IN THE COURT OF APPEAL OF TONGA
APPELLATE JURISDICTION
NUKU’ALOFA REGISTRY

AC 13 of 2017

[AM 4 of 2017]

BETWEEN:	FRIENDLY ISLANDS SATELLITE COMMUNICATIONS COMPANY LIMITED (TONGASAT)				
- Appellant

AND:			MINISTER OF REVENUE AND CUSTOMS					
										- Respondent	

Coram     		 :	Handley J
				Blanchard J 
				Hansen J

Counsel 		:	Mr. W. Edwards for the Appellant
Mr. S. Sisifa SC for the Respondent

Date of Hearing		:	20 March 2018
Date of Judgment		:	 26 March 2018

JUDGMENT OF THE COURT

[1]	This appeal concerns the liability of the appellant for consumption tax (CT) under the Consumption Tax Act 2003 (the Act) on the services it rendered to the Government of Tonga under two agreements.  

[2]	The first was an agency agreement dated 30 June 1994 and the second an assignment and licence agreement dated 31 May 2014 (the licence agreement) The agency agreement was terminated by an agreement dated 30 April 2009 with effect from 5 September 2008, but the Company’s right to further payments in respect of contracts already entered into with third parties was preserved until 2038. 

[3]	Tonga entered into the agency and licence agreements in order to exploit the geostationary and non-geostationary communication satellite orbital positions allocated to Tonga by the International Telecommunications Union (ITU) of Geneva, an organisation under the auspices of the United Nations.

[4]	The Government evidently realised in 1994 that it lacked the ability at that time to exploit those orbital positions itself and believed that the Company would be able to assist it in doing this.

[5]	The agency agreement established a normal relationship of principal and agent between the Government and the Company. The Government appointed the Company its exclusive agent to enter into contracts for the launching or operating of satellites in the orbital positions allocated to Tonga including submitting registration and other filings with the ITU and associated services.

[6]	Under cl 1.4 all contracts entered into by the Company with third parties relating to the use of Tonga’s orbital positions were subject to the approval of the Government, such approval not to be unreasonably withheld. Under cl 1.5 the Company was obliged to negotiate contracts in good faith in an effort to secure a reasonable amount of gross revenue for the parties, but the Government would not normally be involved in negotiations with third parties.

[7]	The agency agreement was to expire on 8 April 2038 with provision for renegotiation after 1 July 2003.

[8]	The gross receipts from contracts negotiated by the Company were to be deposited within 10 days in an account opened by the Company (cl 3.1). Copies of monthly bank statements were to be sent directly to the Government. The relevant bank account was opened in Hong Kong.

[9]	Clauses 3.2 and 3.3 provided for the Company’s gross revenue above $US 5 million to be shared equally with the Government. The Company was obliged to pay Tongan income tax after deducting its payments to the Government (cl 3.5).

[10]	Under cl 4.2 the Company was obliged to submit audited financial statements within 3 months of the end of the financial year.

[11]	The Company assumed full responsibility for managing the registration and other requirements of the Radio Regulation Board (RRB) of the ITU (cl 5.1) and for coordination of the orbital positions sought by the Government before and (cl 5.2) after registrations.

[12]	Under cl 5.10 the Company was obliged, as agent for the Government, to maintain a satellite registry complying with the Convention on Registration of Objects launched into Outer-Space. All satellites subject to contracts approved by the Government were to be registered on the satellite register. Copies of the register were to be kept current at the Nuku’alofa offices of the Company and the Government.

[13]	Clause 5.13 obliged the Company to attempt to ensure that at least one satellite transponder was available for the use by the Government at no charge for the duration of the agreement.

[14]	The licence agreement entitled the company to further payments, but the Company did not perform any services under this agreement that rendered it liable to CT.

[15]	On 14 August 2015 the Ministry issued a notice of amended assessment of the CT payable by the Company for the period 1 July 2006 to 31 March 2015 in the sum of $T17,931,141.27. The adjustment sheet which accompanied the notice stated that the Company was providing telecommunications services through the marketing of orbital slots, and that the services were supplied in Tonga where its head office and central management are located, and its contracts were entered into or ratified.

[16]	The Company lodged an objection to the amended assessment and when it was disallowed it applied to the Tax Tribunal under ss. 9 and 10 of the Revenue Services Administration Act 2004 (the 2004 Act) for a review of the Minister’s decision.

[17]	After a lengthy hearing the Tribunal held on 3 February 2017 that the Company’s share of the gross receipts under the agency agreement had been supplied from a place of business outside Tonga. Therefore they were not liable for CT under s.10 (2) of the Act. The Tribunal’s reasons extended for 45 pages. Its formal order was not before us.

[18]	The Minister appealed to the Supreme Court under s.10 of the 2004 Act which limits appeals to “a question of law”. The notice of appeal sets out the order of the Tribunal.

[19]	The appeal was heard by Scott J who gave judgment on 2 September 2017 allowing the appeal for concise reasons in 8 pages. His formal order is not before us but we infer that it was that sought by the Minister in his notice of appeal. This was an order (i.e. a declaration) that the Company had supplied services from a place of business in Tonga and was therefore liable to pay CT under s.10(2) of the Act.

[20]	On 3 October 2017 the Company appealed to this Court seeking a declaration that the Company made no taxable supplies of services within Tonga and is not liable to pay CT under the amended assessment. 

[21]	The orders made below and that sought by the Company in this Court do not reflect the powers of the Tribunal. The relevant section of the 2004 Act, s.9 (3), provides:
“Where the application for review relates to a taxation assessment the Tax Tribunal may make an order to –
(a)	Affirm, reduce, or increase the taxation assessment to which the objection decision relates; or
(b)	Remit the taxation assessment to the Chief Commissioner of Revenue for reconsideration...”

[22]	The orders of this Court will reflect the powers of the Tribunal under s.9 (3).

[23]	Section 5(1)(a) of the Act provides that CT shall be levied on a taxable supply by a taxable person. Section 5(5) provides the CT shall be recoverable from the recipient of the supply. Section 2 defines taxable supply as 
“the supply in Tonga by a person in connection with the carrying on of an enterprise”.
“Services” is relevantly defined by s.2 as meaning “the provision of work or facilities or anything that is not goods or money”.

[24]	The Company carried on an enterprise and performance of its obligations under the agency agreement involved the supply of services to the Government.

[25]	The key section for the purposes of this appeal is s.10(2) which relevantly provides:
“..a supply of services shall occur at the place of business from which the services are supplied”.
The Act does not contain a definition of place of business which therefore has its normal meaning.

[26]	The Minister did not rely on the provisions in s.10(3), (4), and (5) which further define the circumstances in which services are supplied in Tonga.

[27]	The critical question for this Court is whether the Tribunal fell into legal error when holding that the services provided by the Company to the Government were not supplied in Tonga.

[28]	Section 5(2) provides that the amount of CT payable in respect of a taxable supply shall be based on the value of that taxable supply. Section 11(2) provides that the value of a supply of services shall be “the consideration for the supply”.

[29]	Consideration in relation to a supply is relevantly defined by s.2 as including “the amount in money paid or payable by any person directly or indirectly for the supply”.

[30]	The Company’s remuneration was received directly from third parties who had entered into contracts for the use of Tonga’s orbital slots, but indirectly from the Government which authorised the Company to retain a half share of the gross proceeds.

[31]	As the Tribunal and the Supreme Court recognised, the Minister’s assessment was based on the view that the Company had supplied services to the Government through its place of business in Tonga. It was not based on services supplied to third parties that contracted for the use of Tonga’s orbital slots.

[32]	The Tribunal found [23]:
“... most of the work carried out by [the Company] that resulted in revenue under the Agency agreement was performed overseas for the Government ... though there may have been some reporting and possibly meetings to update the Government that were held in Tonga ... the actual performance of the Agency agreement very substantially, if not exclusively, took place outside Tonga and thus the services were ... in reality foreign services and not domestic services...”

[33]	The Tribunal further found [28]:
“... the agency agreement did create a relationship of supplier [the Company] and recipient of services being the Government ... and ... consideration was paid for those services, namely retention of [a] defined part of the revenue received from the contracting parties for the assignment of the orbital slots”. 

[34]	The Tribunal continued, referring to s.10(2) of the Act [30]:
“... if the place of business was Tonga ... then these services, which would otherwise be regarded by us as plainly foreign services ... would be treated as domestic services and liable for consumption tax”.

[35]	The Tribunal formulated the issue to be decided [22]:
“... did [the Company] have a foreign place of business from which the supplies were made”.

[36]	They held [37]:	
“place of business means ...[the] premises from which, in a practical sense, business activities were conducted leading to the provision of services”.

[37]	They concluded [38]:
“Having considered the evidence ... we consider that between 2005 through to 2010 [the Company] did have ... a place of business in Hong Kong ... [which] was ... a fixed or permanent place of [the Company] from which it performed its Asian orbital business”.

[38]	The Tribunal finally held in relation to services provided under the agency agreement:
“[38]	We consider therefore that in concluding the agreements between 2003 and 2006 [the Company] was performing services outside of Tonga for which it received a revenue share or consideration from the Government ... in acquiring its share of the revenue ....... from these contracts [the Company] operated its Asian orbital business from premises at Causeway Bay, Hong Kong, and that these were not domestic services liable for CT”.

[39]	In relation to the payments the Company received and retained under the licence agreement the Tribunal found [41]:
“We do not see ... that [the Company] performed any services under this agreement with Tonga that rendered it liable to CT”.

[40]	Scott J noted [13] the finding of the Tribunal in [23] noted above [32] that the Company had reported to the Government in Tonga and that its representatives had attended meetings here to update the Government. He then noted [16] that the Tribunal had found [28] that the agency agreement did create a relationship of supplier and recipient between the Company and the Government. 

[41]	The reasons of Scott J which he held entitled him to intervene appear in [17] and [20]:
“[17]	It appears to me ... that the Tribunal took the view that since the bulk of [the Company’s] business activity took place out of its overseas place of business, the supply which it acknowledged was provided by its Tongan place of business should be disregarded”.	
[20]	In my view neither the existence of places of business outside Tonga nor the proportion of the supplier’s business conducted through such overseas places of business affects the critical question which is, was there a taxable supply within Tonga. In my view there was nothing before the Tribunal to show that this was not the case and accordingly the application should have been dismissed”.

[42]	In para [22] Scott J referred to “the question of law raised” but he did not identify that question unless it was the “no evidence” point in his [20] above.

[43]	The only services identified by the Tribunal as having been supplied to the Government in Tonga were reporting to the Government, attending meetings with its representatives, keeping records and submitting contracts for ratification.

[44]	In our judgment these ancillary and consequential services in Tonga cannot support an assessment of CT based on revenue received outside Tonga, from contracts negotiated and entered into outside Tonga with non-residents, for the use of Tonga’s orbital slots outside Tonga.

[45]	The services supplied to the Government in Tonga before contracts were entered into attracted no revenue at that stage. Services supplied in Tonga after contracts had been entered into were supplied after the revenue had been earned and received.

[46]	CT is imposed by s.5(2) on “the value of the taxable supply”. Section 11(2) provides that “the value of a supply of ... services shall be the consideration for the supply”. Consideration is relevantly defined in s.2 as “an amount in money paid or payable by any person for the supply”.

[47]	Nothing was paid directly or indirectly to the Company for the ancillary and consequential services supplied by it to the Government in Tonga.

[48]	The Company had authority to enter into contracts for the use of Tonga’s orbital slots, subject to ratification by the Government. The Company had to submit each contract for ratification and no doubt it would report on the merits of the contract and the reasons why the Government should ratify it. All this would take place in Tonga from its place of business in Tonga.

[49]	This service did not attract a separate consideration and it can fairly be regarded as ancillary and consequential. It involved reporting on services already supplied in marketing the orbital slots and in negotiations outside Tonga leading to the formation of the contract outside Tonga.

[50]	The Tribunal held that these services in Tonga could not support the assessment and in our judgment it did not err in law in doing so.

[51]	It follows that the Judge erred and the Company’s appeal must be allowed.

[52]	The appeal must have succeeded in part in any event because the Tribunal found [41], referred to above [14], that the Company did not supply any services to the Government under the licence agreement. Scott J noted [21] that the Minister did not challenge this finding. This Court therefore would have been bound in any event to reduce the assessment to exclude the CT charged on the consideration received by the Company under the licence agreement.

[53]	There was a fundamental problem with this assessment based as it was on the supply of services to the Government. If the Minister was correct the Company could and should have charged the Government with the CT payable on the share of the gross revenue it retained. Section 5(5) of the Act provides.
“Notwithstanding anything in any Law, the CT payable by a taxable person shall be recoverable from the recipient of the supply”

[54]	This principle is reflected in the transitional provision in s.36(6) which provides:
“If a registered person concluded a contract before the commencement of this Act, the person shall recover any CT on taxable supplies made by the person under the contract after the commencement of the Act, and such CT shall be recovered notwithstanding that the contract contained no provision relating to the recovery of CT”.

[55]	The agency agreement was entered into before the commencement of the Act. It appears therefore that if the Minister had succeeded in upholding his assessment the Company could have recovered the tax from the Government. 

[56]	The Court makes the following orders:
		1.	Appeal allowed with costs.
		2.	Set aside the judgment of the Supreme Court.
3.	Subject to a variation in the order of the Tribunal, the appeal to the Supreme Court is dismissed with costs.
4.	Substitute for the order made by the Tribunal an order that the amended assessment of consumption tax dated 14 August 2015 in the amount of $T17,931,141.27 is reduced to nil.

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                                                                     Handley J 

   …………………………..
                         Blanchard J

  …………………………..
    Hansen J