IN THE HIGH COURT OF FIJI
AT SUVA
APPELLATE JURISDICTION

CIVIL APPEAL NO. HBA0006 OF 1998

Between:

COLONIAL MUTUAL SOCIETY LIMITED
Appellant

and

THE COMMISSIONER OF INLAND REVENUE
Respondent

Dr. S. Sahu Khan for the Appellant
Mr. Amani Bale for the Respondent

Date of Judgment: 7.9.05

JUDGMENT

This is an appeal by Colonial Mutual Society Limited (the ‘CMSL’) from the decision of the VAT Tribunal (the ‘Tribunal’) on the issue whether CMSL is liable to pay tax under the Value Added Tax Decree 1991 (the ‘VAT Decree’). 

The Tribunal found that CMSL is liable. 

Facts

The Appellant, Colonial Mutual Life Assurance Society Ltd (CMSL) is a ‘registered person’ under the Value Added Tax Decree 1991 (VAT Decree). It is the owner of a commercial property in Suva known as the ‘Dominion House’. 

The premises were at the relevant time rented out to the following overseas missions: Australian Embassy, Japanese Embassy, French Embassy, and Commission of the European Community

CMSL had refused to pay VAT on the rent paid by these missions because their tenants (the various Embassies) are exempt from VAT under the Vienna Convention.

The appellant (the CMSL) had not accounted to the respondent (the CIR) for ‘output tax’ in respect of rent received from the said Overseas Missions, but it had claimed full input tax credits in respect of costs incurred by it in providing rental accommodation in Dominion house.

The Commissioner of Inland Revenue (the ‘CIR’) had assessed the Appellant CMSL for VAT and additional taxes since July 1992 in respect of rents received by it from the said Overseas Missions.

On 27 January 1996, the Appellant objected through notice to the assessments made by the Respondent. The Respondent rejected the objection by letter dated 20 June 1996 and hence the appeal was taken to the VAT Tribunal for a review of the Respondent’s decision.

On 6 October 1997, the VAT Tribunal dismissed the appeal. On 10 March 1997 the Appellant’s Reference of Appeal was filed before this Court.

Decision of the VAT Tribunal

Mr. M. J. C. Saunders (the Tribunal) in dismissing the appeal decided as follows:

a)	“Part III imposes a tax on imports and Part IV a tax on supply. Section 15 charges the tax on supply on services by a registered person in the course or furtherance of a taxable activity. The Appellant is clearly such a person so far as leasing properties is concerned.”

b)	“Any tenant, Embassy or not, is equally clearly not such a person as far as the payment of rent is concerned.”

c)	“A lessor, all other requirements having been met, is required to pay the supply tax irrespective of the tenant’s position so far as any VAT liability is concerned.”
Issues

The issues in this appeal are the same as the ones that were heard in the VAT Tribunal and they are as contained in the submission of the Respondent, namely:

.	Whether the assessments made by the Commissioner are correct in fact and in law;

.	Whether the Appellant is liable for the VAT when the Overseas Missions are refusing to pay the same.

Appellant’s Contention

The counsel for the appellant (CMSL) submits in short that VAT is not payable by the supplier (CMSL in this case) but it merely ‘charges’ the tax known as VAT on all the goods and services supplied. He says that CMSL is only effectively the tax collecting agency for CIR and is liable to account to the Commissioner for the VAT collected. This is in accordance with the said section 15(1) of the VAT Decree.

Dr. Sahu Khan submits that the position is made very clear by Keane D.J. in Case L29 (1989) 11 NZTC 1, 175 at 1, 179 (case supplied by the Respondent) where the Public Information Bulletin states:

“It is not intended, nor is it the effect, that GST (VAT in Fiji) be a tax on business profits or turnover. GST is ultimately a tax on the consumption and in reality is paid by the end-user. The Tax is, however, ‘collected’ along the way by ‘registered persons’ and ‘returned’ at regular intervals either to the Inland Revenue Department or the Customs Department.”
(emphasis mine).

Counsel goes on to submit that it is agreed that the ultimate duty to account for the Tax (VAT) and to pay the same to the Commissioner is on the supplier or ‘registered person’. However, that does not mean that the Tax is imposed on the supplier. As Keane D.J. stated on Page 1179 of the same case:

“No distortion seems to be involved in describing the supplier’s duty to pay Tax as a ‘liability’, even recognising the intent that the supplier merely collect the tax.”

Further, at page 1179 Keane D.J. stated:

“It appears to remain the case, however, that the supplier is the sole person under the Act, who has a duty to account for and to pay GST.”

Dr. Sahu Khan concludes by saying that as the ‘registered person’ the CMSL has the responsibility to charge the tax and as the collecting agency to collect it and forward it to the Commissioner. However, if it does not charge the tax then it shall not be liable to pay the same.

Counsel says that in this case the embassies are exempt from tax under the Vienna Convention.

Are foreign embassies liable for VAT?

The question now arises whether the embassies are liable for VAT.

I give below Dr. Sahu Khan’s argument on whether foreign embassies are liable for VAT or not.

He argues:

“…in this regard Article 23 of the Vienna Convention states:

1.	The sending State and the head of the mission shall be exempt from all national, regional or municipal dues and taxes in respect of the premises of the mission, whether owned or leased, other than such as represent payment for specific services rendered.

2.	The exemption from taxation referred to in this Article shall not
apply to such dues and taxes payable under the law of the receiving State by person contracting with the Sending State or the head of the mission.” (emphasis mine).

Under the said Article 23(1) the Embassies are exempt from all taxes in respect of their premises.

Article 23(2) applies if the Appellant was liable for such for VAT. 

Article 34 of the Vienna Convention that has been cited by the VAT unit states:-

“A diplomatic agent shall be exempt from all dues and taxes, personal or real, national, regional or municipal, except: (a) indirect taxes of a kind which are normally incorporated in the price of the goods or services.”

Article 34(2) applies to indirect taxes payable by a diplomatic agent under the Vienna Convention. In Article 1(e) there is a definition of ‘diplomatic agent’ namely:

“1.(e) a “diplomatic agent” is the head of the mission or a member of the diplomatic staff of the omission.”

Therefore, Article 34 is not applicable to embassies as such but only to “diplomatic agent”.

In the light of the above provisions counsel submits that Foreign Embassies and Overseas Missions are not liable to pay Tax. Therefore, CMSL cannot charge tax on those missions and embassies and hence CMSL cannot be liable to account for such tax.

It is the submission of the Appellant that the Commissioner relied upon and misconstrued section 34 of the Vienna Convention in making its decision on imposing tax. The Commissioner had all the time accepted in writing that under Article 23 of the Vienna Convention, the embassies and the EU Community were exempt from VAT. Exemption provided under Article 34 is where diplomatic agents are not exempted from indirect taxes of the receiving State.

Diplomatic agent is defined as “the head of the mission or a member of the diplomatic staff of the mission”. The Appellant contends that the Commissioner relied upon this Article to state that CMSL is liable to tax where it is submitted that it was completely irrelevant. Diplomatic agents are individuals and therefore Article 34 cannot apply here.

The contention is that the Commissioner was completely wrong by saying that the embassies are taxable under Article 34.

Respondent’s contention

Mr. Bale for the respondent (CIR) submits that the issue is whether CMSL is liable for VAT and not the Embassies because only CMSL is registered for VAT and not the Embassies. It has nothing to do with Embassies.

Mr. Bale submits that 	VAT is not charged on commodities per se but rather it is charged on the supply of commodities.

He referred to the case of Edwards & Edwards v Dittmer (1989) 11 NZTC 6,063 where Greig J stated at 6,065 that the calculation, return and payment of tax is provided for under the Act and it imposes the duty of calculating and paying on the vendor, the supplier of the goods and services. There is no obligation on the purchaser or receiver of the goods and services to pay tax under that Part of the Act.

The supplier (not the recipient) is the only person on whom the responsibility to pay tax is bestowed.

The parties themselves do not determine when and if VAT is charged. It is charged by virtue of the Decree and by virtue of the intention or the terms of a contract made between the parties, although the contract is normally a necessary incident of the application of VAT to a transaction.

It is therefore submitted by the respondent that it is irrelevant to the issue whether the tenant (recipient) is liable to taxation or not. The VAT Decree clearly provides that it is the supplier and not the recipient who is liable to pay the VAT on the supply of the services. Section 15(1) of the VAT Decree is relevant here which provides, inter alia:

(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 ten 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.

Furthermore, he submits that it is only the supplier who has recourse against the Commissioner and not the recipient. Also, that whether or not the Government of the Embassies in question is exempt from VAT under the Vienna Convention cannot affect the obligations of CMSL under the VAT Decree because CMSL is not a party to and has no rights under the Vienna Convention.

Therefore, the respondent submits that the VAT Tribunal did not err in law and in fact in dismissing the appeal and that his decision should be upheld.

Consideration of the issues

I shall now consider the issues before me.

Section 58 of the VAT Decree provides for an appeal to the High Court. It states as follows:

“If the appellant is dissatisfied with the decision of the Tribunal, he may, within twenty eight days after the date of such decision, give a written notice to the Commissioner ... that he desires to appeal from the decision. If an appellant gives such notice or if the Commissioner is dissatisfied with the decision, the Commissioner shall refer the matter to the High Court for hearing and determination… and the Commissioner shall notify the other party to the appeal that he has made such reference. On any such reference, the High Court shall hear and consider such matter upon the papers and evidence referred and upon any further evidence which the appellant or the Commissioner produces under the direction of the said Court.” 

In this case, the provisions of the VAT Decree allow the Court to hear and determine this matter in accordance with the papers and evidence produced in court.

After hearing both sides the Tribunal (Honourable M.J.C. Saunders) gave his decision in terms stated at the beginning.

After referring to the said s15 he came to the conclusion that since the CMSL conducted a ‘taxable activity’, and whether Embassies are exempted or not, the CMSL is still liable.

This is a bare statement with all due respect and no reasoning has been advanced for arriving at this conclusion or decision. It is not stated whether Dr. Sahu Khan’s arguments have been considered or not. 

Issue 1

The first issue is whether the assessments of the Commissioner are correct in fact and in law?

I have set out in some detail the appellant’s argument on this issue.

I agree with Dr. Sahu Khan in the arguments advanced by him and his interpretation of the said section 15.

Since the embassies are exempt for tax and no tax has been charged the appellant should not have to account to the Commissioner for VAT under s15 of the VAT Decree.

As I said the Tribunal referred to the said section 15 of the VAT Decree as a basis on which he found that the Appellant fell within the criteria under this section.

However, the Appellant contends that the basis on which the Commissioner made his decision was on Article 34 of the Vienna Convention referred to hereabove.

The appropriate section to which the Tribunal should have based his decision is Article 23 of the Vienna Convention provisions whereof have been stated hereabove.

This Article is specific in exempting Overseas Missions from taxes and dues on premises. There can be no other interpretation of the section other than the meaning that it suggests. In this case, I hold that Overseas Missions are exempted from taxes on the use of premises.

I also refer to Article 23(3). That Article means that the exemption from tax under the said Article 23(2) shall not apply to those persons contracting with the sending State or the head of the mission, who owe under the law such dues and taxes to the receiving State. In this case, CMSL is the contracting party with the sending States of Australia, Japan, French and the Community of the European Union and although its activity is a ‘taxable activity’ otherwise, does not warrant taxes under the VAT Decree in the case of Embassies. 

Therefore, CMSL can claim exemption under the provisions of the Vienna Convention. Had the Convention and the Embassies not been dragged into the case, then the matter would have been simple and under s15 CMSL could not have escaped from paying tax.

There appears to be a lacuna or loophole in the law or it is not spelt out in so many words what the law is in this regard. I find that the liability of the respective parties are not clearly stated in the Vat Decree. 

The Commissioner has therefore in fact made an error in law in making his assessments of holding CMSL liable for tax.

Issues 2

Whether the Appellant is liable to pay VAT when the Overseas Missions are refusing to pay the same.

Here again on this issue I agree with Dr. Sahu Khan’s arguments.

I have also come to the conclusion that since the Embassies are exempt and are not liable to pay tax, under the said section 15, the CMSL (the appellant) cannot be made liable to account for such tax when none is required to be ‘charged’ under the exemption provisions.

I refer to he said section 15 of the VAT Decree. 

The relevant elements of this provision are: supply made in Fiji, of goods and services, on or after 1st July 1992, by a registered person, in the course or furtherance of a taxable activity and not being an exempt supply. 

Furthermore, the Decree makes it compulsory for every registered person to pay tax, as provided under section 40(1) which states that: 

“Every registered person, for each taxable period, shall, not later than the last day allowed under this Decree for furnishing a return for that taxable period, pay to the Commissioner the tax payable for that period as calculated pursuant to section 39 of this Decree.”

CMSL makes the assertion and I agree that they cannot possibly be required to pay tax as they cannot collect tax from its tenants namely, the Embassies. The tenants are under the Vienna Convention, to which Fiji is a party to, exempted from paying tax. This assertion comes from the fact that the provisions of section 15 of the VAT Decree allows only for the charging of the tax by a registered person but not on paying for the tax. Also that CMSL is only acting as a collecting agent of the tax. In addition, where the Overseas Missions are exempt from taxes, they could not possibly have charged tax on their supply.

To determine whether CMSL is liable is to define the elements of the imposition of tax. The meaning of the word “supply” under the VAT Decree states that:

“3(2) where goods and services acquired or produced by a registered person in the course or furtherance of making taxable supplies by that person are appropriated to use other than for the purposes of making those taxable supplies, the appropriation of those goods and services shall be deemed to be a supply made in the course or furtherance of that person’s taxable activity.” 

‘Taxable activity’ means:

“For the purposes of this Decree, the term “taxable activity” means:

4(1)(a) 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 on in the form of a business, services, trade, manufacture, profession, vocation, association, or club; and …..”

The question then is whether CMSL falls under the definition stated above. CMSL is the landlord of the Dominion House to which they provide services of renting out premises to various businesses and offices. One such activity is renting out part of their premises to the said Overseas Missions.

Thus by renting its premises, CMSL is then, under the definition of supply stated above, deemed to have its “services produced by a registered person”. CMSL is registered under the VAT Decree. In addition, the “taxable activity” that CMSL is said to have been carrying out is the business of renting its premises.

On the question of CMSL being merely a collecting agent, it is my view that this is correct. It is also so that it is conducting a “taxable activity”.

Had it not been for the exemption granted the Embassies, the CMSL
would have been liable to account to CIR for VAT.

In the outcome, on the facts and circumstances of this Appeal for the above reasons I find that the Appellant is not liable to pay tax under the VAT Decree and that it falls into the category of being exempt from paying tax. The Appellant’s contention that it cannot possibly be allowed to be charged tax is upheld as it does not receive tax itself. 

I uphold the submissions of Dr. Sahu Khan in toto and do not agree with the respondent’s interpretation of the relevant sections of the Vat Decree and the Vienna Convention.

Therefore, the appeal succeeds and is allowed with costs the sum of $500.00 to be paid by the respondent to the appellant within 28 days.

D. Pathik
Judge

At Suva
7 September 2005