South Atlantic Jazz Festival (Pty) Ltd v CSARS – HC A129/2014 WC 6 February 2015
14 April 2015
Posted by: Author: Erich Bell
Author: Erich Bell (SAIT Technical)
This case is an appeal to the Western Cape High Court ("Court”) and considers whether a supplier’s failure to issue a tax invoice, despite being demanded by the vendor to do so, precludes the vendor from applying the provisions of either section 20(7) or section 16(2)(f) of the Value-Added Tax Act (No. 89 of 1991) ("VAT Act”) to claim an input tax deduction.
The appellant staged international jazz festivals on an annual basis for which it concluded sponsorship contracts with South African Airways, the City of Cape Town, the South African Broadcasting Corporation and Telkom. In terms of these sponsorship contracts the sponsors paid money and provided goods and services for the festival. The taxpayer then as quod pro quo provided branding and marketing services to the sponsors. It was common cause between the parties that the contracts represented barter transactions. All parties were registered vendors.
The appellant was liable to declare output tax on the value of supply of its branding and marketing services in terms of section 7(1)(a) of the VAT Act, but failed to do so. SARS accordingly raised additional assessments based on the values and terms stipulated in the sponsorship contracts. The appellant did not contest the liability for output tax on the transactions but it contended that it should be entitled to offset that liability with the input tax attributable to the supplies made to the sponsors in terms of the provisions of either sections 20(7) or 16(2)(f) of the VAT Act. The appellant’s reliance on the aforesaid sections stemmed from the fact that the sponsors never issued tax invoices to it in terms of section 20 of the VAT Act and that the contracts should therefore serve as proof of its entitlement to a deduction of input tax. It was furthermore contended by the appellant that the Commissioner is responsible, in terms of section 4(1) of the VAT Act, to carry out the provisions of the Act and that he took no action against the sponsors to ensure compliance with section 20, nor did he impose punitive measures on them.
Both the Commissioner, in the taxpayer’s objection, and the Tax Court, on appeal, denied the application of section 16(2)(f) which would entitle the appellant to claim input tax on the said supplies. The Commissioner’s grounds were that the taxpayer was not in possession of a valid tax invoice, while the Tax Court held that the appellant ought to have created its own tax invoices in terms of section 20(2) of the VAT Act (due to the failure by the sponsors to issue tax invoices to the appellant).
The Court held that even though some of the sponsorship contracts expressly stated that it excluded VAT in certain circumstances, the proviso to section 10(2) of the VAT Act must operate to deem output tax (equal to the tax fraction of the open market value of the goods and services) to have been included in the value of the supply due to the fact that the sponsors did not separately account therefor. It was further held that the sponsors should have provided the appellant with tax invoices. The High Court therefore had to decide whether the provisions of either section 20(7)(b) or 16(2)(f) of the VAT Act should have been applied to allow the appellant to deduct the input tax as a result of the failure of the sponsors to issue tax invoices to the appellant.
The Court held that with regards to section 20(7)(b) that the Commissioner must be satisfied that there must be (a) an existence or availability of sufficient documentary records and (b) that it would be impractical to require a full tax invoice to be issued before the Commissioner may direct that no tax invoice is required to be issued. The Court accepted that the sponsorship contracts constituted sufficient documentary evidence but held that it would not have been impractical in the present case for the sponsors to have issued full tax invoices.
Section 16(2)(f) of the VAT Act, before its amendment by the Taxation Laws Amendment Act (No. 31 of 2013) held the following (emphasis added):
"No deduction of input tax in respect of a supply of goods or services…or any other deduction shall be made in terms of this Act, unless –
(f) the vendor, in any other case, is in possession of documentary proof, as is acceptable to the Commissioner, substantiating the vendor’s entitlement to the deduction at the time a return in respect of the deduction is furnished.”
The Court held that the contracts serve as proof for the vendor’s entitlement to the input tax deductions where the following was held by Binns-Ward J at paragraph :
"…If the documents were good enough for the Commissioner to assess the appellant’s output tax liability, it is impossible to conceive, having regard to the character of the particular transactions, why they should not also have been sufficient for the purpose of computing the input tax which should have been deemed to have been levied by the sponsors…”
SARS raised three arguments in an attempt to prevent the application of section 16(2)(f), each one of these arguments is dealt with below.
1. The Commissioner contended that section 16(2)(f) is not applicable to deductions claimed in respect of input tax. The Court rejected this contention and held that the phrase "in any other case” refers to in any case other than those in section 16(2)(a)-(e) and that section 16(2)(f) applies to deductions of input tax.
2. It was further contended by the Commissioner that the sponsorship contracts may not accurately represent the value of the services rendered and consideration paid therefore and that it doesn’t comply with section 20(4) of the VAT Act. In this regard the Court firstly held that the Commissioner may not raise a new ground for the first time during this stage of the proceedings as the appellant needs to produce evidence to the contrary. It was furthermore held that this contention is unattainable as the Commissioner used the contracts as basis to calculate the appellant’s output tax liability. With regards to the contention that the sponsorship contracts do not comply with section 20(4) of the VAT Act, the Court held that if the requirements of section 20(4) had to be satisfied then there would be no need or scope for section 16(2)(f) and that the argument must therefore fail.
3. Lastly the Commissioner contended that its decision not to allow the input tax deduction in terms of section 16(2)(f) constitutes and "administrative action” for purposes of the Promotion to Administrative Justice Act (No. 3 of 2000) ("PAJA”) and that the decision can only be reviewed through an application in terms of section 6 of the PAJA and not by an appeal in terms of the VAT Act. The Court held that this contention is comparable to the case considered in Kommissaris van Binnelandse Inkomste v Transvaalse Suikerkorporasie Bpk 1985 (2) SA 668 (T). In this regard Binns-Ward J referred to p. 671G-I of the case supra where van der Walt J held the following at paragraph :
"…It held that save in respect of decisions in relation to which a right of appeal was expressly excluded by the tax legislation, the tax court was empowered to take into consideration whether or not the Commissioner had properly exercised his discretion in respect of making assessments that were subject to appeal. In that context, so the Court held, where the exercise of discretion is pertinent to the making of the impugned assessment, the ‘appeal’ is in reality a ‘review’ of the Commissioner’s decision on customary review grounds…”
In this regard, Binns-Ward J held the following at paragraph  (emphasis added):
"There has been no suggestion by the Commissioner that the assessments in issue in the current case were not susceptible to appeal. The Commissioner’s decision not to allow a deduction in terms of s16(2)(f) of the VAT At was integral to the making of the assessments. The matter is thus in all respects relevant for the jurisdictional argument directly analogous to that which presented in Transvaalse Suikerkorporasie...The appellant in the current matter was exercising a right of appeal to the tax court against the assessments: it was not seeking the review and setting aside of a decision in terms of s16(2)(f) of the VAT Act. The fact that the determination of the appeal might entail the tax court in considering the legality of an administrative decision that was integral to the making of the assessment does not deprive the court of its jurisdiction to decide the appeal. To interpret and apply the legislation as requiring the dichotomous procedures enjoined in the argument advanced on behalf of the Commissioner would in many cases defeat the very purpose of the establishment of the specialist tax court. The jurisdiction of the tax court to determine tax appeals is conferred without any limitation in s117(1) of the TAA. The court must be taken to have been invested with all the powers that are inherently necessary for it to fulfil its expressly provided functions.”
The appeal succeeded with the following order:
1. The appeal is upheld with costs.
2. The order of the tax court is set aside and replaced with an order as follows:
(i) The appellant’s appeal against the additional VAT assessments made for the tax periods 04/2006, 12/2006, 04/2007, 08/2007 and 12/2007 is upheld
(ii) The assessments are set aside and referred back to the Commissioner for reconsideration.
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