ABC (Pty) Ltd v The Commissioner for the South African Revenue Service

• Jurisdiction: South Africa
• Judge: Savage J
• Judgment Date: 05 December 2018
• Citation: 2019 JDR 0143 (Tax)
• Docket Number: VAT 1558
• Court: Tax Court

Savage J:

Introduction

[1]

This matter is concerned with the interpretation and application of s 8(15) of the Value-Added Tax Act 89 of 1991 ('the Act'). It takes the form of an appeal against additional Value-Added Tax ('VAT') assessments raised by the respondent, the Commissioner for the South African Revenue Service ('CSARS'), against the appellant, ABC (Pty) Ltd, in the amount of R3 444 764 for its 06/2009, R4 631 620 for its 06/2010 and R5 932 209 for its 06/2011, VAT periods and interest.

[2]

The facts are not in dispute. The appellant, a South African VAT vendor, manufactures and distributes drinking beverages in South Africa under a variety of brands – not as owner of the brands, but in terms of an exclusive rights distribution agreement entered into with foreign offshore entities (the 'brand owners'). In doing so the appellant uses

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Savage J

the brand owners' trademarks and intellectual property. The brand owners invest in the advertising and promotion ('A&P') of the brands to build and maintain brand recognition and perception, with the aim of generating sales and sustainable long-term cash flow by way of enhanced brand equity.

[3]

The appellant provides a single supply of an A&P service to the foreign brand owners, using its subsidiary and joint venture partner, X Entity, having outsourced its sales, marketing and distribution operations to X Entity. For the A&P service provided, the appellant invoices the foreign brand owners a fee. This is calculated with reference to the annual amount spent (through the payment of a fee to X Entity) on A&P expenditure, without differentiating on the tax invoice between services rendered to the brand owners and goods consumed within South Africa. The brand owners and the appellant split the funding of A&P expenditure on a 50:50 basis up to 15% of net sales value for the brand in question, above which the brand owner funds the balance. The appellant's costs include advertising and promotional costs, including expenditure incurred in relation to goods which take the form of promotional products distributed locally such as gifts, competitions, display materials, personality promotions, promotional items such as lanyards and t-shirts, product tastings and local product giveaways.

[4]

The CSARS raised additional VAT assessments against the appellant for its 2009, 2010 and 2011 vat periods in terms of which VAT was levied at the rate of 14% in terms of s 7(1)(a) of the Act on the goods part of the supply of the A&P service provided by the appellant to the brand owners. The remainder of the A&P service supplied was accepted by CSARS as having been properly zero-rated by the appellant in terms of s 11(2)(l). The basis for the additional VAT assessments raised was that the supply of promotional products was deemed a separate supply of goods in terms of s 8(15).

[5]

Section 8(15) of the Act provides, in relevant part:

'(15) For the purposes of this Act, where a single supply of goods or services or of goods and services would, if separate considerations had been payable, have been charged with tax in part at the rate applicable under section 7 (1)(a) and in part at the rate applicable under section 11, each part of the supply concerned shall be deemed to be a separate supply.'

[6]

Having been deemed in terms of s 8(15) to be a separate supply of goods, such supply was assessed not to qualify for zero-rating in terms of s 11(2)(l) but to constitute a standard-rated supply in terms of s 7(1)(a).

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Savage J

[7]

Section 7(1)(a) provides that:

'(1) Subject to the exemptions, exceptions, deductions and adjustments provided for in this Act, there shall be levied and paid for the benefit of the National Revenue Fund a tax, to be known as value added tax—

(a)

on the supply by any vendor of goods or services supplied by him on or after the commencement date in the course or furtherance of any enterprise carried out by him; …'

[8]

Section 11(2)(l) states:

'(2) Where, but for this section, a supply of services…would be charged with tax at the rate referred to in section 7(1), such supply of services shall… be charged with tax at the rate of zero percent where—

…

(l)

the services are supplied to a person who is not a resident of the Republic, not being services which are supplied directly—

…

(ii)

in connection with movable property…situated inside the Republic at the time the services are rendered…'

Appellant's case

[9]

The appellant seeks that the disputed assessments and interest be set aside on the basis that s 8(15) can only apply to different, independently cognisable services supplied together, when such supplies could sensibly have been supplied separately for their own sake. The provision, it is submitted, does not permit an artificial dissection of a single non- dissociable service supplied into separate components or supplies, each carrying its own VAT treatment.

[10]

The evidence of Mr V, who was employed by the appellant in a senior role responsible for marketing, was that the appellant's contractual obligation was to provide a single A&P service to the brand owners, who set the strategic direction and identity of the brand, drove brand performance at global level, established global marketing strategies and controlled production and innovation activities. The appellant was granted considerable latitude to tailor the distribution and marketing of products to bring this in line with the strategy set by the brand owners given its local market knowledge. It therefore determined the particular A&P activities undertaken in any year and the amounts expended on each activity, as part of an integrated marketing campaign to build and maintain the brand owners' brand image and enhance the brand owners' brand equity.

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[11]

Mr V stated that the marketing plan comprised of an integrated mix of media, promotions, sponsorships, relationship marketing, product giveaways and sampling, with two categories of physical goods used locally: products taken out of stock for use in product sampling or tasting; and point of sale items such as branded glassware, t-shirts, and lanyards to raise brand awareness and advertise the product. He stated that the use and distribution of promotional goods was not undertaken as an end in itself or as a distinct supply, but as a means to achieve the objective of the preservation and enhancement of the brands. From a commercial perspective, according to Mr V, it did not make sense to separate out the goods component from other components of the service provided. He disputed that promotional goods were given away by the appellant for no return, since the return was an enhancement of brand equity for the brand owners.

[12]

Mr W, a chartered accountant employed in a financial controller role in the appellant's tax and treasury department, undertook what he stated was an 'artificial' exercise to extricate the cost of the various promotional items and product released from stock to marketing in the supply of the A&P service to brand owners. His evidence was that this exercise demonstrated that the value of such items typically was below 20% of the total A&P spend in a given year.

[13]

Counsel for the appellant argued that its contractual obligation to foreign brand owners was to provide an A&P service to build and maintain brand recognition and growth for brand owners. In providing this service, X Entity distributed the tasting stock and promotional materials directly to members of the public not as an aim in itself but to preserve and enhance brand equity for foreign brand owners. The distribution of these goods was merely a facet of the A&P service supplied and not a distinct supply. In this regard, it was functionally no different from the distribution of other promotional or advertising material such as flyers or pamphlets. The supply in its entirety should therefore be zero-rated in terms of s 11(2)(l) of the Act in that it constituted the provision of services and to separate the supply of goods from the provision of the A&P service would distort the functioning of the VAT system. This would require an impractical or...