DIESEL TRACKER CC
and
THE COMMISSIONER FOR THE
9OUTH AFRICAN REVENUE SERVICES
APPELLANT
RESPONDENT
APPEAL JUDGMENT Deilvcr•d on y7 Avgust2008
sWAlN 0
(1§ This is an appeal against the Judgment of Levinsohn D J P sitting in the Durban Tax Codrt, in which a determinstion by the respondent that the sale transaction between the appellant and one Roux WaS a "schema" within the meaning of Section 73 (1) of tbe Value Added Tax Act 89 of 1991 (The VAT Act), was upheld.
{2] The background facts relevant to this appeal whiCh are common cause, are set out In paragraphs 3 - 18 of the judgment I the CDurt a quo, ar6 need not be repeated.
(3j As a consequence of the determination by the ‹espondent, a claim for notional input tax in terms of the VAT Act by the appellant, in the amount of R1,847,891.53 was disallowed by the respondent, who in addition levled a penalty of one hundred percent additional
tax.
(41 The crucial issue is whether the appellant discharged the onus of showing that the respondent was wrong in concluding that the sale trar›saotion was scheme to obtain a tax benefit, within tha msaning of Section 73 of the VAT A¢t, The Court a ęoo concluded that the appellant had failed in th!s endeavour, and it is this
conclusion which is challenged on appaal.
(5] The essence of tha enquiry in terms of Section 73 of the VAT
Act into any "schome", which in th‹s case is the said sale transaction,
is whether:
{5.1] Tie same was entered into, or carned out by means, or ir› a
manner, “which would n0t normally be employed for bona fide business
purposes. other than the obtaining of a tax benefit” or
[5.2] "has created rights Of obligations which would not normally be created. between persons dealing at arm's length" and
(5.3} was entered into, Or carried out solely or mg.inly for th0
purpos8S Of Obtaining a tax benefit.
[6) the rebuttable presumption contained in Section 73 (3), has the effect th6t once it ‹s proved that I.he scheme concerned, does or would result in a tax benefit. then it is presum.ed that the schef!'I was entered into. or carried out, solely or mainly, for tha purpose of
obtaining such tax benefit.
tg It is common cause that the safe transaction did produce a tax benefit, in the form of notional input tax and consequently the appellant bore the onus of proving that the sale was not concluded, solely or mainly, for the purposes of obtaining the notional input tax.
{8] The following evidence is relevant to determine whether, due regard being had to the substance of the sale agreement, it was entered into, or carried out by means, or in a manner, normally employed for bona fide business purposes, other than obtaining the
tax senefit.
4
{9] Ro x test ed that Executive Helicopters (Pty) Ltd
(Executive) wished tp buy aI! of the helicopter spares
pr¿2parea to offer one thousand shares in Tantco Global
and were
(Pty) Ltd.
(Tantco), plus a ship and a submarine in ‹eturñ, H9 howexr
refused to 6eIl all of la spares to Executive. and wanted to set a parcel of the 9pares to the appellant He said to Executive that they could then buy these remaining spares from the appellant.
(10a The explanation, advanced by P.0UX f0f Els conduct, was th8t he wanted shares in the appellant. All Of thB members' shares were held equally bg g|9 two daughters i-iIda McGovern and Y* Engelbrecht. I-Ie “desperately" Wanted shares in the appellant because he was the patent hoJdaF Of the device marketed by the ”appellant and th ng was s#pping&utgf f‘h\ honds
for him in the deal “was to grit thirty percent of the sh8res. b4Ck f/OM Dieso!
Tracker" and his “whole life was" that he wanted the shares bsck because of the device he had deveJopad and he saw the potential of this. It was “the most imporIa»t thlng' for him to get the shares d
“this was the only way“ for him to get the shares, namely by offering tha ship and submarine to hi9 daughters in return for shares in the
appellant.
[111 In addition, Roux maintained that the only benefit for him in the appellant at the outset was that he "had a job’ and “I was not happy but I haa no Ohoice at tr:s stage' and at that stage he ”load no members’ inter st in Dieal Tracker. I would heva worked for my own 9milY’.
{12] McGovern said that her father, ROUX 'Wanted back i•\o the Business° and “I th!nk he s6w that it was very importanftor jim to get back into the business" a0Ö ‘We didn't wsnt him in the business and ’it w6S Engelbracht gnd my bU9lness We had an agreement with Mr. Roux thBt he
was going t0 Work f0F US".
{UI The picture that is painted by this evidence is of a desperate Roux trying to acquire a members' interest in the appellant, so thgt he might share in the Spo||S which WOUJd flow from the exploitation and marketing of the device, which was after a0, his bfgif\child. frustrating this IOgitimatB dasire wera his two daughters, who did
not want him in the business of the appellant, and obdurately
refused to aIl'ow any members' interest in favour of Roux. Roux Was therefore compelled to overcome their raluCta.nce artd rg5iSt¥tnc@by offering them a deal whiCh Was so good they could not refuse.
(14) Ali of this evidence Is however directly contrad cted by me exchange of the following correspondence between the respondent
and the appellant. On 20 March 2006 be respondent wrote to the appellant requasting, inter a/ia, the following information.
‘According to lhe 8usiness P)an that Diesel Tracke‹ cc submittedtogether wilh thelr application for VAT registratlon, the diesel traCker unit, which Will b6 SOÏd / installed by the CC, was designed and dex«loped by Adriaan ROMX PÏease explain why Mr. Roux then had to purchase 15*/• of the shareholding In this CC if it is hiG' FOÖUct that will be so‹d / ineta0ed by the GC (in wrltIng)"-
The reply by the appatlant to this query dated 31 March 2006 is as foltow9:
fdUU*ROVa .V' *•••-••• -•- -• '
"Mr. AJ Roux designed the Diesel Tracker Unit and in fact the patsnt rights are rogieterad in Mr, AJ ROux's name aS p0r Annexure E:1•3. The rig.his for the production, sales and marketing were acquired by Oiesef Track+r cc at no cost due to the fact that km. AJ Roux was ladle to finance and 6¿ppoñ the futufe research, development, marketing and sales of the Diese) 7racI‹c Unit. Mr. AJ Roux would be issued 15°4 sh6‹8holdi in the member's interest in the cc at no coet. It was further agreed thot Mr, AJ Roux would be re»Ponslble (Or overseeing tha ant‹re project \n the General Manager capacity and be paid a salary, but only Once ‹ncomo was generated from the Diesa\ Tracker Unit, less arrangements were agreed to ve‹ocy.
The memóars of Oesel TracKef CC fUrth9red ąnd flnanced the projeat and sought other means of financing tle pro}ect. Tle transac ian lou tha purchase of tha ship and submarine avolved over a period of same 9 onths until II was finalisad and In so dolng a furthar 15% shareno1ding Qf member's intefest in tle cc was negotiated with Mr. AJ Roux aa payment for tho spares sold to
xacutivśH ic pte gMrAV Ręce pracemIdIng-a totaf of 36% —--— — — - - -
{15j Before examining the rami£lGations of this contradiction, \t ¥ neces9ary 1o deal with the context and manner in which tha letter. written on behalf of the appellant, wgs raised in evidence in the Court a quo.
(16) Under cross-examination, McGovern, after explain ng that Roux wanted to get back into the business of the appellant, said the following:
"I know that you are going t0 6hQw me a leker now saying thai In the beginning we said it was a verbal agreement that we would give him 10% of the business.
’ 7
That s right at the beglnnTng When the Shlp and the submarine carne p. we pot ev0rything together lt nas a new contract and we decided that hO 0Bf\
buy 30’/‹ shares of OÎe9elTracker"
(17} The contents of the letter, which formed part of the bundTe of documents placed before the Court a quo. were however not referrad to and neitrier McGovern nor Roux were a.sked to explain its contents. Mr. LOUW, S.C., who togetÜBf wÏth Mr, Ellis, a.ppear8d for the appellant, submitted that the fact that McGoV6*0 Spontäneously f'aferred to the letter was an indication of her onesty. I-Iowever, the contents of the letter, lead together with het attempted axplanation of its contents,albsit C yptic, IaadG Ir\B to 8
different conclusion.
(18a The contents of the letter flatly contradicts tf›e vidence of Roux in a number of respects. namely that rna wa9 desperate to obtain a members' interest in the appellant and this Was his motivation for diverting the sale of a portion of the helicopter spares, via the appellant to /xeCutivs, The letter also contradicts hl9 evidence that all he had was 6 )0b in the appellant and was redUG6d to the position of working for his family, which he was unhappy about. According to the correspondence, he was in fact Omitted at all times to a gratuitous members' interast Of fifteen perGent.
[19d McGovern did not dispute the accurac\‹ of the letter, but sought to explain its contents by saying that was the arrangement i!”l the beginning, which was overtaken by the later agreement to sell
Roux a thirty percent members' interest. This however is not what the letter clearly conveys, which is that Roux e as entitled to a fifteen percent members' interest gratuitously, the transaction for the purchase of the Ghip and submarine evolved over a period of nine months, and ”in so doing a further 150/ shareholding of member's Interest in the cc was negotiated with Mr. As \kfiiux 6s ayment for the spares sold to Executive Hei!coptats making Mr AU Rovx's shereh 0 a total of 30%" There was no agreement to sell Roux a thirty percent members' interest in return for the spares, according to the correspondence. The agreement was for the sale of only a fifteen percent members' interest.
{20) The response of ur. Louw, S.C., to this contradiction was to submit that sight must not be Io»t of the bigger picture, namely that the main objective of the appellant was the development and marketing of the device and the ship and submarine were acquired to achieve that objective. Their hire would generate a much needed sou,rce of income to develop and markel the device,
[21] However, the irresistible infersnca is that Roux and McGovem have been untruthful regsrd‹ng the expressed motivation of Roux, for selling a portion of the sparas to the appellant, as well as the details of the sale. Why would Roux and McGovern wish to rrii‹represent› what Roux's motivation was? If Roux's motivation in concludin9 ‹he deal was solely, or mainly, the objective contended
for by Mr. Louw, S.C , there would be no need for any deception.
The purpose of the deception must. have been to mask what the
truB or main purpose was, namely the acquisition by the appellant of an entitlement to payment of the notional input tax.
[22j I am fortified in this view by a number of other aspects of the sale, which l'eads me to the conclusion that the safe was not one which would normally be .employed for 6ona //de business purposes. They a'Iso lead me to conclude that the sale created rights or obligations, wtiich would not locally be created, between persons dealing at arm's length.
(23] Roux stated that tha saw price ror the spares of R15 mJtlion was baaed upon the valuation of R47 million for the 6hip and submarine. In other words, the thirty percent members' interest that
“ l2o acqured in return for the spares, ha a viañé”of RU mt!liâ1.- “ “ McGovern confirmed that the value of the assets of the appellant,
when the thirty percent membei's' interest was .sold to Roux, was R47 miIl'ion. Consequently, the cale price o/ the spares sold by Roux to the appellant wash not determined by refefer›ce to the inventory of spares and their valuation, carried out by Fouche of News Air Lease SA CC. The sale price of the spares wBs determined by the value of the .ship and the submarine, which the eppellant would acquire by the subsequent sale of the .same spafes to Executive. The disparity in to fictonal value of the spares on the one hand, and the true value of the sfi'ip 6nd the submarine an the other bartered by the appellant and Executive, is strikingly apparent. Why would Executive be prepared to exchange a shi'p and a submarine valued at R47 mi’IlJon for spares “valued" at R15 million? Tne answer is obvious. Executive obviously did nol care
how the assets they were prepared to barter for all of the spares, were divided between Roux and the appellant. Provided they acquired all of the spares, it was clearly irrelevant to Executive that the Tantco Global sha es, upon which no fixed value could be placed al tne time, because the mine was not Operational, were exchanged for spares valued at R97.5 million, whereas a ship and submarine worth R47 million. were exchanged for spares only “valued° at R15 million.
[24) In my v‹ew, seen in the above context, the sale transaction ”” was not one which would normally be employed for do/ a fide business purposes. other than to obtain the notiona| input tax Clearly Roux and the appellant cara not dealing with each other at arm’s length and the rights and obligations they created exhibit this characteristic. Why would Roux forego his right to a gratuitous fifteen percent members* interest in the appellant and replace it with an obligation to pay fn'r a thirty percent interest, the purchaSR price for which was R15 million worth of spares, the value of which was determined by assets tha apperant would subseq.uentIy acqu:ire, if the transaction was at arm's length†
[25) The evtdence given by Raum and McGovern as to what their knowledge was of the issue of national input tax, at the time the deal was conctuded, is causa for concern. McGovern, when asked by Levinsohn OJP whather anybody had thought of this at the time,
initially stated I don't know if We kQRV/ aböut that, thet wasn't our Main purpose but when pressed, stated that she did not know about ’rt. Roux, when asked by Levinsohn DJP whether Roux thought 6b0ut
the VAT implications of not being a registered vendor, and selling
the spares for R15 million stated.
"If I 9ay I did not think about it, 1 was also on my mid yes, but it actually has nothing to do with me"
but later said he was only advised by the accountant regarding notional input tax "when the claim was put in or the deal wd9 on" However, be then agreed with the suggestion that there was a discussion at›out VAT, when the deal was being structured and "done".
(26] When the vasiTlation Jn the evidence of goux and McGoverri in this regard is considered, in the context of the finding I have made as to their dishonesty in respect of their professed motivation for concluding the salR, /Bs well as the dstai\s of the sale, I am sgain driver to the conclusion that they have not bean honost in this regard,
{27] I am therefore satisfied that the Court a quo was correct in concluding thet the appellant had failad to discharge the onus of showing that the respondant wrongly concluded that this was a scheme to obtain a tax benefit, within the meaning of Section 73 of rhe VAT Act. It therefore becomes unnecessary to consider the remaining criticisms advanced by fair. Louw. S G., against th.e judgment of the Court a quo, which were largely based upon the
aFgUrrlgnt that the Court a quo wrongly decided that the spares were but Worth the value placed upon them. )p this regard Mr. Louw, S 3 , pointed to the valuation I have previously referred to. He
SUbFnitted that this view permeat0d the Judgment of the Court a quo
and led it to incorrectly reach the c•nclu6ion it did. In the view I take
Of the matter, and for the reasons I have set out above, I do not regard the issue of the valuation of tha spares as being of overriding significance.
(26) As regards the pona‹ty tmp»sed by tt›e respondent, in \errns of Section 60 of the Act, the only submiSStUn by Mr. Louw, S.C. in this regard, was that St had tO be f4und that the conduct of the appellant a t..n.›onaI'.ti e. that tha.scheme..wai enter.e6..i*lê with }he_ purpOse of oötaining the tax benefit. I have found this to be the
case.
(29} As regards the costs of the appeal, this matter was adjourned on two previous occasions. On the fret occasion the costs were reserved, and on the second the costs were oirectad fa de costs of the appeal. On the first occasion, the ap.peak was adjourned to
enable the appellant to obtain legal representation. On this bans,
Mr. van der Merwe, who appeared for the respondent, submitted that the appellant should be Ordered to pay the costs of the first adjOumment. Mr. LOuw, S,C subm\tted that each party should pay their own costs. Mr. •ar der Merwe's submission is clearly preferable.
[3D] I would therefore propose the following order:
The appeal is dismissed The appellant is ordered to p•y the costs of1he appeal, such costs to include the costs occasioned by the two previous adjournments of the appeal,
HERON J
I agfea and It is so ordered
Z7/08/Z 0 0'2 \ 0 ' 4 0
l4
Appeer•n ea:
For the Appellant
Instructed b.y
For the Respondents Instructed by
Date of Hearing
Date of Filing of Judgment
Adv. A. Leuw, S.C. With Adv, A. ElliS
Roelof vgndsr Netwe Attorneys Pretoria
Adv. M.P. van d9f MBfWO•
The mmrriissionerfor the S.A. Revenue Series/State Attorney
21 August 2009
27 August 2009