SDC LTD Versus THE Commissioner General Zimbabwe Revenue Authority

### Preamble
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HH 648-18
FA 16/14
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SDC LTD

versus

THE COMMISSIONER GENERAL ZIMBABWE REVENUE AUTHORITY

THE SPECIAL COURT FOR INCOME TAX APPEALS

KUDYA J

HARARE, 20 and 21 October 2015 & 12 October 2018

Income Tax Appeal: Preliminary Points

Daniel Erasmus & Henry Vorster, for the appellant

S.P Musithu & Renzva, for the respondent

KUDYA J: This judgment deals with ten preliminary points in respect of the applicability of s 98 of the Income Tax Act [Chapter 23:06] general anti-avoidance provisions, GAAP, that were raised by the appellant against the additional assessments issued against the appellant by the respondent on 22 July 2015 for the tax years 2009 to 2012.

The Factual Background

The appellant is a public company listed on the Zimbabwe Stock Exchange and is the legal owner of five trademarks developed and registered in Zimbabwe on 2 October 2000 [annexure L of appellant’s case p 120-123 Bundle 1].  It is a holding company of subsidiaries in Zimbabwe, Botswana, Zambia, Tanzania, the Democratic Republic of the Congo, Malawi, Kenya, South Africa and Lesotho. The subsidiaries breed and market certified crop seeds in their host countries of registration. The trademarks comprised of a Trade Name and four unique marks indicating the maturity level of a particular seed and product variety number. These trademarks were also registered at the African Regional Industrial Property Organisation (ARIPO) in 2002 for use in Lesotho, Malawi, Swaziland, Tanzania, Uganda and Zimbabwe.

The trade name was introduced and popularised outside Zimbabwe by each subsidiary in its host country. The initial funding, market development, research and development and product promotions for the first four years of each subsidiary was purportedly subsidised by the Botswana subsidiary for a fee, termed a royalty in the appellant’s Group Transfer Pricing Policy and a research fee in the agreements between the other subsidiaries and the Botswana subsidiary. The subsidiaries were thereafter responsible for registering and maintaining the new product varieties in their host countries at their own expense. They did not charge these expenses to the appellant nor did the appellant charge them for the use of its trade name.

The respondent conducted an investigation into the tax affairs of the appellant for the period February 2009 to December 2012.  In a letter dated 2 August 2013 the case manager computed in a schedule both value added tax and income tax purportedly accruing to the appellant on both management fees and royalties. The parties exchanged correspondence on the matter and held meetings to discuss points of dispute which culminated in the amended income tax assessments dated 25 November 2013, covering the tax years ended 31 December 2009, 2010, 2011 and 2012 for an aggregate liability of US$7 890 510.23.

It was common cause that the Zimbabwean subsidiary of the appellant received management fees from the other foreign subsidiaries on a cost recovery basis. The respondent imputed a 25% mark-up on such fees to the appellant. The mark-up was based on the tax before profit rate of 20% as measured against the management fees turnover [letter of 2 August 2013 annexure P to appellant’s case p 165]. The research or royalty fee paid to the Botswana subsidiary by the other subsidiaries less the economic value addition expenses not exceeding 5% was also imputed to the appellant by the respondent ostensibly for the use of its trademarks.

On 24 December 2013, the appellant objected to the amended assessments. The objection was disallowed on 7 May 2014 and in addition the respondent increased the additional tax levied on the appellant from 60% to 100%. The appellant filed a notice of appeal to this Court on 22 May 2014. On 22 July 2015 the appellant issued further amended assessments that incorporated the increased penalties.

At the pre-trial hearing meeting held on 30 July 2015, 10 preliminary issues were referred for argument and were heard on 20 and 21 October 2015.  The parties filed bulk written heads of argument and a compendium of supporting case law encompassing well over 3 000 pages and pleadings in excess of 2 500 pages.

The appellant thus sought the setting aside of the additional assessments issued on 22 July 2015  with costs on the ground that they were unlawful and thus invalid or alternatively on the basis that the first and second requirements of s 98 had not been established by the respondent, in respect of both the management fees and royalties; or that the respondent failed to discharge onus on the third requirement of abnormality,  and that OECD TPGs applied and respondent estopped from denying their applicability, and that all new ground raised by the respondent be struck out as were the use of unlawfully obtained information and use of “without prejudice correspondence”.

I deal with each issue seriatim.

Whether or not the Commissioner charged a tax in terms of s 98 of the Income Tax Act or whether he made adjustments in terms of the same section

The appellant submitted that the conduct of the respondent in invoking the provisions of s 98 of the Income Tax Act, without first establishing “jurisdictional facts” was illegal and in contravention of both the Constitution of Zimbabwe and the Administrative Justice Act [Chapter 10:28]. The respondent disputed that it infringed either the Constitution or the Administrative Justice Act in applying s 98 to the conduct of the appellant, which resulted in the disputed amended assessments.

In its letter of 25 November 2013, the respondent indicated the jurisdictional facts on which s 98 was invoked. The respondent raised management fees against the appellant on eight grounds. The first was that the appellant was a holding company that was listed on the local bourse and had in fulfilment of the listing requirements disclosed the particulars of its directors and senior managers who “collectively had the appropriate expertise and experience for the management of the group’s business”. The Group consisted of 12 directors and each subsidiary had its own board. The research, marketing, skilled personnel and internal audit departments were listed in annexure B1, B2 and B3 on pages 398 to 405 of the main bundle.  Some of the group senior managers were the Group Chief Executive and his personal assistant, Group Finance Director, Group Accounting Manager, Group Public Relations Manager, Head of Group Marketing, Head of Research, Head of Internal Audit, Maize Program Consultant, Plant Breeder and Wheat Programme Manager and Group Technical Services Executive. The Group Head Office was located at a separate venue from its Zimbabwean subsidiary. The respondent discounted the purported reorganisation or restructuring of 2005 involving the transfer of the seed business operations Head Office functions to the Zimbabwean subsidiary on account of its separate existence and operations independent of the subsidiary after the purported date of transfer which were inconsistent with mere shareholder activities. He found that it was a trading entity in its own right with its own date stamps and letter heads in use long after the purported 2005 restructuring. [p 94, 249-260,]. The Plant Breeder mentored junior maize breeders and they collectively used their wit, labour and skill in Zimbabwe to develop hybrid seeds. The plant breeder acted as the maize programme consultant and receiving expert to the research and development guests of the appellant with an on-going obligation to breed maize for the Group. The plant breeder bred, developed and released high yielding and adaptable crop varieties to the farming community.

The Commissioner also relied on a Transfer Pricing Policy document produced by a consultant engaged for the purpose by the appellant The document attributed to the appellant group operational services, salary increments, forex purchase approvals, policy preparations, treasury management, provision of guarantees, payment of approvals, capex expenditure and highlighted that executive time of between 60 and 70% was expended  on these services[ p 43, 48-50, 67, 69, 72-74, 90, 112-115 and 118-120 of respondent’s bundle and the contrary view on p11-12 para 633 of appellant’s bundle]. In the determination the Commissioner opined that:

“The transaction, operation or scheme of housing the head office function in a subsidiary created rights to obligations which would not normally be created between parties dealing at arm’s length. The reversal done by my officers to position the head office function within [the appellant] in terms of section 98 is therefore correct.”

In regards to royalties the respondent relied on the group financial statements which showed that research costs were 76.65% in Zimbabwe and 2.5% in Botswana. The trademarks used by the Botswana entity to which all the other foreign subsidiaries gravitated were owned by the appellant yet the subsidiaries were not paying any royalties to the appellant for their use. The purported assignment to the Botswana entity were not produced [The respondent alleged that fake assignment documents were produced pp, 198-200 para 116, 118, 121 p 21 para 131, 133, 134 and 137 and p 289, 291 of appellant’s bundle]. The Commissioner found that the development and monitoring of regional trials were conducted by the appellant’s personnel in Zimbabwe.

Therefore, in regards to royalty fees, the respondent found that the appellant was the registered holder of the trademarks. The respondent found that the appellant managed and controlled marketing functions of the group through the Head of Group Marketing,  and research and development through the Group Research Manager and Maize Programme Consultant. The respondent further found that although the appellant guaranteed the loans availed to the subsidiaries they paid royalties to the Botswana subsidiary for the use of the appellant’s trademarks, trade name less any beneficiation costs incurred by each subsidiary.

The Commissioner maintained these findings in his determination of 7 May 2014, which is the subject of the present appeal. It seems to me that in both the letter accompanying the amended assessments and the determination of the objection the respondent established two very important jurisdictional facts in regards to both management fees and royalties. These were that the foreign subsidiaries of the appellant paid management fees to the Zimbabwean subsidiary and not to the appellant and royalties to the Botswana subsidiary and not to the appellant. The respondent was satisfied on the facts supplied by the appellant and which it did not create that the personnel against whom management fees were paid belonged to the appellant as did the trademarks for which royalties were paid. On the basis of these facts that the respondent invoked s 98 of the Income Tax Act.

The essential elements of s 98 have been interpreted and applied in this country in many cases. The one that quickly comes to mind is A v Commissioner of Taxes 1985 (2) ZLR 223 (HC) at 232F-233B. The four requirements set out in s 98 are the existence of a transaction, operation or scheme entered into or carried out by the taxpayer; with the effect of avoiding, reducing or postponing the payment of any tax the circumstances of its existence or operationalization which in the opinion of the Commissioner are either abnormal or created abnormal rights and obligations for parties dealing at arm’s length [rational and justifiable basis for abnormality/arm’s length standards were applied]. The last requirement is that the Commissioner must form a second opinion that the sole or one of the main purposes of the transaction, operation or scheme was to avoid, postpone or reduce tax liability. When these have been met, the Commissioner is obliged to compute the tax liability by ignoring the transaction, operation or scheme or by the use of any other appropriate method which removes or reduces the avoidance, postponement or reduction.

The respondent determined that a transaction, operation or scheme which had the effect of avoiding or reducing the appellant’s tax liability was entered into and executed between the appellant and its Zimbabwean subsidiary. The transaction, operation or scheme involved the transfer of the appellant’s employees and functions to that subsidiary. The effect of the transaction, operation or scheme was that the foreign subsidiaries of the appellant remitted management fees at cost to the Zimbabwean subsidiary for functions that were conducted and controlled by the appellant’s employees and resulted in the diversion of the management fees which were due to the appellant to the Zimbabwean subsidiary. The respondent thus found that but for the arrangement between the appellant and the Zimbabwean subsidiary, these fees should have been paid to the appellant, as encapsulated in the appellant’s Transfer Pricing Policy. The transaction, operation or scheme actually succeeded in the avoidance or reduction of the appellant’s tax liability in Zimbabwe. The Commissioner further formed the opinion that the arrangement whereby the holding company was controlled by instead of controlling the subsidiary was an abnormal commercial practice. He further formed the additional opinion that the payment of management fees at cost, without any mark-up for the services rendered, created abnormal rights and obligations between the Zimbabwean subsidiary and the foreign subsidiaries that would not have been present between parties acting at arm’s length.

The respondent applied the same reasoning to the royalties for the use of the appellant’s trademarks, which trademarks were inexplicably attributed to a Batswana subsidiary. Unlike the management fees, a mark-up was added to the cost of the services supplied by the Batswana subsidiary with the trademarks. In addition, the respondent took the “without prejudice” communications and negotiations with the appellant on the rates at which these should have been computed as evidence that both management fees and royalties had been diverted to the Zimbabwean and Batswana subsidiaries, respectively. The respondent thus formed the opinion that the diversion of income due to the appellant under both heads was abnormal and additionally or alternatively offended the arm’s length principle. The respondent thus found from the information supplied by the appellant that the first three requirements of s 98 had been met. His decision was based on the jurisdictional facts established from the information supplied by the appellant. Thereafter, from the reasons proffered by the appellant for entering into these arrangements, rightly or wrongly, he formed the further opinion that the sole or one of the main purposes of such arrangements was to avoid or reduce the appellant’s tax liability.  He was dissatisfied by whatever reasons the appellant proffered for entering and executing these arrangements.

I must emphasize that in determining the first preliminary issue, I am not concerned with whether or not the respondent’s opinions in respect of the abnormality, arm’s length or purpose requirements were correct or wrong. Rather, I am concerned with whether he disclosed the bases for those opinions. Whether the bases and the computations were erroneous as postulated from paras 79 to 83 of the appellant’s written heads of argument speaks not to the preliminary issue but perhaps to the issues that must be determined at the main appeal hearing. There is no doubt in my mind that the respondent invoked the four requirements of s 98 of the Income Tax Act before he went about determining the liability and amount of tax due.

The whole purpose of invoking these requirements is to enable the respondent to legally compute the additional taxable amount that should be properly charged against the taxpayer on whom these requirements are met. The closing words of s 98 provide the two formulae that the respondent may employ. The first is to ignore the arrangement and the second is to utilize any method he deems appropriate but both must either expunge the tax benefit that accrued to the taxpayer or reduce it. It is the application of the closing words of s 98 that the first preliminary issue is concerned with.  The appellant treated it in its objection, grounds of appeal and case and in both written and oral argument as a creation of taxable income while the respondent considered it in the letter of assessment, the determination and in both written and oral argument as an adjustment. It seems to me that whether one calls it a creation of income or an adjustment of income, is a question of irrelevant semantics. The closing words under consideration are of wide application. They empower the respondent to ignore the transaction and to apply any formula that obliterates the tax benefit or diminishes it altogether. By operation of law, the respondent is permitted to create notional income and correspondingly adjust the tax liability of the taxpayer. The contention that this is contrary to the proposition made in G Bank Zimbabwe Ltd v Zimbabwe Revenue Authority 2015 (1) ZLR 348(H) at 366A and H Bank Zimbabwe Ltd v Zimbabwe Revenue Authority 2015 (1) ZLR 1007 (H) at 1030A-B on the one hand and the Commissioner for Inland Revenue v King 1947 (2) SA 196 (A) at 207-208 on the other is incorrect. The relevant sentiments in G Bank were that:

“The bottom line was that either way income had to exist before it was liable to taxation. The income must either have accrued or been received or deemed to have accrued or received by the taxpayer in order to trigger tax liability”

And in H Bank:

“Like in G Bank, on the authority of the King case, supra, I am satisfied that the Commissioner cannot invoke s 98 against a tax payer who abstains from earning income and to whom no income accrued or was received or is deemed to have been accrued or received.”

It is well to recall that on the facts, the Bank cases, supra, established by the taxpayers on appeal, the need to proceed to compute the notional liability did not arise because the taxpayers established that the transactions, operations or schemes in question were entered into or carried out in a normal manner in regards to both the arm’s length and the rights or obligations created requirements with the result that the Court was precluded from computing the notional income envisaged by the closing words of s 98. In the King case, supra at p 210 two distinctions were made between avoiding liability and reducing the amount. The first was between (i) a man who orders his affairs so as to have no income that would expose one to income tax liability and (ii) one who orders his affairs so as to escape liability for taxation which he ought to pay income which in reality is his. The second was between (i) reducing the amount of tax from what it would have been if one had not entered into the transaction and (ii) reducing the amount of tax from what it ought to ought to be in the tax year under assessment. Watermeyer CJ held that under the closing words of s 98 avoiding liability carried the meaning of escaping from tax liability for taxation he ought to pay upon income which in reality is his while reducing the amount meant reducing the amount of tax from what it ought to be in the tax under consideration.

My understanding of the respondent’s case is that the appellant affronted the (ii) in the Watermeyer CJ formulation above.  It entered into a transaction, operation or scheme which had the effect of escaping from liability for taxation which he ought to have paid on management fees and royalties which were in realty its own and thus reduced the amount of tax it ought to have paid in each tax year. The contention by Mr Musithu, for the respondent, to that effect clearly demonstrates that the respondent did not raise the assessments in violation of either the Bank cases or the King’s case.  If the appellant’s contention is that the Commissioner was wrong and that the correct position relates to (i) in the Watermeyer formulation, then that is a matter that can properly be resolved in the main appeal seeing that it is not a pure matter of law but of the application of the facts to the law.

In any event the above quotations in both Bank cases were concluding remarks reached after the assessment of all the essential elements of s 98. They were made after a factual finding had been made that the conduct of the taxpayer was in comparison with transactions conducted by other similarly placed commercial players either normal or at arm’s length. In the G Bank case it was proved by the taxpayer that Nostro accounts did not earn interest. The attempt by the Commissioner to impute notional interest to the bank was misplaced. In those circumstances the Commissioner could not legally tax income which was not actually created or deemed by the transaction, operation or scheme to have been created. In the present matter the Commissioner averred that he found that the appellant escaped from liability for taxation which he ought to pay upon income which in reality was his but which the taxpayer ascribed to its Zimbabwean subsidiary. It thus repositioned or redirected its income to both the Zimbabwe subsidiary in respect of management fees and the Botswana subsidiary in respect of royalties.

Mr Vorster, for the appellant, in reply, contended that unlike in s 23 (1) and ss 24 (b) and 98A (1) of the Income Tax Act where Parliament expressly reposed the power to create and adjust income to the Commissioner, it did not do so in s 98.  I disagree.  The relevant portion in s 23 (1), 24 (b) and 98A (1) read:

“The Commissioner may, for the purpose of determining the taxable income or assessed loss, as the case may be, of such first-mentioned person, determine the fair market price at which such purchase or sale shall be taken into his accounts or returns for assessment.”

24 (b) The Commissioner may if conditions are made or imposed between any of the persons mentioned in para (a) in their business or financial relations which, in the opinion of the Commissioner, differ from those which would be made between two persons dealing with each other at arm’s length determine the taxable income of the person carrying on business in Zimbabwe as if such conditions had not been made or imposed in accordance with the conditions which, in the opinion of the Commissioner, might be expected to have been made or imposed between two persons dealing with each other  at arm’s length.”

98A (1) Where an individual attempts to split income with an associate, the Commissioner may adjust the taxable income of the taxpayer and the associate to prevent any reduction in tax payable as a result of the splitting.”

The closing words in s 98 state that:

“The Commissioner shall determine the liability for any tax and the amount thereof as if the transaction, operation or scheme had not been entered into or carried out, or in such a manner as in the circumstances of the case he considers appropriate for the prevention or diminution of such avoidance, postponement or reduction.” [Underlining in all the provisions mine own for emphasis]

It seems to me that in all these instances the Commissioner is accorded the power to create notional income where the taxpayer infringes the requirements of either section. To my mind, that all the above underlined words bear the same practical effect. S 98A (1) adjusts income purportedly earned by a related party to the taxpayer while all the other sections create notional income by deeming it into existence. In those circumstances, the contentions of the appellant in paras 87 to 91 of its written heads of argument miss the purpose for which s 23, 24, 98 and 98A were enacted. It was to ensure that a taxpayer paid the correct amount of tax arising from all its transactions which would fit into the provisions of those sections. In my view, the correct amount of tax due is paid after an adjustment has been made on the old tax paid. The effect of all these sections is to force the taxpayer to pay the adjusted tax.  The contrary submissions thus made by the appellant are devoid of merit.

Thus stripped of semantics, under s 98 the respondent after identifying the transaction, operation or scheme is empowered to ignore or reposition the transaction, operation or scheme and in the process to create notional income and adjust the taxpayer’s tax liability reflected in its original tax returns.  This is apparently what the respondent did in the instant case before he issued the amended income tax amendments.  It seems to me that the process of ignoring or repositioning an existing transaction, operation or scheme and determining liability and calculating the tax due, in practically terms necessarily involves creation of notional income and its subsequent adjustment as against the offending taxpayer. In the alternative, the appellant raised a constitutional argument contending that the power to determine liability and the amount thereof was vague, arbitrary and discriminatory and offended against the rule of law.  It is an argument that was not raised in the objection and require consent or leave, which have neither been sought nor granted. In any event, it was a misplaced submission in view of the fact that the same powers are accorded to the Commissioner by s 6, 8, 10, 11, 12 and 15 of the Income Tax Act, which define gross income and deem both income and its source. I hold that the respondent acted lawfully in so doing. Accordingly, I dismiss the first preliminary point raised by the appellant.

Has the Commissioner created and is he authorised to create a transaction, operation or scheme by s 98 can Commissioner create new TOS.

The appellant contended that the respondent was not empowered by s 98 and thus acted unlawfully and ultra vires to create transactions, operations or schemes that do not exist. Mr Erasmus, for the appellant, argued that the respondent acted in a capricious, arbitrary and random fashion in determining the additional taxable management fees and royalties liability in the total sum of US$5 726 090.02. Mr Musithu agreed that s 98 does not permit the Commissioner to create transactions, operations or schemes but contended that the Commissioner did not do so in the instant case.  In Commissioner of Taxes v Ferera 1976 (2) SA 653 (RAD) at 658B McDonald JP indicated that:

“The next point is that the Commissioner is obliged to exercise his powers under the Section if the transaction, operation or scheme has the stipulated effect, if he is of the opinion that the requisite abnormality is present and if he is further of the opinion that the taxpayer’s purpose was as stated in the section. Here again there is clear indication that it is the intention of the Legislature to cast the net in such a way as to block every possible avenue of escape.”

In my view, the respondent did not create any transaction, operation or scheme in regards to both management fees and royalties. Rather it relied on the circumstances provided by the appellant and its subsidiaries to identify the transactions, operations or schemes in question. It was the appellant which purportedly transferred its head office functions to its subsidiaries and purportedly assigned its trademarks and its hybrid seed varieties to its Botswana subsidiary. It was not rewarded for the management services conducted by its employees nor for the use of its trademarks, seed varieties, research, development and marketing efforts including preparation and monitoring group budgets, managing research, planning operations and breeding goals. The transactions, operations or schemes were thus created by the appellant and not the respondent. The effect of these transactions was to divert taxable income away from the appellant into the coffers of these subsidiaries. The diversion had the effect of avoiding, postponing or reducing the tax liability of the appellant. The first two requirements which trigger the exercise of the appellant’s powers appear to have been present from the circumstances that the appellant disclosed to the respondent. The respondent contended that it merely redirected the diverted income to the correct source and that the correctness of the computation mechanism was the subject of the main appeal.  In his written heads from para 19.16 to 19.18, the respondent submitted that the diversions were akin to simulated transactions which according to SARS v NWK Ltd at p 15 and ERF 3183/1 Ladysmith (Pty) Ltd and Another v Commissioner for Inland Revenue at p 21 attract a charge of tax avoidance. The words used to describe the diversion of income are “dressing up or disguising a transaction”, “tax evasion or the avoidance of a peremptory law”, deceptive form wrapped in a veil” and “its true nature and substance”, “simulation” , “charade” , “dishonest transaction”, “deceive by concealing” and  “fraudem legis”. The second preliminary point is accordingly dismissed for lack of merit.

Whether or not the attribution of management fees and royalties to the appellant by the respondent is a misapplication of section 98

It was common cause that the application of s 98 is based on an examination by the Commissioner of the circumstances surrounding the business activities of a taxpayer that impact the taxpayer’s tax liability. If he is satisfied that the four jurisdictional facts outlined in the section are satisfied he is obliged to determine liability and the amount thereof. The respondent identified the business arrangements made between the appellant and two of its subsidiaries that purportedly affected both the management fees and royalty income due to the appellant as the holding company. The respondent was satisfied that all the four jurisdictional facts were met and in the result raised the amended assessments, the subject of the appeal. The basis of the appeal to this court, as is in any appeal before any judicial tribunal, is that the application of the four requirements by the respondent to the business arrangements identified between the appellant and its two subsidiaries were wrong. The answer to that question is the gravamen of the appeal and in my view cannot be determined by way of the posited preliminary question. In other words, it is pre-mature for me to determine the question as a preliminary issue. The appellant must per force establish its averments in the main appeal.

It, however, appears from the oral submissions that the question the appellant sought determination under this head was whether s 98 could be applied to tax evasion in view of the averment in the Respondent’s case in para 109, p 197 of appellant’s bundle 1 and replicated in para 20.13 page 21 of the written heads of argument  that the business arrangements in question “were not only abnormal but downright illegal” in respect of management fees and para 132 p203  that all royalties that at law were due to the appellant and assigned to the subsidiary was “illegal as there was no legal basis for doing so”. Mr Erasmus submitted on the authority of Bosch & Another v CSARS, 75 SATC 1 at para [9] that as tax evasion was illegal and void, it could not attract the provisions of s 98, which are only concerned with tax avoidance. In that case, WAGLAY J stated that:

“In any event, any transaction which has its purpose tax evasion is unlawful as tax evasion constitutes a criminal offence in terms of the Income Tax Act. NWK cannot therefore be authority for setting aside a transaction as simulated by reason of being a vehicle for tax evasion as this is automatic in terms of the law. On the other hand if the words ‘evasion of tax’ are to be substituted with ‘avoidance of tax’ then the dictum goes against the accepted practice in our Income Tax law which permits transactions aimed at tax avoidance. Furthermore the confusion created by the judgment mitigates against it serving as a precedent binding upon lower courts.”

Mr Renzva, for the respondent submitted that the respondent did not abandon avoidance for evasion. He conceded that illegality was not raised in both the letter of assessment and determination. He maintained that that the assessments were not actuated by illegality but avoidance and abandoned illegality raised in both the pleadings and heads of argument. Notwithstanding the abandonment, I do not agree with the appellant’s submission that tax evasion is not captured in s 98. It seems to me that as long as tax evasion is conducted by a transaction, operation or scheme which meets the four criteria set out in s 98, then section 98 could properly be invoked to extirpate its effects. I would therefore beg to differ with the sentiments of Waglay J above. Indeed that tax evasion falls into the requirements of s 98 explains the sentiments of Lewis JA in NWK Ltd case, which WAGLAY J criticised.

In addition, the appellant contended that the respondent could not apply s 98 to a simulated transaction, otherwise known as the substance over form doctrine. Mr Erasmus took issue with the contention by the respondent that “the section allows the Commissioner to determine the taxable income of the appellant by making adjustments on schemes which were in existence but disguised by the appellant to avoid payment of tax.” He argued that the two were mutually exclusive concepts. The doctrine has been explained in such cases as Zandberg v Van Zyl 1910 AD 302 at 309; Commissioner of Customs and Excise v Randles Brothers and Hudson 1941 AD 369; Commissioner of Customs and Excise v Randles Brothers and Hudson 1941 AD 369, NWK Ltd, Roschon (Pty) Ltd v Anchor Auto Body Builders CC and Others 2014 (4) SA 318 (SCA) in para 15, 27, 32, 33, 35 and 37. Basically it is an illusion designed to conceal the true agreement between the parties and once established, the court will not be deceived by its form but will rend aside its veil to uncover it and give effect to the true and genuine agreement. In the letter of assessment the respondent applied it and came to the same conclusion as s 98 but relied on s 98 for his findings.

In the final analysis, the Commissioner and this Court stand guided by the words of McDonald JP in Commissioner of Taxes v Ferera, supra, at 659B-F:

“If sec. 91 were to be construed so as to confer immunity from interference on taxpayers either on the ground that they have frankly admitted their intention to avoid, postpone or reduce liability for tax or on the ground that they have been astute enough to employ a so-called “normal method” of doing so, the Court, in adopting such constructions, would not “have added force and life to the cure and remedy” contained in that section but, on the contrary, by adopting “subtle inventions and evasions” would , to a large extent, have nullified its remedial provisions. The sense in which the word “normally” is used in the section is the sense in which the word is used in the following statement by SHREINER JA, in the passage from his judgment cited earlier in this judgment:

“But the Commissioner would be properly aggrieved if a transaction or operation were entered into which prevented income from accruing to the taxpayer while leaving him in the position of one to whom the income would normally and naturally accrue.”

And

“Now normally and naturally the owner of an income-producing asset receives the income and the labourer receives the reward of his labour. Any departure from this order of things, if done with the object of prejudicing the fiscus, is subject of legitimate objection by the Commissioner, which is met by the machinery of the section.”

When by a transaction, operation or scheme income has been prevented from accruing in a way it would “normally and naturally accrue”, it is clearly no answer for the taxpayer to say that a quite normal method of tax avoidance was used to bring about this result. The acceptance of such an answer would defeat the purpose of the section.”

It seems to me that the Commissioner is entitled to apply the provisions of s 98 to the purported management fees and royalties. The preliminary point thus raised lacks merit.

As between the Appellant and the respondent, who bears the onus of proving the applicability of section 98

Mr Vorster submitted [para 120-170 of written heads] on the authority of certain common law principles to statutory construction and several South African cases [expressly or impliedly] that on appeal the onus was on the Commissioner to establish the first three jurisdictional facts of s 98 on a balance of probabilities. Mr Renzva para 21.1 -21.10 of the respondent’s written heads] relied on my decision in H Bank case at 1020B – 1022C for the contrary submission that the onus lay on the appellant by dint of practical common sense and s 63 of the Income Tax Act.

The two provisions which fall for determination on the question of onus in this matter are s 63 and para (o) of the Eleventh Schedule to the Income Tax Act. Section 63 reads:

“In any objection or appeal under this Act, the burden of proof that any amount is exempt from or not liable to the tax [appeal is that the amount determined by the Commissioner purportedly under s98 is not liable to the tax]] or is subject to any deduction in terms of this Act or credit, shall be upon the person claiming such exemption, non-liability, deduction or credit and upon the hearing of any appeal the court shall not reverse or alter any decision of the Commissioner unless it is shown by the appellant that the decision is wrong.”

And para (o) of the Eleventh Schedule states:

“The decisions of the Commissioner to which any person may object under paragraph (b) of subsection (1) of section sixty-two are those made in terms of—

(o) section ninety-eight: Provided that in any objection made in terms of this paragraph and in any subsequent appeal lodged in terms of section sixty-five against the decision of the Commissioner thereon [DETERMINATION OF OBJECTION], the burden of proof that the avoidance or postponement of liability for any tax or the reduction of the amount thereof was neither the sole purpose nor one of the main purposes of any transaction, operation or scheme, shall be upon the taxpayer;”

It is necessary to juxtapose these two against the then equivalent sections in the South African Income Tax Act No 58 of 1962. Before its repeal s 82 read:

“The burden of proof that any amount is exempt from or not liable to any tax chargeable under this Act or is subject to any deduction, abatement, set-off in terms of this Act, shall be upon the person claiming such exemption, non-liability, deduction, abatement or set-off, and upon the hearing of any appeal from any decision of the commissioner, the decision shall not be reversed or altered unless it is shown by the appellant that the decision is wrong.”

And s 103 (4), which was purportedly equivalent to our para (o) of the Eleventh Schedule said:

“Any decision of the Commissioner under subsections (1) (2) or (3) shall be subject to objection and appeal, and whenever in proceedings relating thereto it is proved that the transaction, operation, scheme, agreement or change in shareholding or members interests in question would result in the avoidance or postponement of liability for payment of any tax, duty or levy imposed by this Act or any provision of the Income Tax act or any other law administered by the Commissioner, or in the reduction in the amount thereof, it shall be presumed, until the contrary is proved-

in the case of any such transaction, operation or scheme, that it was entered into or carried out solely or mainly for the purposes of the avoidance or the postponement of such liability or”

The Zimbabwean s 98 provides:

“Where any transaction, operation or scheme (including a transaction, operation or scheme involving the alienation of property) has been entered into or carried out, which has the effect of avoiding or postponing liability for any tax or of reducing the amount of such liability, and which in the opinion of the Commissioner, having regard to the circumstances under which the transaction, operation or scheme was entered into or carried out-

was entered into or carried out by means or in a manner which would not normally be employed in the entering into or carrying out of a transaction, operation or scheme of the nature of the transaction, operation or scheme in question; or

has created rights or obligations which would not normally be created between persons dealing at arm’s length under a transaction, operation, or scheme of the nature of the transaction, operation or scheme in question;

and the Commissioner is of the opinion that the avoidance or postponement of such liability or the reduction of the amount of such liability was the sole purpose or one of the main purposes of the transaction, operation or scheme, the Commissioner shall determine the liability for any tax and the amount thereof as if the transaction, operation or scheme had not been entered into or carried out, or in such a manner as in the circumstances of the case he considers appropriate for the prevention or diminution of such avoidance, postponement or reduction.”

The South African s 103 (1) states:

Whenever the Commissioner is satisfied that any transaction, operation or scheme (whether entered into or carried out before or after the commencement of this Act, and including a transaction, operation or scheme involving the alienation of property)-

has been entered into or carried out which had the effect[same meaning as result in sub-s (4) Geustyn at 576F but effect and purpose distinguished.] of avoiding or postponing liability for the payment of any tax, duty, or levy imposed by this Act or any previous Income Tax Act, or of reducing the amount thereof; and

having regard to the circumstances under which the transaction, operation or scheme was entered into or carried out-

was entered into or carried out by means or in a manner which would not normally be employed in the entering into or carrying out of a transaction, operation or scheme in question; or

has created rights or obligations which would not normally be created between persons dealing at arm’s length under a transaction, operation or scheme of the nature of the transaction, operation or scheme in question; and

was entered into or carried out solely or mainly for the purposes of avoidance or the postponement of liability for the payment of any tax, duty, or levy (whether imposed by this Act or any previous Income Tax Act or any other law administered by the Commissioner) or the reduction of the amount of such liability’

the Commissioner shall determine the liability for any tax, duty or levy imposed by this Act, and the amount thereof, as if the transaction, operation or scheme had not been entered into or carried out, or in such a manner as in the circumstances of the case he deems appropriate for the prevention or diminution of such avoidance, postponement or reduction.

It is noteworthy that when the Secretary for Inland Revenue v Geustyn, Forsyth & Joubert 1971 (3) SA 567 (A) was decided s 103(1) of the South African Act 58 of 1962 was similar in word and juxtaposition of the opinion of the Secretary to the prevailing s 98 of our Income Tax Act as is apparent from pp 570H-571D. The words “whenever the Secretary is satisfied was a latter day addition. However, both formulations of s 103 retained sub-s (4) in the same format. The Zimbabwean legislation has not had the crucially underlined phrase that is found in subs-s (4) of the South African Acts, “and whenever in proceedings relating thereto it is proved ….would result”. At 576H the Geustyn, Forsyth& Joubert case equates intention to purpose in restating the obvious point that “the intention or purposes with which any particular transaction is entered into is a question of fact”.

The locus classicus

The seminal case on onus is the South African Appellant Division case of South Cape Corporation (Pty) Ltd v Engineering Management Services (Pty) Ltd [1977] 4 All SA 53 (A) at 60; 1977 (3) SA 534 (A) at 548A-B.  Corbett JA stated that:

“The word onus has often been used to denote, inter alia, two distinct concepts:

the duty which is cast on the particular litigant, in order to be successful, of finally satisfying the court that he is entitled to succeed on his claim or defence, as the case may be; and

the duty cast upon the litigant to adduce evidence in order to combat a prima facie case made by his opponent

Only the first of these concepts represents onus in its true and original sense (the overall onus). In this sense the onus can never shift from the party upon whom it originally rested.”

The case firstly identifies the proper or overall or true onus, which not only never shifts but remains on one party. This rests on the party who must prove its case in order to succeed. The second is the burden of providing evidence in rebuttal and arises when the party with the true onus establishes a prima facie case thereby casting upon the other party the duty to rebut the prima facie case. The evidentiary burden can shift and move back and forth between the contending parties several times depending on the issues that arise and the nature of the case. The evidentiary burden is not onus in the true sense.  It becomes most relevant at the end of the case after all the evidence has been led and the court cannot resolve the evidence on the probabilities because they are more or less even.

The South African cases

Mr Vorster submitted that all the SA cases that deal with s 82 and 103 place the onus on the first three requirements of s 103 either expressly or impliedly on the Commissioner. He conceded that the duty to begin was on the appellant and suggested that in this appeal I may find the Commissioner established a prima facie case against appellant by the assessment itself casting the burden of rebuttal on the appellant. The real issue resting as it does on how the Court evaluates the evidence at the end of the trial, the onus is one of tools used in evaluating evidence by the Court at the end of the trial.

In ITC 1151 (1971) 33 SATC 133at para [36], where both parties accepted that the onus was on the Commissioner, Tebutt AJ confirmed without giving reasons the parties understanding that indeed the onus was on the Commissioner. He stated that:

“The onus on the Secretary, however, goes somewhat further than establishing the existence of a scheme which has or had the effect of avoiding the tax concerned or reducing the amount thereof. He must also establish that the scheme was entered into or carried out by means or in a manner which would not normally be employed in the operation of a scheme such as the one in question or has created rights and obligations which would not normally be created between persons dealing at arm’s length under a scheme such as the one in question.”

In Commissioner for Inland Revenue v Louw 1983 (3) SA 551 (A) CORBETT JA conflated the two part third requirement into one under the abnormality rubric and reversed the appeal without any suggestion that the Special Court was wrong to cast the onus on this requirement on the Commissioner.  At 571C he said:

“I proceed now to consider the various requirements laid down by s 103 for the exercise by the Commissioner of his powers under that section and the evidence and submissions relevant thereto.”

And at 575D-E:

“In view of the fact that it was common cause that the incorporation of the practice had the effect of postponing liability for income tax, a rebuttable presumption arose that such a postponement was the sole or one of the main purposes of the scheme comprised by the incorporation of the practice (s 103 (4) (a) and the passage quoted from the judgment in the Geustyn’s case supra). The onus of achieving such rebuttal lay on the respondent. Did he discharge this onus? The Special Court found that he had done so. On appeal it was argued that the Special Court had erred.”

ITC 1636, (1997) 60 SATC 267 at 300 Kroon J cast the primary onus of establishing the first three elements on the taxpayer for two reasons. The first was that the casting of the presumption on the taxpayer on the fourth requirement was an indication that initially the legislature meant to place all the four requirements on the Commissioner. However, in its wisdom, it decided to aid the Commissioner in regard to the fourth element only and left the onus to prove the other three on him. The second was that casting the onus on the taxpayer on the first three requirements would make the presumption on the fourth requirement redundant. Again Kroon J appears to me to have correctly applied the applied the generalia specialibus non derogant legal principle.  He found s 103 to be a particular provision, which was removed from the application of a general provision, s 82 particularly in view of the wording of subs (4) of s 103. In any event he was bound by the Geustyn case where OGILVIE THOMPSON CJ stated at 575B that:

“Notwithstanding this assumption, the appeal can only succeed if it be shown that the Special Court could not reasonably have concluded that the fourth requirement of sec. 103 of the Act (viz., that the avoidance, postponement or reduction of tax “was the sole or one of the main purposes of the transaction”) had not been established. In this regard the Secretary is, as already mentioned, greatly aided by the presumption created by sec. 103 (4) for, inasmuch as it is common cause that it was proved that the transaction in issue would result in the avoidance, postponement or reduction of liability for tax, there was thus an onus upon the respondent to prove the contrary to the Special Court”.

ITC 1636 went on appeal as Commissioner for Inland Revenue v Conhage (Pty) Ltd 61 SATC 391. At p 397 para [12] and [13] HEFER JA deduced from previous cases of the Appellate Division and Geustyn that:

“The effect, purpose and normality of a transaction are essentially questions of fact. The onus is on the Commissioner to prove that its effect was to avoid or postpone the liability for tax or to reduce the amount thereof. Upon proof that this was the case it is presumed (in terms of sub-s (4)) that the effect of the transaction was also its sole or its main purpose. What has to be determined in every case is the subjective purpose of the taxpayer.”

And in para [13]

“In the present case the Special Court found that the Commissioner had not established the abnormality of the sales and leasebacks and that Tycon had established the absence of the purpose requirement. Both findings were attacked in this Court, but a decision in Tycon’s favour on either will dispose of the appeal. I proceed to deal with the purpose of the transactions.”

And he concluded in para [16] and [17]:

“In view of this conclusion it is not necessary to deal with the Special Court’s finding that the abnormality of the transactions had not been established. Suffice it to say that what the Commissioner had to establish, was the abnormality of the transactions as sales and leasebacks. To decide whether he had done so, the court rightly took all the circumstances of the case into account and did not contend itself with an examination of the typicality of the terms of the agreements. I conclude therefore that the Special Court correctly found in Tycon’s favour on the second issue as well.”

Lastly in in ITC 1862 (2012) 75 SATC 34 para [9] DESAI J says:

“The onus to establish the existence of the transaction complying with the effect and abnormality requirements is on the Commissioner (see ITC 1636 (1997) 60  267 at 317-324). This judgment was upheld on appeal in Commissioner for Inland Revenue v Conhage (Pty) Ltd 1999 (4) SA 1149 (SCA). Although the incidence of onus was not expressly canvassed in the appeal judgment, the formulation in para [16] thereof shows that the Supreme Court of Appeal agreed with the analysis of the court a quo.”

The Zimbabwean cases

In Ferera v Commissioner of Taxes 1975 (4) SA 693 (R) at 695C GOLDIN J cast the onus of proving that the Commissioner had wrongly applied and incorrectly invoked the provisions of the relevant section on the taxpayer and at 697F again squarely placed the onus of establishing the third requirement of abnormality on the taxpayer.

Mr Vorster observed that GOLDIN J overlooked para (o) of the then Tenth Schedule to the Income Tax Act which cast the onus on the taxpayer to establish the fourth element. However, it seems to me that GOLDIN J was correct in observing that Zimbabwe did not have a provision similar to s 103 (4) of the South African Act, which has always been differently worded to para (o) of both the Tenth Schedule and the present Eleventh Schedule. Para (o) has never had and does not have the pertinent wording in s 103 (4), which requires the Commissioner to prove anything. All that the Commissioner is required to do under s 98 as read with para (o) is to make findings of fact based on the admitted facts or upon circumstantial evidence or both. It does not require the Commissioner to prove anything. He is only required to do is to make findings of fact based on admitted facts or upon circumstantial evidence.

On appeal as Commissioner of Taxes v Ferera, supra at 658B-D, McDonald JP made the immutable comment that:

“The next point is that the Commissioner is obliged to exercise its powers under the section if the transaction, operation or scheme has the stipulated “effect”, if he is of the “opinion” that the requisite abnormality is present and if he is further of the “opinion” that the taxpayer’s purpose was as stated in the section. Here again there is a clear indication that it is the intention of the Legislature to cast the net in such a way as to block every possible avenue of escape. This intention is also manifest by the further provision that when the stipulated effect is present and the requisite opinions are held the onus rests on the taxpayer (under the Eleventh Schedule to the Act) to establish on a balance of probabilities that he did not have the purpose set out in the section. Moreover, the section strikes not only at avoidance but also at mere postponement and reduction. This is a further indication of the Legislature’s intention to make the section all embracing. In short, the Legislature, by every conceivable means, has endeavoured to make it extremely difficult for a taxpayer to avoid the payment of tax, which, in the normal course of his business and but for his desire to avoid, postpone or reduce such payment, would fall due.”

The precursor to the Zimbabwean Supreme Court allowed the appeal but most importantly did not criticise the finding of GOLDIN J that the onus lay on the taxpayer to show that the Commissioner’s findings on the first three requirements of s 98 were wrong. The effusion and freedom of expression exhibited by MCDONALD JP suggests his approval of the approach taken by Goldin J on the question of onus.

In G Bank the matter proceeded on the basis that the onus was on the taxpayer to show that the Commissioner wrongly exercised his s 98 opinion. I maintained that position in H Bank and CF (Pvt) Ltd v Zimbabwe Revenue Authority HH 99/2018 at p 23 of the cyclostyled judgment. It does not appear to me that the South African cases referred to in this matter are of any assistance in regards to the onus issue.  I hold that the onus rests on the taxpayer to show on a balance of probabilities that the Commissioner wrongly invoked the provisions of s 98.

Under the South African Act, the section 103 requirements are predicated on the words “whenever the Commissioner is satisfied” which preface all these requirements. In addition the wording of sub-s (4) has the phrase “and whenever in proceedings relating thereto it is proved that the transaction, operation, scheme, agreement or change in shareholding or members interests in question would result in the avoidance or postponement of liability for payment of any tax, duty or levy imposed by this Act”, which does not form part of the Zimbabwean legislation.  That phrase indeed suggests that the Commissioner is required to prove the three preceding requirements in s 103 (1) of the South African Act (underlining mine for emphasis). In my view, that phrase is the game changer for the South African Courts. Under s 98, the Commissioner or on appeal the Special Court is required to make a finding of fact on the existence of a transaction, operation or scheme which has the stipulated effect. The third requirement in regards to either of the abnormality strands hangs on the opinion of the Commissioner or on appeal of the Special Court, which is based on the nature of the circumstances in which it was entered into or carried out. Once the Commissioner or the Special Court finds the abnormality strand present he must make a further opinion on the actual purpose of the transaction, operation or scheme. If he finds the sole or one of the main purposes was to avoid, postpone or reduce tax, he determines the tax liability and amount thereof.

This is the five step method that the Commissioner utilizes to assess the correct tax due from a taxpayer who falls into the requirements of s 98. The method of assessment is no different from the old system that the Commissioner employed before the introduction of self-assessments, where an income tax examiner would check the information and figures filled in by a taxpayer.  If he formed an opinion from the information that the tax return was incorrect he would assess the taxpayer for either a payment or a refund. It is only when that process of assessment was over that a dissatisfied taxpayer would object and if need be appeal. In the normal assessment the taxpayer would use the provisions of s 63 and under the s 98 scenario he would use para (o) of the Eleventh Schedule. The wording of that paragraph suggests to me that the Legislature sought to declare that once the Commissioner formed the opinion on what the taxpayer’s purpose was, the duty to disprove that purpose lay on the impugned taxpayer. What prompts the appeal is the purpose based assessment which is the culmination of the preceding three requirements. The taxpayer is in such an appeal is at liberty to treat the findings of the Commissioner or the Special Court in each of the requirements as aggregates of one whole. The appeal attacks the propriety of the findings of the Commissioner or the Special Court that each requirement was met from the circumstances proffered during the investigation and appeal.

The suggestion that the wording of para (o) would be redundant if the onus on the first three requirements were placed on the taxpayer on appeal does not arise. Such a suggestion negates the practical circumstances in which the Commissioner makes his opinion. It is not thump sucked from the air. It is based on the investigations. At the time he makes the opinion he does not make it nor present the basis of the opinion to some other authority. He obviously provides the taxpayer with the basis of his opinion, which then forms the basis for an objection, if the taxpayer disagrees. If the taxpayer fails to convince the Commissioner that his opinion is wrong, the Commissioner confirms the assessment. The whole purpose of an objection is for the taxpayer to persuade the Commissioner that his opinions were erroneous. At no stage is the Commissioner required to prove that his opinion was correct. Thus when the taxpayer launches an appeal based on the any of jurisdictional requirements of s 103, whether they are the first three or the fourth, he is obliged to aver and prove that the Commissioner’s opinions were wrong either in finding the first three jurisdictional facts established or the fourth, the purpose requirement, fulfilled. It is the manner in which the challenge is allowed by the operation of law that places the burden of proof in the objection and on appeal on the taxpayer.

In my view, the four requirements constitute the findings that the Commissioner must make before he assesses the taxpayer. He makes them on an examination of the circumstances provided to him by the taxpayer.  In making them, he does not bear any onus to prove them to anyone. He sits in the same position as the Special Court when it determines the appeal. Just as the Special Court does not bear the onus to prove the four requirements, neither does the Commissioner. Whatever decision the Special Court makes, it is appealed against not on the basis that the Special Court failed to establish the onus on it to proof the four requirements but on the basis that its decision whether for or against the taxpayer was wrong. The onus to establish that it was wrong rests on the party who makes such an allegation.  It is on the basis of these cumulative reasons that I maintain that the South African decisions which placed the onus on the Commissioner to establish the first three jurisdictional requirements cannot be followed in Zimbabwe.

The whole architecture of objection to the s 98 decision is premised on the opinion made by the Commissioner. On appeal, the Commissioner has the evidential burden of rebuttal. The Special Court is not a court of first instance. It is an appeal Court. On objection and appeal, the Commissioner would have exercised the fifth step in s 98. The meaning of liability in the context of s 98 was provided in by reference to STEYN CJ’s sentiments in Smith v Commissioner for Inland Revenue 1964 (1) SA 324 (A) at 333F in Commissioner for Inland Revenue v Louw, supra at 578H thus:

“The ordinary natural meaning of avoiding liability for a tax on income is to get out of the way   of, escape, or prevent an anticipated liability.”

And by reference to Trollip JA in Hicklin’s case supra at 492H-493A) that:

“That means a liability for tax that the taxpayer anticipates will or may fall on him in the future. Now such a liability may vary from an imminent, certain prospect to some vague, remote possibility. …..Lord Denning spoke of ‘a liability which is about to fall on you’, which suggests one of some imminence. However, it is unnecessary and hence inadvisable to decide here whether a vertical line should be drawn somewhere along that wide range of meanings in order to delimit the connotation of ‘an anticipated liability’.”

This definition is in tandem with Desai J’s sentiments in ITC 1862 at para [59] to the effect that:

“Identifying the Commissioner’s true case is important because of the nature of section 103. It involves the exercise of an extraordinary administrative power enabling the Commissioner to overturn the express and ordinary consequences of applying the Act. The exercise of that power involves his ‘determining’ a liability for tax. An appeal in this context is against the Commissioner’s ‘decision’(s 103) (4)) namely his determination of a tax liability and its amount.”

On appeal the taxpayer falls under the overarching shadow of s 63 of the Income Tax Act because he is protesting against the tax liability imposed on him and the amount thereof that is captured in the amended assessment.  I hold that the onus to establish on a balance of probabilities that the Commissioner’s s 98 derived opinions were wrong falls on the taxpayer.

The generalia specialibus non derogant maxim

The generalia specialibus non derogant maxim is a guide to statutory interpretation, which has been defined in the Black’s Law Dictionary 2 ed as “things general do not derogate from things special” and in the Duhaime’s Law Dictionary as “the provisions of a general statute must yield to those of a special one” and the Claassen's Dictionary translates the maxim to mean “general provisions do not derogate from special”. The principle is recognised in our law and has been applied in R v Landman 1966 (3) SA 679 (RA), S v Coulter 1971 (1) SA 162 (RA) at 163C and Wizard Pools (M) Ltd v Mashonaland Turf Club 1996 (2) ZLR 293 (SC) at 300. In the latter case, MCNALLY JA understood it to mean “general provisions do not override pre-existing particular provisions” but redefined it to mean “special provisions do derogate[override/diminish rights] from the general” .

In R v Landman at 681E QUENET JP while recognising that the maxim  did not provide a ready answer applied it to two different statutes, the Master and Servant Act, the earlier statute and the Criminal Code, the latter statute. After referring to s 34 of the earlier statute and s 35 of the latter statute held that the maxim “expresses a general truth based on the experience and an understanding of human behaviour and regard must be had to it when one seeks the legislature’s intention as expressed in its various enactments” . He recognised that the earlier was more general in describing the rights of all masters and servants while the latter was more specific in regulating the rights of all owners of property against perpetrators and held two were standalone statutes which were neither inconsistent nor repugnant to each other nor was there any implied repeal of the earlier by the latter for the Master did not have a choice of remedies. In S v Coulter Lewis JA applied it to the provisions of the same statute. It was held that the general provisions of s 190 were subject to and ousted by s 217 (2) of the same Act which precluded suspension of a driver’s license for driving without due care and attention. In the light of the definition of the phrase “subject to” articulated in Attorney-General v Makamba 2005 (2) ZLR 54 (S) it is unclear why LEWIS JA felt compelled to employ the maxim in the same statute. MALABA JA, (as he then was) said:

“The governing phrase “subject to subsection (2)” can only mean “Except as provided by subsection (2)” or to similar effect, “Without prejudice to what is provided by subsection (2)”. In Chinamora v Angwa Furnishers (Pvt) Ltd & Ors 1996 (2) ZLR 664 at 689 D-F, GUBBAY CJ said:

“The phrase ‘subject to’ is a simple expedient which subjects the provisions of the subject section to the provisions of the master section. Where there is a clash, the concept shows which of the two takes effect” This much emerges clearly from the judgment of MILLER JA in S v Murwane 1982 (3) SA 717 (A) at 747H:

‘The purpose of the phrase “subject to”…is to establish what is dominant and what is subordinate or subservient; that to which a provision is ‘subject’, is dominant-in case of conflict it prevails over that which is subject to it. Certainly, in the field of legislation, the phrase has this clear and accepted connotation.”

In this case, the phrase “subject to subsection (2)” means that the prohibition in subs (1) applies in all circumstances except where those described in subs (2) existed.”

Lastly, in Wizard Pool reference was made to two statutes, the earlier Totalizator Act with a special provision and the latter Pooling Act with a general provision. It was held at 301D-E that an earlier special enactment (Act with a special provision) cannot be repealed by nor subordinated to a general provision of a subsequent enactment.  It seems to me from the definition of the maxim recognised and applied in R v Landman and Wizard Pool (Pvt) Ltd cases, supra, that the maxim is best employed in respect of two statutes. It is clear that para (o) is promulgated in terms of s 62 (1) (b) of the Income Tax Act, which prescribes decisions made by the Commissioner which are subject to objection and appeal. In the absence of paragraph (o), the decision made by the Commissioner under s 98 would not be subject to objection and appeal. It seems to me that in the legislative scheme of s 98 the singular use of the word decision denotes the culmination of the 5 step approach, whose final result is the decision. The appellant is allowed by para (o) to object to and appeal against the postulated decision. In my view, the face of that decision is the fourth requirement. It seems to me that the while the application of the first three requirements of s 98 are decisions of the Commissioner, the fourth requirement constitutes the dominant decision to which all the others subordinate to.  It is the fourth decision that triggers the determination of tax liability and the amount thereof and it is the decision on which an objection and appeal depend. The casting of the onus on taxpayer on the fourth requirement does not imply that there is an onus placed on the Commissioner to establish the preceding three requirements on objection and appeal. It would be illogical to place onus on the Commissioner in the objection that is addressed to himself or on appeal against a decision he has already made. In making the decision the Commissioner is not required to prove anything, rather it is the taxpayer who is obliged to disprove the intention ascribed to him by the Commissioner.  In any event, intention being a subjective matter is best addressed by the taxpayer. In my consideration, there is no conflict or inconsistency between para (o) of the Eleventh Schedule as worded and s 63. In my finding, para (o) is complementary to s 63 to the extent that both apply to an objection or appeal against a finding of liability. After all, the cumulative decision arising from s 98 is the determination of tax liability and the amount thereof. These are what the appellant appeals against in this matter. It bears the onus of establishing on a balance of probabilities that the Commissioner was wrong in imputing liability to him in the assessed amounts.

I am not persuaded that s 63 is a general provision while s 98 is a specific provision. Rather it seems to me that but for para (o) of the 11th Schedule, the taxpayer would be precluded from objecting and appealing against the determination of tax liability and the amount thereof made by the Commissioner under s 98. The appellant contended that s 63 applied to the ordinary accrual and incurral provisions of the Income Tax Act under the rubric of the relief he seeks while para (o) applied to s 98 only where the relief he seeks was not in dispute, question being whether the Commissioner can ignore it.

Both s 63 and 98 deal with liability of an amount, in the latter computed after the 5 step approach. That assessment would be appealable of right under s 65. But the appellant may wish to appeal against the fourth requirement. The fourth requirement deals with the purpose finding for which without para (o) would not be a decision for which the taxpayer would be unable to appeal.

Whether or not the OECD Transfer Pricing Guidelines are applicable to Zimbabwe in terms of domestic law or of persuasive value

The parties agreed that if the first three preliminary points were found against the appellant, the question as to whether the OECD Transfer Pricing Guidelines were applicable in Zimbabwe would best be determined at the main appeal hearing. Accordingly, I defer it the main appeal hearing.

Whether or not the Commissioner introduced new grounds of assessment on or after the objection and determination and if so, whether or not he is permitted by law to do so [jurisdiction of court  to hear Zimra conduct, procedurally unfair steps by Zimra and the broad applicable principles] [ILLEGALITY IN COMMISIONER’S CASE AND HEADS MAY DISPOSE OF THE WHOLE APPEAL AS IT DOES NOT ARISE FROM S 98]

The appellant contended that the respondent raised new grounds and reasons for the additional assessment in the Commissioner’s case, which were not indicated in the determination, in breach of both the principle of functus officio, legality, reasonableness and procedural unfairness. . Mr Erasmus strongly advocated for the new reasons to be struck out from the record. In the alternative, he applied for the condonation of the late filing of new grounds of appeal as set out in the replication. He contended that the raising of the new reasons constituted the good and sufficient cause contemplated in s 65(4) of the Income Tax Act.

The appellant submitted that he Special Court or the High Court sitting on appeal under the Income Tax Act has the jurisdiction to exercise review powers. Mr Erasmus contended that the power is conferred by rule 1 of the Twelfth Schedule to the Income Tax Act. It reads:

“The rules in this Part shall apply in the determination of appeals under section sixty-five or any proceedings incidental thereto or connected therewith—

1. 	The Special Court shall have all the powers of the High Court as in civil actions, and the general procedure and practice, save as specially provided for by these rules, shall be that prevailing in the High Court, in so far as the same is applicable, and if any matter should arise which is not contemplated by either such procedure and practice or these rules, the Special Court shall give instructions regarding the course to be pursued, which instructions shall be binding on the parties.”

The rule in question specifically applies to appeals and not to reviews. Indeed s 64, 65 and 66 of the Income Tax Act to which they pertain are all appeal provisions. The Income Tax Act does not provide any review powers to either the Special Court or High Court sitting on an income tax appeal.  The right to the review of administrative justice enshrined in s 68 (3) of the Constitution is met by the Administrative of Justice Act which in s 4(1) confers the power to do so on the High Court. See PIL v Zimbabwe Revenue Authority HH 213/2017 at 19-21 of the cyclostyled judgment.  The point is made that there is distinction in our law between a review and an appeal by reference to the words of MCNALLY JA in Charumbira v Commissioner of Taxes 1998 (1) ZLR 584 (S) at 585B-D that the difference between an appeal and a review “is fundamental and well established…….judicial review as GUBBAY CJ said in Muringi v Air Zimbabwe Corp & Anor 1997 (2) ZLR 488 (S) at 440F is concerned not with the correctness of the decision, but with the decision making process”.

At page 19 the following conclusion is made.

“It seems to me that the Law Lords made at least two pertinent points in the above cited case. The first was that the judicial review process was incompatible with the statutory appeal procedure provided in tax legislation. The second was that such a review process could only be brought before the formal courts in exceptional circumstances and not before the special courts. The Preston case does not support the submission made by Mr Manase with respect to an appeal brought to this Court.”

Again, the answer to this preliminary question was provided in BT (Pvt) Ltd v Zimbabwe Revenue Authority 2014 (2) ZLR 640 (H) at 644F-645E. I reiterate what GUBBAY CJ emphasised in Sommer Ranching (Pvt) Ltd v Commissioner of Taxes 1999 (1) ZLR 438(S) at 443A-B, which is binding on me:

“Presently, it is well settled that an appeal against a decision where the Commissioner exercised a discretion, the Special Court is called upon to exercise its own original discretion. Nor is it restricted to the evidence which the Commissioner had before him. The appeal to the Special Court is not only a rehearing but can involve the leading of evidence and the submission of facts and arguments of which the Commissioner was unaware. See Commissioner for Inland Revenue v da Costa 47 SATC 87 (A) at 95; 1985 (3) SA 768 (A) at 775B-G; K v CoT 1993 (1) ZLR 142 (S) at 147B-F; 55 SATC 276 (ZS) at 281.” (Underlining mine for emphasis).

It seems to me that three points emerge from the above quotation. The first is that the present appeal is a rehearing in which I am called upon to exercise my own independent discretion. The second is that the Commissioner was entitled to determine the objection on the basis of the evidence which he had before him. The evidence sought to be impugned was before him before he made the determination. It was therefore in my view irrelevant whether or not he referred to this evidence in his decision. It was evidence which the appellant knew was in the Commissioner’s possession. In any event, in answering the appellant’s very detailed and long case, the Commissioner was entitled to leave no stone unturned and respond in like fashion in demonstration of the full factors he considered in making the decision to the objection.  He is permitted by the rules of procedure to do so. He did not infringe any of the requirements of the Constitution or the Administrative of Justice Act that were outlined by the appellant. After all, a civil trial is not a game of hide and seek. Each party is required to make full disclosure of the material facts on which it relies on. The Commissioner has done so on the pleadings and cannot be maligned for doing so.

The third point is that in our jurisdiction and appeal is different from a review. The points raised by the appellant by reference to the Administrative Justice Act seek a review of the Commissioner’s administrative conduct. The Administrative Justice Act itself prescribes that relief under s 4 and 5 of the Act is taken in the High Court. In any event, it seems to me that the Income Tax Act does not confer this Court with any review jurisdiction. The submission that para 1 of the Twelfth Schedule imbues this Court with the full powers of the High Court is incorrect.  The powers conferred on this Court resonate with the powers exercised in the High Court in respect of actions proceedings. This is because the nature of the appeal hearing in this Court is in the wide sense and not in the narrow sense. It is in the nature of a trial where oral and documentary evidence may be led.

In any event, the case of L v CoT 1975 (2) SA (RAD) 649 at 652A  permits the Commissioner to rely on any basis on appeal as long as he gives sufficient notice of his intention to do so.  MCDONALD ACJ said:

“But in any event, the respondent is entitled to support the judgment of the court below on any basis. Proper notice to the appellant had been given in the court below that this was one of three bases on which the assessments could be supported. It was for the appellant to examine all the grounds upon which his appeal might fail and only proceed after having done so. There is no substance, in my view, in Mr Squires’ submission that the respondent should be penalised in costs because in the Court below the matter was dealt with on a consideration of the scheme as a whole rather than on the consideration of a particular transaction or operation.”

The application for condonation runs counter to the underlined advice rendered in L v CoT, supra. It must fail. Likewise, the request for review in this appeal must fail.

I have decided to deal with each of the points raised to demonstrate that the Commissioner did not raise any new grounds or reasons.

The alleged new grounds

The appellant identified twelve new grounds and reasons that were allegedly raised by the respondent for the first time in the Commissioner’s case. The respondent disputed that it raised any such grounds and reasons for the first time in response to the appellant’s case. I deal with each one in turn.

Reversal of reliance on OECD TPGs and increase penalties from 60% to 100%

The appellant contended that the refusal by the Commissioner to be bound by the OECD TPGs constituted an unfair administrative practice, an abuse of power, a breach of natural justice and was exercised in bad faith. It argued that the respondent’s conduct breached both s 3 as read with s 5 (d) (f) (i) (n) and (p) of the Administrative Justice Act. The respondent retorted that it applied its own understanding of the law on the point.  I agree with the respondent that it was entitled in making the determination to articulate its own understanding of the law. It was not raising any new ground but was fleshing out the reasons for the determination. In any event, the nature of the appeal to this Court permits the appellant to countervail the so called new grounds and reasons in oral evidence or in argument. The appeal to this Court is a rehearing. The Special Court is not bound by the information that was placed before the Commissioner. It affords the appellant a fair hearing which would cure any administrative breaches ascribed to the Commissioner.

The reference to the agreement between the Botswana and Zambian subsidiaries was materially wrong, irrelevant and illegal

The appellant contended that the introduction of the agreement was in breach of s 5 (c) of the Administrative of Justice Act. The respondent ascribed the agreement to Zimbabwe and Zambia. The respondent averred that reference to the agreement and its contents was made by the appellant to the respondent’s investigating team in the letter of 1 July 2013, before the amended assessments were issued. It seems to me that the respondent was entitled utilize the agreement in determining whether firstly there was a transaction or operation or scheme between the appellant and the Botswana subsidiary and depending on its findings to proceeded to determine the tax liability and amount thereof. The agreement appeared to be relevant in setting the base for imputing the royalties that would have flowed between the appellant and Botswana subsidiary for the use of the appellant’s trademarks. The terms and contents appeared to the respondent to cast a perfect reflection of the taxable income that would have flowed to the appellant from the subsidiaries that were using its trademarks.

The tax ruling suggestion

The respondent indicated this was a mere suggestion and not a new ground. That seeking such a tax ruling might have been contrary to s 34D of the Revenue Authority Act which appears to preclude related parties from seeking a ruling on the pricing of their goods and services between themselves  would still not make the suggestion a new ground or reason.  The appellant recognised it as a suggestion.

The reference to “without prejudice” settlement and negotiation letters

There was other correspondence dated 28 May, 3and 25 June and 1 and 15 July 2013, which did not bear the “without prejudice” appellation which referred to the same information that was contained in the without prejudice letters.  In any event the without prejudice letters appeared to accept liability and appeared to negotiate the computation of such liability. The efficacy of the so called without prejudice letters appears to me to be doubtful in view of the sentiments of MALABA JA in Commissioner of Taxes v Astra Holdings (Pvt) Ltd, infra at 428B that the Commissioner has no right to disclaim the right to tax that is due and abandon its statutory power to collect it, which in my view, would have been the effective outcome of the without prejudice negotiations. Again, ROPER J in Milward v Glase 1950 (3) SA 547 (W) held that an invitation to discuss settlement in a letter which invitation is not accepted would not be privileged from disclosure notwithstanding that it is written without prejudice. The appellant’s submissions woefully fell short of establishing that the invitation to conduct these negotiations on a without prejudice basis was accepted by the Commissioner. Accordingly, they neither constitute new grounds as they were always within the knowledge of the parties at the time the determination was made.

The reference to the draft transfer pricing policy warning from consultant

The appellant contended that the document was irrelevant. The respondent retorted that the document was availed to the respondent before 20 February 2013, long before the letter of assessment and determination could not have constituted new ground or reasons in the Commissioner’s case. To the respondent it was relevant in view of the opinion of the tax consultant on the tax consequences of charging management fees to subsidiaries on a cost recovery basis. My view is that the respondent was entitled to place before the appeal court this information as it tended to buttress its determination.

The reference to the location of the group treasurer.

The physical location of the group treasurer was a fact always known by the appellant, who raised it in the letter of objection. The respondent was entitled to respond to it. It was not a new reason. The main appeal procedure provides the appellant the opportunity to lead evidence on the true position. In my view it did not constitute a new ground, rather it tended to buttress the determination made by the respondent. .

The reference to the trail of the expenses for funding research

The information on these expenses was supplied by the appellant in its financial statements and appeared to have been used to disprove the averments made by the appellant.

The reference to the arm’s length second requirement of the royalties charged

It is apparent to me that the respondent referred to this requirement in respect of royalties in its determination n para 3 on p 3 thereof. It was not a new ground.

The reference to plant breeders’ rights

The respondent found that the plant breeders were employees of the appellant and that the product intangibles developed in the host countries were hybrid seeds derived from the 5 trademarks owned by the appellant. The reference to plant breeders could not therefore have constituted a new reason made after the fact.

The reference to power of appellant to refuse registrations in foreign markets,

I agree with the response of the respondent that this was not a new reason but an answer to an averment made in the appellant’s case based on the alleged ownership of the hybrid seeds.

The reference to the interpretation of s 8 (d) (iii) of the Income Tax Act in respect of royalties

This does not appear to have been a new reason as it appears to have been the basis of the respondent’s decision on ground 6 of the objection on page 5 of the determination.  The respondent adjudged the 5 trademarks and the application of the wit, skill and labour of the Zimbabwe based employees of the appellant to have been, as a matter of the practical hard fact envisaged in Liquidator Rhodesia Metals Ltd v CoT 1938 AD at 379, the source of the imputed royalties.

The reference to s 47 in regards to penalties

The appellant deferred argument to the main appeal on this point.

The reference to e-mails harvested from the Group Financial Director’s alleged personal computer without warrant after objection but before the determination

It was apparent from the response to the allegations that there exists a factual dispute of fact on the alleged search and seizure. However, it is clear from the admitted facts that the appellant is not precluded from exercise its rights including the audi alteram partem rule on the point in the main appeal.

In my view, the appellant has failed to establish on a balance of probabilities that any of its constitutional or Administrative Justice Act derived rights were violated. It does not appear to me that the Commissioner introduced any new grounds of assessments after the determination.  I would also dismiss the preliminary point on this basis.

The other argument

The appellant further contended that while the respondent was permitted by s 62 (4) of the Income Tax Act on receipt of a notice of objection to an assessment to reduce or alter the assessment, he is precluded from altering the grounds of assessment in his determination or thereafter in the Commissioner’s case deposed to in response to the appellant’s case. The respondent disputed the contention. The section provides:

“(4) 	On receipt of a notice of objection to an assessment, a decision or the determination of a reduction of tax the Commissioner—

(a) 	may reduce or alter the assessment, alter the decision or, as the case may be, increase or alter the reduction or may disallow the objection; and

(b) 	shall send the person upon whom the assessment has been made or to whom the decision has been conveyed or, as the case may be, to whom the reduction has been allowed, notice of the reduction, increase, alteration or disallowance.

Provided that, if the Commissioner has not notified the person who lodged the objection of his decision on it within three months after receiving the notice of objection, or within such longer period as the Commissioner and that person may agree, the objection shall be deemed to have been disallowed.”

I hold that the proviso to subs (4) above calls the determination to the objection “his decision”. In other words the decision contemplated by s 62 (4) could be the alteration or reduction of the assessment, or the alteration of the decision made in terms of s 61 (1) (b) of the Income Tax Act under which s 98 falls or the increase or alteration of the reduction or the disallowance of the objection. So anyone of these four categories would constitutes the Commissioner’s s 62 (4) decision.

The appellant further contended that the respondent was prohibited by s 47 (1) (c) (iii) from varying any decision made under s 62 (4) in an additional assessment. In relevant, section 47 (1) reads:

“47 Additional assessments

(1) 	If the Commissioner, having made an assessment on any taxpayer, later considers that—

(a) 	an amount of taxable income which should have been charged to tax has not been charged to tax; or

(b) 	…………………….

(c) 	……………..………

he shall adjust such assessment so as to charge to tax such amount of taxable …and if any tax is due either additionally, or alternatively, call upon the taxpayer to pay the correct amount of tax:

Provided that—

(i) 	no such adjustments or call upon the taxpayer shall be made if the assessment was made in accordance with the practice generally prevailing at the time the assessment was made;

(ii) 	subject to proviso (i), no such adjustment or call upon the taxpayer shall be made after six years from the end of the relevant year of assessment, unless the Commissioner is satisfied that the adjustment or call is necessary as a result of fraud, misrepresentation or wilful non-disclosure of facts, in which case the adjustment or call may be made at any time thereafter;

the powers conferred by this subsection shall not be construed so as to the permit the Commissioner to vary any decision made by him in terms of subsection (4) of section sixty-two.”

In my view, section 47 (1) allows the Commissioner to revisit an assessment he made if the taxpayer paid an incorrect amount of tax provided he complies with each of the three provisos enunciated in that subsection. One of those provisos, proviso (iii) precludes the Commissioner from re-opening an assessment which was objected to and for which he made a decision of, either reducing or altering the objected assessment or disallowing the objection. He cannot use s 47 (1) (a) to vary the decision he made to an assessment previously objected to.

It does not appear that the Commissioner was precluded from altering the penalty by s 47 (1) (c) (iii) as he was not making a determination to an objection for the second time.

The functus officio contention

In an application to amend the Commissioner’s r 10 statement and counter application to strike out new reasons that the Commissioner had added to that statement  in ABC (Pty) Ltd v CSARS TC 13238 and 13164/2008 at para [43]  8 December 2014 ROGERS J based his decision on the authority of ITC 1862 75 SATC 34.  The question in the latter case was whether the Commissioner could at the end of the trial rely on grounds that were not raised in his rule 10 statement.  It was held that on appeal he was confined to the initial grounds on which his satisfaction was based.  He was precluded from supporting the impugned assessment on the basis of matters on which he was not satisfied when he issued the assessment. The inarticulate premise on which the decision was based can be traced to the functus officio principle, defined in Hiemstra & Gonin’s Trilingual Legal Dictionary 3 ed (1992) as “no longer officiating”. The principle was exhaustively considered by PLASKET AJA in  Retail Motor Industry organisation & Anor v Minister of Water & Environmental Affairs & Anor [2013] 3 All SA 435 (SCA)  442 para[23-25]. He stated in para [25] that:

“It is not necessary in this judgment to define the exact boundaries of the functus officio principle., save to say the following: first, the principle applies only to final decisions, secondly, it usually applies where rights and benefits have been granted-and thus when it would be unfair to deprive a person of an entitlement that has already vested; thirdly an administrative decision-maker may vary or revoke even such a decision if the empowering legislation authorises him or her to do so (although such a decision would be subject to procedural fairness  having been observed and any other conditions), fourthly, the functus officio principle does not apply to the amendment or repeal of subordinate legislation.”

Again, the appellant further contended that the respondent failed to provide the appellant with a proper opportunity to respond to the averment in the determination that the OECD TPGs were in applicable in Zimbabwe when all along it knew that that was the mainstay of the appellant’s case. Mr Erasmus contended that the respondent acted in breach of the principle of procedural fairness and contrary to the audi partem alteram principle pronounced by the Privy Council in Mahon v Air New Zealand Ltd [1984] AC 808 at 821 thus:

“any person represented at the enquiry will be adversely affected by the decision to make the finding should not be left in the dark as to the risk of the finding being made and thus deprived of any opportunity to adduce additional material of probative value which had it been placed before the decision maker, might have deterred him from making the finding even though it cannot be predicted that it would inevitably have had that result.”

In view of the sentiments propounded by MCDONALD ACJ in L v Cot, supra, and GUBBAY CJ in Sommer Ranching (Pvt) Ltd, supra, the reasoning of the South African Courts on the point must play second fiddle. The Commissioner is empowered to act as he did in the present matter.

Accordingly, the sixth preliminary point is also devoid of merit.

whether or not the Commissioner relied on the OECD TPGs to justify his position on assessments[legitimate expectation] and if so, whether or not he is estopped from changing his position

The preliminary issue in question arises from the contents of the letter of assessment of 25 November 2013. The case manager wrote:

“I have gone through the cases you cited i.e.  DHL Incorporated and Subsidiaries v Commissioner Inland Revenue TC memo 1998-461. 301December 1998 and Glaxo Smith Kline Inc. v The Queen 2008 TCC 324 and I do not see anything amiss with the manner that I have come to my conclusion that there is tax payable based on the figures that I have presented to you. I have equally considered the OECD guidelines and there is nothing that can persuade me to vary my assessment. To the contrary the cases you cited as well as the OECD guidelines actually support the position I have taken in that I have allowed the expenses stated in the agreement before arriving at the royalties’ rate. I believe you are aware that cases decided outside Zimbabwe have got a persuasive authority.”

The subject matter addressed by the case manager was the tax payable based on the figures presented to the appellant. The case manager alleged that the manner he computed the royalties rate equally cohered with the OECD guidelines on apportioning profits in accordance with the triad of functions, risks and asset in the specific instances enumerated in para 7 of the Commissioner’s case. I agree with Mr Renzva that all reference to the OECD guidelines in the interaction between the parties was demonstrably at the instance of the appellant as shown by the letters of 25 June 2013 and 19 August 2013 [p394 and 244 of bundle 1]. The case manager does not appear to have acknowledged that the OECD guidelines applied in Zimbabwe. It was the Commissioner who categorically intimated that they were not domesticated for use in Zimbabwe and that they were not the only means at his disposal to determine transfer pricing issues. He adopted the method embodied in the agreement between two of the appellant’s subsidiaries to compute the royalty rate imputed to the appellant.

The appellant based its claims for legitimate expectation in the use of the OECD guidelines on the reference to economic substance and shareholder activities in para 91.1 of the Commissioner’s case. It is correct that the term shareholder activities is a technical term at the heart of the OECD guidelines in paras 7.9 and 7.10 in Chapter 7.  It was first introduced in the discourse between the parties by the appellant in para B 2.2.2.2.5 on p 32 of the objection together with reference to Chapter 7 of the OECD guidelines [p 90 of bundle 1].  The use of the term “shareholders activities” by the respondent in response to the legal averments made in the appellant’s case could not have provided retroactive justification for legitimate expectation. The term includes free services from a co-ordinating centre to group members such as the planning of specific operations, emergency management, troubleshooting advice, parent shareholders meetings, issuing shares in the parent company, costs of the supervisory board, consolidation of reports, capital raising, investment protection, managerial and monitoring costs that the group exercises as a shareholder but which the recipient would not need nor pay for to an independent party. The term is employed in both the United Nations Transfer Pricing Guidelines and the OECD TPGs to determine whether the payment of a service was at arm’s length.  The UN version is driven firstly by the actual provision of a beneficial economic and commercial service, which is neither a shareholder activity nor a duplication and secondly by the cost base plus mark-up audit approach to ascertain whether the price was at arm’s length. The UN guidelines anticipate levying an arm’s length cost base plus mark-up price for the service rendered. The OECD guidelines employ the Comparable Uncontrolled Price (CUP) method, the cost plus return method and the resale minus method in calculating notional arm’s length income.

The requirements for legitimate expectation were common ground between the parties. The cases relied on by the appellant of National Director of Public Prosecution v Phillips and Ors 2002 (4) SA 60 (W) para [28] SA Veterinary Council and Anor v Greg Szymanski 2003 (4) SA 42 (SCA) para [19] were among the many cases on the subject that were conveniently listed and adopted by NDOU J in Matake & Ors v Minister of Local Government & Housing and Anor 2007 (2) ZLR 96 (H) at 100E-101C, amongst which were 5 Supreme Court cases that accord the principle the imprimatur of law in our jurisdiction.  The basic four requirements which found the principle are:

The representation underlying the expectation must be clear, unambiguous and devoid of relevant qualification’. It accords with the principle of fairness in public administration, fairness to both the administration and the subject. It protects public officials against the risk that their unwitting ambiguous statements may create legitimate expectations. It is also not unfair to those who choose to rely on such statements. It is always open to them to seek clarification before they do so, failing which they act at their peril.

The expectation must be reasonable.

The representation must have been induced by the decision maker;

The representation must be one which it was competent and lawful for the decision maker to make without which the reliance cannot be legitimate:

It is clear from the interaction between the parties during the investigation that the OECD TPGs were initiated and induced by the appellant and not by the case manager and his subordinates. The officials clearly spelt out to the appellant the basis upon which they initially sought to and finally imputed the notional income to the appellant. They did not rely on the OECD principles. Rather it was the appellant who sought to railroad those principles down their proverbial throat. I agree with Mr Renzva that in these circumstances it cannot lie in the mouth of the appellant to begin to suggest that the first three requirements of the doctrine of legitimate expectation as set out above were met. They were not. The best that can be said of the letter of 25 November 2013 was that the while the case manager made his decision on another basis his conclusion remained unaffected by an application of the OECD guidelines that he referred to. He did not make any clear representation to the effect that the OECD guidelines were applicable in the case before him. If anything, the definite position of the Commissioner, which was further affirmed in argument, was that they did not apply.  Insofar as the Commissioner was concerned, the purported representation was clearly outside the remit of the case manager to make. The intricacies of the law on the subject raised by the appellant by reference to our Constitution and customary international law would obviously have been beyond the legal comprehension and competence of case manager.

In regards to revenue matters the issue of legitimate expectation was comprehensively addressed by MALABA JA, as he then was, in Commissioner of Taxes v Astra Holdings (Pvt) Ltd 2003 (1) ZLR 417 (S) at 431D-432A. It is to the effect that an error of law cannot found legitimate expectation. In the present matter, it does not appear to me that the case manager ever expressly or tacitly accepted or even suggested that the OECD TPGs applied to the dispute on appeal between the parties. He simply made it clear that he was relying on the relevant provisions of s 98 of the Income Tax Act.

The appellant also invoked the principle of estoppel by representation enunciated by CORBETT JA in Aris Enterprises (Finance) (Pty) Ltd v Protea Assurance Co Ltd Assurance [1981] 4 All SA 238 (AD) at 246-7, 1981 (3) SA 274(A) at 291D-F against the Commissioner. It was held that a party:

“was precluded, that is, estopped, from denying the truth of the representation previously made by him to another person if the latter believing in the truth of representation acted thereon to his prejudice.”

Even then, CORBETT JA observed as did MALABA JA in Commissioner of Taxes v Astra Holdings (Pvt) Ltd 2003 (1) ZLR 417 (S) at 427F-429D that estoppel cannot be raised to prevent or excuse the performance of a statutory duty or discretion, otherwise to do so would be anathema to the public interest.

Mr Erasmus submitted that the Commissioner was estopped from disputing the application on appeal of the OECD TPGs, a best international arm’s length defining practice to transfer pricing under s 98 of the Income Tax Act, which was acknowledged and applied by his case manager in the letter of assessment in the computation of the royalty rate. I do not find that the respondent was estopped from exercising his statutory powers to determine the objection by any representation made by the case manager nor was he precluded by the doctrine of legitimate expectation to exercise his own mind against the appellant on the applicability of OECD TPGs in our law.  Accordingly, the preliminary point in issue also lacks merit.

whether  or not the Commissioner conducted an unlawful search and seizure in terms of s 44 (8) of the Income Tax Act  as read with the Constitution and the  Administrative Justice Act [Erasmus calls it 5]

It was common ground that the issue was not raised in the objection because the search and “seizure” was conducted after the letter of objection had been served on the respondent but before he had made his determination. I accept that in those circumstances there was no way it would have found its way in the letter of objection and I accepted that it be ventilated. It is correct that the South Africa the Constitutional Court in Gaertner & Ors v Minister of Finance, CSARS & Ors CCT 56/13 [2013] ZACC 38 at para 12, 14, 73 and 74 and Haynes v Commissioner for Inland Revenue 64 SATC 321 held that the Commissioner was required to exhaust the non-invasive provisions before resorting to the more intrusive method in obtaining any information from the taxpayer to pass muster the infringement of the constitutionally protected right to privacy. The appellant contended that the Commissioner did not have any reasonable grounds to conduct the search and seizure in question.

The respondent raised three points against the preliminary point. The first was that the exigencies of the situation prompted by the lack of cooperation by the appellant necessitated the warrantless search and “seizure”. The second was that the appellant’s official, the Chief Financial Officer, consented to the search and collection of the computer on the advice of the appellant’s tax consultant, thus making the “seizure” lawful and compliant with s 57 of the Constitution.  And lastly that even if the search and seizure were in breach of s 57 of the Constitution the evidence so collected was in any event admissible at the discretion of the Court. The first two points raise disputes of fact which cannot be resolved without calling evidence and they constitute adequate reason for dismissing the preliminary point. However,  for the sake of completeness, I feel compelled to deal with the possible effect of section 57 of the Constitution on this preliminary point.

Section 57 provides that:

“Every person has the right to privacy, which includes the right not to have:

their home, premises or property entered without their permission;

their person, home, premises or property searched;

their possessions seized;

the privacy of their communications infringed; or

their health condition disclosed”

The right to privacy is abridged by s 81 of the constitution by a law of general application to the extent that the limitation is fair, reasonable, necessary and justifiable in a democratic society based on openness, justice, human dignity, equality and freedom”. Subsection (2) (a) to (f) of s 86 lists six factors that constitute a non-exhaustive relevant factors menu that may justify such derogation to the right of privacy. The appellant conceded that s 44 of the Income Tax Act was the law of general application envisaged by s 86 which permitted the abridgement of a taxpayer’s right to privacy but submitted that the respondent breached subpara (2) (f) by adopting more intrusive instead of less restrictive means in the search and seizure operation mounted against the taxpayer.

Section 44 (1), (2) and (8) of the Income Tax Act provides:

“44 Production of documents and evidence on oath

(1) 	For the purpose of obtaining full information in respect of any part of the income `of a taxpayer or his liability to tax or any matter relating to the collection of his tax or any matter relating to employees’ tax (as defined in paragraph 1 of the Thirteenth Schedule), the Commissioner may require any person to produce for examination by the Commissioner, or by any person appointed by him for that purpose, at such time and place and as may be appointed by the Commissioner for that purpose, any deeds, plans, instruments, books, records, accounts, trade lists, stock lists or documents which the Commissioner may consider necessary for the purposes of this Act.

(2) 	Any deeds, plans, instruments, books, records, accounts, trade lists, stock lists or documents which in terms of subsection (1) are produced to the Commissioner, or to the person appointed by him, may be retained by the Commissioner or such person for as long as they may be reasonably required for any assessment or for any criminal or other proceedings under this Act.

(8) 	Any officer engaged in carrying out the provisions of this Act may, if he has reasonable grounds for believing that it is necessary to do so for the enforcement of any tax—

(a) 	at any reasonable time during the day enter any business premises;

(b) 	require any person to produce for its inspection any—

(i) 	book, record, statement, account, trade list, stock list or other document; or

(ii) 	file, schedule, working paper or calculation relating to the determination of a taxpayer’s income, expenses or liability for tax;

(c) 	require any person to prepare and additionally, or alternatively, to produce for inspection a print-out or other reproduction of any information stored in a computer or other information retrieval system;

(d) 	take possession of any document or other thing referred to in paragraph (b) or (c) for so long as may be necessary for the purpose of any examination, investigation, trial or inquiry;

(e) 	require any person reasonably suspected of having committed an offence under this Act or any person who may be able to supply information in connection with a suspected offence to give his name and address.”

Section 44 imbues the Commissioner with extensive and draconian administrative powers to obtain full information bearing on the income and correlative tax liability of any taxpayer.  He can call for and examine in person or by proxy any deeds, plans, instruments, books, records, account trade lists, stock lists or documents and further retain them for as long as they may reasonably be required for any assessment or criminal or other proceedings envisaged by the Act. Like a court, he has power to summons on reasonable written notice any person he considers able to furnish information concerning the accrual to or receipt of income by any taxpayer and examine such person on oath and if the taxpayer so chooses in the presence of his legal practitioner, accountant or other adviser. The statement is recorded, corrected, signed by and a copy thereof availed the deponent.   Where the Commissioner reasonably suspects the taxpayer of committing an offence under the Act, he may obtain ex parte a judicial warrant to search premises, remove and open any article, seize and retain the listed documents as evidence material to the tax liability of any person for as long as they may reasonably be required for such assessment, criminal or other proceedings.  The dispossessed person is entitled to make copies and extracts of such documents during office hours under the supervision of the Commissioner. Subsection (11) and (12) penalize any person who wilfully deposes to a false statement, masquerades as a designated officer, hinders, obstructs and assaults such an officer or wilfully defies a lawful demand made by the designated officer.

The proxy of the Commissioner is any officer “carrying out the provisions of the Act…….for the enforcement of tax”. The officer in question is empowered on reasonable grounds to request, search, seize, examine and retain the listed documents.

Section 44 (8) allows an officer “carrying out the provisions of the Act” for the enforcement of any tax on reasonable grounds and at any reasonable time during the day to enter any business premises without a warrant and require any person to produce any book, record, statement, account trade list, stock list or other document, file, schedule, working paper or calculation to do with the determination of a taxpayer’s income, expenses or liability for tax for inspection. He may demand the preparation and production of a print-out or other reproduction of any information stored in a computer or other information retrieval system for inspection and to take possession of any document or other thing identified in subs (8) for the purposes of any examination, investigation, trial or enquiry.

The careful wording of paras (b) and (c) of subsection (8) of s 44 does not exclude  the production for inspection of a computer on which the listed documents are stored in electronic form. The appellant contended that the other thing referred to was not the computer in which the information was stored. The initial impression rendered by para (c) as read with para (d) is that the officer is only permitted to take possession of the print out of the documents stored in the computer or the reproduction of the stored information but not of the computer itself. To my knowledge information may be retrieved from a computer by the use of diskettes, discs, memory sticks and blue tooth technology. But in the absence of these appurtenances, the only way the officer will be able to take possession of the electronic documents is by taking possession of the computer. Regard must be paid to the guidance set out by WALLACE JA in Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA 593 (SCA) at para [18] [25] and [26] who states at para [26] that:[26]:

“An interpretation will not be given that leads to impractical un-business like or oppressive consequences that will stultify the broader operation of the legislation or contract under consideration”

To the same effect is Commissioner of Taxes v Ferera, supra at 658A which requires that “clearly the Courts must not, by their interpretation of the provisions of the section, deprive them of their efficacy”. A purposive and contextual construction of subsection (8) appears to allow the Commissioner to take possession of the electronic file that cannot be printed out or reproduced by other means by taking possession of the computer in which such electronic information is stored.

The respondent appears to have had reasonable grounds for making a surprise visit to the premises where the computer was taken from. It came to the conclusion that the appellant might not have been candid on the nature of its relationship with its subsidiaries in view of the listing requirements of the Zimbabwe Stock Exchange. According to YOUNG J in R v Nyandoro 1960 (1) SA 55 (R) at 58C the administrative authority is not required to conduct a judicial enquiry but to objectively consider whether on the information before him there is a real likelihood of a breach of the legislation under consideration. It seems to me that the Commissioner could take possession of the computer.

But even if I am wrong and s 44 (8) precludes the Commissioner from seizing the computer, it appears under the authority of Chizikani v Law Society of Zimbabwe 1994 (1) ZLR 382 (S) at 386G that the position in Zimbabwe is that such evidence is admissible in evidence.  GUBBAY CJ stated:

“It is, of course, possible that the appellant’s ledger cards were illegally obtained by Mr Sibanda. Save for a limited discretion in a court to disallow the use of documents illegally obtained, the general principle is that documents obtained as a consequence of an unlawful act are admissible in evidence”.

And at 387B the learned Chief Justice was more emphatic that:

“It is pertinent to note that this rule, [on court’s discretion to allow illegally obtained evidence] applies in the criminal matters only, and that with regard to civil cases the Judge has no discretion to refuse to admit evidence which is relevant and admissible on the ground that it was unlawfully obtained.”

Section 80C of the Income Tax Act governs the admissibility of the evidence downloaded from the computer. It says:

“Notwithstanding anything to the contrary contained in any other law the admissibility in evidence of any electronic data for any purposes under this Act shall not be denied:

On the sole ground that it is an electronic data, or if it is the best evidence that the person adducing can reasonably be expected to obtain on the grounds that it is not an original form.”

The suggestion that it was tainted is a triable and not a procedural issue governed by s 80C (3).  It provides that:

“In assessing the evidential weight of electronic data the court shall have regard to such of the following considerations as may be applicable in the circumstances of the case:

The reliability of the manner in which the data was generated, stored and communicated,

The reliability of the manner in which the integrity of the data was maintained.”

The admissibility would not render the trial unfair, or be detrimental to the administration of justice or the public interest. The complaints against the integrity of the information obtained from the computer speak to the probative value of the information and are really matters of evidence, which cannot be decided in a preliminary application.

Guidance on the exercise of discretion may be derived from the provisions of s 70 (3) of the Constitution, which are concerned with a criminal trial and provides that:

“In any criminal trial, evidence that has been obtained in a manner that violates any provision of this Chapter must be excluded if the admission of the evidence would render the trial unfair or would otherwise be detrimental to the administration of justice or the public interest.”

The section envisages a two stage enquiry, firstly, the establishment of the jurisdictional fact that the evidence was obtained in violation of the Bill of Rights and secondly, the existence of prejudice undermining either the fairness of the trial or the administration of justice. See S v Tandwa & Ors 2008 (1) SACR 613 (SCA) and S v Motloutsi 1996 (1) SA 584 (C) which dealt with s 35 (5) of the South African Constitution, equivalent to our s 70 (3).

However, the present proceedings are civil and not criminal in nature. The approach in civil proceedings is underpinned by the poignant observations made by Brand J in Fedics Group (Pty) ltd v Matus 1997 (9) BCLR 1199 (C) and  Fedics Group (Pty) Ltd 1998 (2) SA 617 (C) at para [90]. He stated that:

“There is a fundamental difference between criminal and civil proceedings which is, in my view, of considerable importance in the present context, namely that in a criminal case the accused person employs the privilege against self-incrimination. He has the fundamental right to remain silent. The prosecution must prove its case without any assistance from the accused. The accused is under no duty to disclose his defence nor is he obliged to disclose any documents which might strengthen the State’s case. In civil proceedings the position is quite the opposite. A litigant is not only obliged to disclose his case, he is also obliged to discover all documents which might damage his own case or which may directly or indirectly enable his adversary to advance his case[see Erasmus Superior Court Practice at B1-250].”

Thus even if I were to find that the evidence was illegally obtained I would exercise whatever discretion I might have in favour of the Commissioner.  After all its admission would not be prejudicial to the appellant at the main appeal hearing, which is in the nature of a rehearing at which the appellant will be able to attack the weight of the evidence.

It is unclear from the preliminary point whether the appellant raises it on its own behalf or on behalf of the Chief Financial Officer. In Bernstein & Ors v Bester & Others NNO 1996 (2) SA 751 (CC) at para [84] Ackermann J approved as acute, sound and relevant  the observation of Bryson J in the Supreme Court of New South Wales in Lombard Nash International (Pty) Ltd v Berentsen (1990) 3 ACSR 343 at 346 the observation that:

“The company in a fair sense ought to be thought of as the owner of the knowledge in their (officers’ of the company’s) minds.”

It seems to me that the information complained of which had a bearing on the appellant and was held by a top official of the appellant, fell outside that official’s private domain. Belonging as it does to a public company operating in the public sphere under authority of a statute has concomitant responsibilities and obligations which attenuate any reasonable expectation of privacy. It falls into the wide prescript of s 44 (1) of any information bearing on a person’s tax liability.  Again, I dismiss the preliminary point in question.

Is information unlawfully obtained admissible

It is clear from my rendition of the 8th preliminary point that the information is admissible.

Whether s 98 is applicable

As already noted earlier on in this judgment, this preliminary point was dependent on the determination of the first three preliminary points. They were decided against the appellant, so the question must be deferred to the main appeal hearing. In accordance with the agreement between the parties, it is stood over to the main appeal hearing.

Conclusion

In conclusion, I must reiterate that para 1 of the Twelfth Schedule does not confer High Court jurisdiction on this Court nor does it convert this Court into the High Court. In the premises, this court is not conferred with review jurisdiction. The Administrative Justice Act was the law contemplated by s 68 of the Constitution and it provides review jurisdiction against administrative complaints to the High Court. The Special Court or the High Court sitting under s 65 have the limited jurisdiction provided by the Twelfth Schedule to merely exercise appeal jurisdiction and not the wider jurisdiction of the High Court. It only adopts High Court rules in those matters pertaining to civil actions and the general procedure and practice of such civil actions as they pertain to an appeal in the wide sense, which in essence may take the form of a full-fledged action.

Disposition

Accordingly, all the preliminary points are dismissed with costs.

Atherstone and Cook, appellant’s legal practitioners

Zimbabwe Revenue Authority Legal Division, respondent’s legal practitioners