In the judgment rendered by the Privy Council on 16 May 2016 in the appeal case of Shophold (Mauritius) Ltd v The Assessment Review Committee and another, their Lordships have ruled that if a taxable person has provided services and has waived its contractual right to be paid, it is not liable to pay value added tax (VAT). The facts of the case are as follows.
On 19 March 2003, Shophold (Mauritius) Ltd (Shophold) had entered into a management services agreement with Shoprite (Mauritius) Ltd for the provision of management services in consideration of a fee. Shophold has been registered for VAT and therefore is a taxable person for purposes of our laws. Subsequently, the board of directors of Shophold resolved to waive its right for management fees until Shoprite became a sustainable profit making entity.
Shophold re-instated its right for management fees with effect from 1 July 2006 by virtue of board resolutions passed in 2007 and 2008. As a consequence, Shophold neither issued any invoice nor received any payment for the taxable periods from July 2003 till June 2006. In respect of the tax returns submitted for the years of assessment 2004/05 and 2005/06, the Mauritius Revenue Authority (MRA) made a VAT assessment which the Assessment Revenue Committee upheld to the effect that Shophold had failed to declare management fees and it was deemed for VAT purposes to have received payment for the taxable periods July 2003 to June 2006.
We pause here to clarify on the principles of objecting to a determination of the MRA. When the MRA is dissatisfied with the return of a taxpayer, it proceeds to serve a notice of assessment upon him or her. The relevant tax claimed in the said notice should be paid within 28 days of the date of the notice, unless the taxpayer objects against the assessment. There is a time limit of four years to raise an assessment, except where the taxpayer has failed to submit a return or in case of fraud or wilful neglect.
In case of dissatisfaction with a notice of assessment, the taxpayer may object to the tax claimed within a delay of 28 days. The taxpayer should provide a letter of objection specifying the grounds of the objection and at the same time pay 30% of the amount of income tax claimed.
Where the taxpayer is not satisfied with the determination of an objection of the MRA, a written representation may be lodged with the Assessment Review Committee within 28 days of the date of the determination. Where the taxpayer is not satisfied with the determination of the Assessment Review Committee, he may appeal to the Supreme Court within 28 days of the date of the determination. As a final recourse, where the taxpayer is not satisfied with the judgment of the Supreme Court, he may appeal to the Privy Council within 28 days of the date of the judgment.
In the present matter, the Supreme Court had held that, notwithstanding the waiver to receive monies for the relevant period, the contractual obligation to pay by Shoprite to Shophold remained and the services provided by Shophold were taxable supplies subject to VAT. In the circumstances, Shophold was liable to VAT as if it had been paid.
The Privy Council ruled inter alia that Shophold did not issue any invoice for the technical services which it provided pursuant to the Management Agreement and did not receive any payment for same. The critical interpretation of our laws by their Lordships was that the performance of the services does not by itself give rise to a charge to VAT. Therefore, one may safely provide services, waive fees without incurring any liability for payment of VAT on that basis. Accordingly, their Lordships allowed the appeal of Shophold and ruled that no liability has arisen to pay VAT for the services provided by Shophold during the material times. Sanjay Bhuckory, Sandiram Poonisamy and J Harel appeared for Shophold before the Privy Council while Philip Baker QC principally defended the position of the MRA.