TC
68 where an amount of money was paid to owners of a ship for loss
caused by delay.
In the insurance cases
the insurance money paid and money paid for loss of income were
regarded as "filling the hole" left by the loss of income.
See the Burmah Steam Ship Company-case, supra, p.
73. For this reason money received was regarded as income and was
taxed as such.
In the following
instances the connection between money received and taxable income
derived from mining operations or farming was found to be not
sufficiently direct. The recoupment by a sale of its interest in a
coal mine was found not to be income derived from mining (BP
Southern Africa-case). Because of the rationalization of the
sugar industry farmers lost certain rights. To compensate them for
the loss of these rights, and other burdens imposed upon them, they
were paid a monetary compensation by the Sugar Association. It was
found that the receipts were of a capital nature which fell outside
the ambit of the farmer’s income-earning operations from sugar
farming. (The D & N Promotions-case). Interest earned
as a result of an investment decision by a mine altered the
character of such interest from mining to investment income and took
the interest out of the mining income stream. (Western
Platinum-case).
In the present instance
the respondent sold its vessels to De Beers Marine Namibia (Pty) Ltd
which company then stepped into the shoes of the respondent and
replaced it as the marine prospecting and mining contractor to
Namdeb. The sale of the vessels can in my opinion not be said to
have derived from services rendered in connection with the mining
for diamonds simply because it was paid as a result of the sale of
the vessels and not earned through services rendered. The question
is whether the money so recouped could, in terms of the Act, be
deemed to be derived in connection with services so rendered. In my
opinion not. The money received for the sale of the vessels was in
the nature of a capital accrual, although deemed as income in terms
of sec. 1(h) as 14(4) of the Act, and the vessels were not sold and
the money recouped in order to fill a hole in income. It was
further the business of the respondent to render services in
connection with the mining for diamonds. It was not its business
to sell vessels.
There was therefore no
direct connection between the sale of the vessels and the business
of the respondent and the Special Income Tax Court was correct when
it found that the recoupment was to be taxed in terms of the
provisions of paragraph 3(1)(a) of Schedule 4 of the Act and not in
terms of paragraph 3(1)(c) thereof.
Although Counsel for the
appellant relied on the provisions of sec. 18(1)(a) to support his
submission that if the scheme of the Act is taken into consideration
it would follow that the recoupment of the vessels should be taxed
under paragraph 3(1)(c), both Counsel agreed that whether the
reductions were made under sec 17(1)(e) or sec 18(1)(a) would not
influence the outcome of this matter. I agree. It is therefore
also not necessary to decide this issue.
In the end, and even if
one accepts for the sake of argument, that the income derived from
services rendered in connection with the mining for diamonds is
covered by the definition of “mining” and ‘mining operations”
the result would not have been different.
In the result the appeal
is dismissed with costs.
(Signed)
G.J.C. Strydom
________________________
STRYDOM,
A.J.A.
I
agree.
(Signed)
J.D.G. Maritz
________________________
MARITZ,
J.A.
I
agree.
(Signed)
F.M. Chomba
________________________
CHOMBA,
A.J.A.
COUNSEL Instructed COUNSEL Instructed | MR. The ADV. Engling, |