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IN THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA
Case Number : 472 / 1998
In the matter between
COMSHIPCO SCHIFFAHRTSAGENTUR
GmbH Appellant
and
THE
COMMISSIONER FOR SOUTH AFRICAN
REVENUE
SERVICE Respondent
Composition of the Court : VIVIER,
OLIVIER, STREICHER AND ZULMAN JJA; MPATI AJA
Date of hearing : 20 NOVEMBER
2000
Date of delivery : 19 MARCH
2001
SUMMARY
Address commission paid by a disponent owner of a ship
to the charterer is not expenditure for the purposes of section 11 bis (4)
(f)
of the Income Tax Act 58 of 1962 as amended.
J U D G M E N T
OLIVIER JA
[1] The issue on appeal is whether the appellant is entitled to deduct
the so-called address commission paid by it as disponent owner of ships
to charterers of these ships from its income for the years 1 October 1988
to 30 September 1992 as a marketing allowance for the purposes of
section 11 bis (4) (f) of the Income Tax Act 58 of 1962 as amended (“the
Act”).
[2] The respondent (“the Commissioner”) disallowed the
deduction of
the said commission. An appeal by the taxpayer, the
appellant, against such disallowance was dismissed by the Natal Income Tax
Special
Court, Galgut J presiding. The learned judge later granted leave to
the appellant to appeal the said decision to this Court.
The background
[3] The appellant conducts business in Durban as a ship charterer.
It
is a “domestic company” for the purposes of the Act, and is
liable for payment of income tax in terms of the Act.
[4] The appellant’s business operations were described as
follows by
the court a quo:
“The taxpayer’s business operations consist of the chartering in
by it of ships, and in turn by chartering them out.
When chartering in it does
so by means of time charterparties, and when chartering out by means of either
voyage or time charterparties.
Unlike charters by demise, which are charters
whereby the vessel itself is leased to the charterer and is therefore placed in
the
possession and control of the charterer, voyage and time charters are both
contracts of carriage, in which the owner retains such
possession and control
and in which the owner remains responsible for the navigation and management of
the vessel.
In the case of a voyage charter the carriage is on a defined
voyage or series of voyages, the owner being renumerated by the payment
of
freight, which is usually fixed according to the quantity of cargo shipped.
The master and crew remain the owner’s servants,
the owner retaining
possession of the vessel through them.
A time charter is one where, for a
specific period, the owner makes the vessel available to the charterer, the
consideration payable
by the charterer being fixed by way of a rate for the time
concerned (the rate being called hire, despite the fact that it is not
a lease).
Once again the owner retains possession of the vessel through its master and
crew, who remain his servants, but the charterer
is entitled to determine how
the ship is to be used. Like in the case of a voyage charter, the owner
remains responsible for the
navigation and management of the vessel, something
that I will return to presently.
When a charterer in its turn charters out
the vessel, as does the taxpayer, for the purpose of chartering out it is
referred to as
the disponent owner. As such its obligations to its charterer,
whether it be a voyage or a time charter, are essentially those
of an owner.
It will therefore be such a charterer out, as disponent owner, who will be
responsible, to the charterer at any rate,
for the navigation and management of
the vessel.
Important to the issue in the instant appeal is the responsibility of an owner or disponent owner for the navigation and management of the vessel. (In this regard any reference I make to an owner hereinafter will include a disponent owner.) As part of the said responsibility, and in the absence of a provision to the contrary in the charterparty concerned, in both voyage and time charters it is the function and obligation of the owner towards the charterer to arrange inter alia that the vessel gets into and out of the ports it stops at and that the loading and unloading are done, and in these connections to pay such disbursements as may be necessary, such as port charges, the hire of labour, and the like. It even includes bribes for the purpose of getting a favourable berth. Because these services and payments are vital to the issue in the instant appeal, in the absence of a better description I shall refer to them collectively as port services.
What is at issue in the instant appeal, as I said earlier, are so-called
address commissions.”
[5] Three witnesses were called by the appellant to explain to the
court
a quo the nature of address commission. The court a
quo summarised its nature and effect as follows:
“These are peculiar to the shipping industry, and have been in
existence for a few centuries. They are commissions paid by
an owner to a
charterer. When such a commission is demanded by a charterer it is because,
despite the fact that what I call the
port services are the obligation of the
owner, it is the charterer who, in the interests of the owner no less than in
its own interest,
as a rule
undertakes them. The address commission is in
other words paid by the owner for the benefit of having the charterer undertake
the
port services for which the owner would otherwise have been responsible.
The commission is not reimbursive in the sense of compensating
the charterer for
its expenses, firstly because it is not only for disbursements but also in part
for services rendered that it is
intended to remunerate the charterer, and
secondly because to the extent that it serves to cover disbursements that the
charterer
will incur, it is not intended to be an exact remuneration. On the
contrary the amount, which is fixed in advance, is always expressed
to be a
percentage of ‘the hire earned and paid’ under the charterparty, the
percentage usually being 1.25%. The percentage
is by no means fixed, however,
because in some cases, very much in the minority, the address commission is not
demanded by the charterer,
and in other cases the percentage demanded might be
less or more that 1.25%.”
[6] The description by the judge a quo of the nature and ambit
of
“address commission” seems to me to be in accordance with the
universal understanding of that concept. In the Oxford
English Dictionary,
2nd ed, 1989 one finds as one of the meanings of the word
“address”, “ ... the action of directing or dispatching
(to a
person or place). Still said of ships.” As example the following is
quoted “1882 Charter-party, ship to be addressed
to Charterers or their
Agents at port of discharge, paying 3% address commission”. See also the
discussion of “address
commission” by Ackner, L J in Harmony
Shipping Co. S.A. v Saudi-Europe Line Ltd
(The “Good
Helmsman”), Court of Appeal, 1981 vol 1 Lloyd’s Law Reports
377 at 419 - 421.
[7] It appears from the exhibits before the court a quo that
the address
commissions claimed by the appellant for the years in issue were
provided for in terms of the written charterparties entered into
between the
appellant and the various charterers. The charterparties were concluded on the
commonly used New York Produce Exchange form. Clause 28 thereof
provides for the address commission and reads as follows:
“28 An address commission of 1.25% payable to charterers on the hire
earned and paid under this charter.”
[8] The peculiar character of the address commission is, therefore,
that
it is paid by the “lessor” to the “lessee”.
Was this commission deductible by the lessor from its income
for taxation
purposes?
The Act
[9] The appellant relies on the provisions of section 11 bis
(4) (f) of the
Act. In order to understand the provision, it is necessary
to refer to its history.
[10] Section 11 bis of the Act was enacted and introduced in
1962. It
created a deduction which was additional to the usual deductions
claimable by a taxpayer who derived income from trade. It created
an
exporter’s “market development allowance” and at that
time it was intended, and so worded, to benefit the exporter of goods
only (see section 11 bis and the remarks in Secretary for Inland
Revenue v Consolidated Citrus Estates Limited 1976 (4) SA 500 (A) at 510
E - G and 517 H).
[11] In 1972, however, and by various amendments to section 11
bis,
the ambit of the section was broadened to embrace not only the
export of goods, but of certain services as well, such services
being those which had to do with what the section as amended called the
“export service industry”.
For this purpose the definition of
“exporter” was supplemented to include, not only an exporter of
goods, but also
any person who conducted an export service industry, and the
definition of “export trade” was supplemented to include
any trade
recognised by the Minister of Finance under sub-section (4B) as an export
service industry. Sub-section (4B) provided
in turn that the Minister might by
notice in the Government Gazette recognise as an export service industry
any trade carried on in the Republic if he was satisfied that in the course of
that trade
income was derived in a manner calculated to result directly in an
inflow of foreign currency into the Republic. Acting in terms
of sub-section
(4B), the Minister caused Government Notice no 1184 to be published in
Government Gazette no 5208 dated 9 July 1976, and in terms thereof one of
the trades that he recognised as an export service industry for the purposes
of
section 11 bis was that of the “owners or charterers of
ships”.
[12] It is common cause that the appellant then duly took the
necessary
steps, and was registered as an exporter for the purposes of
sub-section (4C). Consequently it is not in dispute that for the tax
years in
question the appellant was involved in the “export service industry”
for the purposes of section 11 bis, and that it was an exporter as
defined in sub-section 11 (1) and that it would qualify for the exporter’s
marketing allowance
should it meet the other requirements of the section.
[13] Section 11 bis (2) provides that the marketing allowance
would be
available to exporters who have incurred the sort of marketing
expenditure provided for in paragraphs (a) to (o) of sub-section (4), and
sub-section (3) provides that the marketing allowance would be an amount
equal
to seventy-five percent of the marketing expenditure.
[14] This brings me to sub-section (4) and in particular to paragraph
(f)
thereof. It reads as follows:
“(4) For the purposes of subsection (3) the marketing expenditure on which the marketing allowance is to be calculated shall be so much of the expenditure incurred by the exporter during the year of assessment and allowed to be deducted from his income under sections 11 and 17 as is proved to the satisfaction of the Commissioner to have been incurred directly -
............
............
... in respect of commission or other remuneration for orders
for goods exported to any export country or the clearing or forwarding of
any
such goods in such country and, in the case of an exporter who carries on any
trade defined or recognised under subsection (4B) as an export service industry,
any commission or other remuneration for orders for services or goods
obtained in the course of such trade from persons based in an export
country.” (My italics)
[15] This means that to qualify for the exporter’s marketing allowance,
the marketing expenditure must be proved to be:
“ ... so much of the expenditure ... as is ... incurred directly ... in
respect of ... commission or other remuneration for
orders for services ...
obtained ... from persons based in an export country.”
[16] Grammatically and logically one must insert the words “the
procurement of” after the words “commission or other
remuneration for” in subparagraph (f). It is clear that,
as in the case
of the export of goods, the legislature intended to encourage the export of
services by a South African taxpayer in
order to stimulate an inflow into the
Republic of foreign currency, paid by the user of such services. Subsection 11
bis (4B) (a) says this in so many words.
[17] It follows that the situation envisaged by the legislator which
would
qualify for the benefits under section 11 bis (4) (f), is one
where the provider of services in South Africa, ie the taxpayer,
pays commission to an agent, to remunerate the agent for procuring orders for
the services of the South African taxpayer in question,
from persons based in a
foreign country.
[18] Only if one reads the subsection in this way does it become
reconcilable with the other provisions of section 11 bis (4), where a
marketing allowance is recognised for expenditure incurred by the exporter for
research into or obtaining information
(including the remuneration of
consultants, agents or representatives) in respect of the marketing of goods in
any export country
or for the rendering of services to persons based in an
export country (subparagraph (a)); in advertising in an export country or
in
soliciting orders in, or participating in trade fairs in export countries
(subparagraph (b)), etc.
[19] The position is thus that subparagraph (f) envisages that the
South
African exporter of a particular service employs an agent to procure
orders from users of that service in an export country. The
users pay the
service provider for the services provided; the agent is entitled to a
commission for the procurement of the order
for the services provided by the
South African exporter.
[20] The words “or other remuneration” must be read in the context of
the situation described above. It extends the concept of
“commission”.
Perhaps the intermediary who procures the orders
for the exporter’s
service is not an agent of whom it can be said that
he earned a
commission. He may be a broker or an intermediary, who does
not work
for a commission but for another form of remuneration, eg a salary.
Clearly it was the legislature’s intention that whether it is
commission that
is paid or any other form of remuneration, the amount thus
paid by the
exporter qualifies for tax deduction.
[21] I am, therefore, in respectful agreement with the view taken of
the
meaning of the word “commission” in the context of section
11 bis (4) (f) by Corbett CJ in Commissioner for Inland Revenue v
Wandrag Asbestos (Pty) Ltd 1995 (2) SA 197 (A)
(“Wandrag”). In delivering a minority judgment the learned
Chief Justice pointed out at p 214 B that the word “commission”
is
not a term of legal art. He also referred to the Oxford English Dictionary
where “commission” is defined as
“A remuneration for services or work done as an agent, in the form of a
percentage on the amount involved in the transactions;
a pro rata
remuneration to an agent or factor.”
[22] The learned Chief Justice dealt also with the phrase in section
11 bis (4) (f) which is also now under consideration, but in the
context of the export of goods. He said (at 214 E) that the words
“commission
or other remuneration for orders for goods exported to any
export country” are cryptic, but that their meaning is reasonably
clear.
He then stated :
“What the Legislature had in mind, in my view, was expenditure incurred
in the payment of, or an obligation to pay, commission
or other remuneration to
a person for services rendered in obtaining orders for goods which in terms of
the order are exported to
any export country. ... A simple, but typical, case
satisfying the requirements of section 11 (bis) (4) (f) would be where A,
an exporter, has paid R 1 000 to agent B for obtaining an order in terms of
which a quantity of A’s
goods are sold to a purchaser in an export
country.”
[23] Because the judgment of the learned Chief Justice was a minority
one, it is necessary to analyse the facts of the case and the ratio
of the majority judgment in order to ascertain whether the view put forward in
paragraphs [17] to [20] is correct. The facts in Wandrag were the
following: Wandrag was a mining concern, mining and producing asbestos at
Kuruman. Towards the end of 1967, and in order
to secure the marketing of its
asbestos, Wandrag concluded a contract with Griqualand Exploration and
Finance Co Ltd (“Gefco”), which was also a producer and seller
of
asbestos. Wandrag’s aim in the contract was to make use of Gefco’s
existing facilities both for upgrading Wandrag’s
product (Gefco would
further fiberise and blend it with its own fibres) and for marketing the product
overseas. Having blended
Wandrag’s fibres with its own, Gefco would
export the product to overseas buyers acquired by Gefco through its marketing
facilities.
Clause 4 (a) of the agreement provided that Gefco was entitled to
a “selling commission of 15% on the fob price of the fibre”.
The
Commissioner disputed that the 15% “commission” constituted
marketing expenditure within the meaning of that term
in section 11 bis
(4) (f), because the “selling commission” so called in the
contract was not a true commission.
[24] The Commissioner argued that the contract was in reality one of
sale, and the “commission” clause was merely a mechanism to
calculate the net price to be paid by Gefco. Wandrag argued
that the contract
was one of agency or, alternatively, a joint venture.
[25] The majority held that the contract was sui generis, but
that its
purpose was clear : Wandrag was totally dependent upon an export
market but lacked the marketing and processing facilities to obtain
such a
market. The agreement enabled Wandrag to overcome this problem. The
reciprocal benefit it held for Gefco was that it eliminated
potential
competitors in the export market (at 206 G-H per Kumleben JA on behalf of the
majority).
[26] The majority held that the “commission” payable by
Wandrag to
Gefco was commission as envisaged in section 11 bis (4)
(f). Kumleben JA (at 208 F - H) stated as follows:
“It cannot be gainsaid that this payment was, and was intended to be,
remuneration for Gefco for such procurement through its
(Gefco’s)
appointed agents and perhaps employees. It was conceded that had Wandrag
appointed and paid its own foreign agents
for this purpose, the expenditure
would have been directly incurred by Wandrag whether or not they in turn
appointed subagents who
actually secured the orders. I can see no distinction
in principle between that situation and the present in which Gefco was
commissioned
and paid to undertake this task and it in turn appointed agents who
obtained the orders. It is true that the agreement as a whole
cannot be
classified as one of agency. But, on the assumption that the selling
commission in clause 4 (a) was the quid pro quo for marketing
Wandrag’s asbestos and for nothing else, one may validly regard this term
of the agreement as one of agency in
the sense of a mandate given by Wandrag
(the mandator) to Gefco (the mandatory) in terms of which the latter undertook
to perform
the task of procuring orders for export for the
former.”
[27] The view taken in paragraphs [17] to [20] hereof in respect of
the
interpretation of section 11 bis (4) (f) is therefore in line
with the interpretation given to it by both the majority and by the learned
Chief Justice, ie that the true meaning of “commission or other
remuneration”in section 11 bis (4) (f) represents, in a case such as the
present, an amount paid by the disponent owner to an agent or broker or other
intermediary who obtains, from a third party in an
export country, orders for
the services provided by the disponent owner.
[28] The question then becomes a factual one : can it be said that in
the
cases now under consideration the charterers acted as agents, brokers or
some other form of intermediary for the appellant in the
procurement of
orders for the services, provided by the appellant, by users of
such services in an export country?
[29] As was correctly pointed out by the judge a quo, address
commission is paid by the disponent owner to the charterer for the benefit
of having the charterer undertake the port services for
which the owner would
otherwise have been responsible. The “commission” is not
reimbursive in the sense of compensating
the charterer for its expenses, firstly
because it is not only for disbursements made by the charterer but also in part
for services
rendered by it at the port of discharge, and secondly because, to
the extent that it serves to cover disbursements that the charterer
may incur,
it is not an exact remuneration.
[30] In a certain sense one can describe the charterer who undertakes
and pays for the port services for which the owner would otherwise have been
responsible as the agent of the disponent owner. Non constat that the
“commission” paid qualifies for the benefits provided by section 11
bis (4) (f) of the Act. The disponent
owner who pays address commission to the
charterer of the owner’s ship does not pay such commission to remunerate
the charterer
for procuring orders for the services of the disponent
owner. On the contrary, the commission is paid as remuneration for port
services rendered by third parties for the benefit of the disponent owner.
This commission is not paid as a marketing expenditure incurred for the
procurement of orders for the services rendered by the taxpayer (the
disponent owner), but is an expenditure for the procurement of port services
rendered to the taxpayer. It follows that “address
commission” does not qualify for the tax benefits in terms of section 11
bis
(4) (f) of the Act.
[31] In the result, the appeal is dismissed with costs, including the
costs
of two counsel.
P J J OLIVIER JA
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