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High Court of Fiji |
IN THE HIGH COURT OF FIJI
AT SUVA
CIVIL JURISDICTION
CIVIL ACTION HBC 221 OF 2008
BETWEEN:
VERGNET SA
PLAINTIFF
AND:
THE COMMISSIONER OF INLAND REVENUE
DEFENDANT
Mr R Naidu with Ms N Basawaiya for the Plaintiff
Ms F Gavidi with Ms T Rayawa for the Defendant
JUDGMENT
These proceedings were commenced by Originating Summons filed on 11 July 2008. The Plaintiff Vergnet SA (Vergnet) seeks the following relief:
"1. A Declaration that payments made to Vergnet by the Fiji Electricity Authority (FEA) under a contract between Vergnet and FEA dated 8 July 2005 (Contract) are not subject to:
(a) non-resident miscellaneous withholding tax (NRMWT) under section 8A of the Income Tax Act, or
(b) royalty withholding tax (RWT) under section 10A of the Income Tax Act.
2. A Declaration that the action taken by the Commissioner:
(a) in assessing Vergnet to NRMWT of $874,496.41 and
(b) requiring the payment of the above sum by FEA before issuing a tax clearance certificate to FEA to remit the proceeds of payment under the Contract were:
(c) in breach of section 8A and 10A of the Income Tax Act and unlawful and/or
(d) not otherwise in accordance with the Income Tax Act
3. An Order that all sums paid to the Defendant as NRMWT by or on behalf of the Plaintiff be refunded to it, with interest (particulars of which will be supplied at hearing)."
In support of its claim the Plaintiff filed an affidavit sworn by Lisa Jane Apted on 14 July 2008.
The Defendant filed an answering affidavit opposing the relief claimed in the Originating Summons. The affidavit was sworn by Sailosi Ledua, Principal Auditor and filed on 28 August 2008.
The matter came on for hearing on 17 November 2008. Counsel presented oral submissions and also relied upon filed written submissions. A decision had not been handed down by April 2009. As a result it was necessary to relist the matter for a fresh hearing before me. This took place on 3 and 4 June 2010.
Vergnet SA is a foreign company, having been incorporated in France, that was registered on 8 March 2007 under section 367 of the Companies Act Cap 247. Registration was required as it had established a place of business within Fiji.
Vergnet entered into an agreement with FEA on 8 July 2005 to design, manufacture, construct, install, commission, test, operate and complete a wind farm at Butoni, Sigatoka. The wind farm was to consist of 37 wind turbine generators (WTG).
The "Contractual Terms of Agreement" document described the agreement as a "Turnkey Contract". I was informed from the Bar Table by Counsel for the Plaintiff that this expression refers to an agreement where the purchaser contracts to have delivered the end product that requires the purchaser simply "to turn a key" and start using the product. It was suggested that the purchase of a new motor vehicle was a good example. However Counsel for the Defendant did not agree with this explanation nor the comparison.
Apart from the Turnkey Contract document itself there were a number of documents, all of which were listed in the Turnkey Contract, that together constituted "the Contract" between the parties. Some of the documents contain clauses that are relevant to the present dispute and to which I shall briefly refer later in this judgment.
The contract price was Euro (€)11,542,030 or FJD$25,091,370. The contract was successfully performed and concluded with the opening of the wind farm on 26 October 2007.
On the issue of jurisdiction, it was accepted by the parties that these proceedings were properly commenced in the High Court. In this case there was no assessment made by the Defendant in respect of any tax liability on the part of the Plaintiff. The amount in dispute was paid by way of an interim arrangement and was paid by FEA out of the contract price to the Defendant.
One of the documents included in the Contract was the Memorandum of Understanding. Clause 4 of that document dealt with "Intellectual Property Rights". Clause 4.1 stated:
"Unless otherwise expressly agreed between the Parties, the co-operation envisaged by this Memorandum of Understanding does not intend to change the underlying fact that each party is responsible for and shall retain the rights of its own respective products, and services. Furthermore, each party shall retain its proprietary rights and title and its patents and other intellectual property and know-how that are in that party's possession from time to time."
Clause 3 of that document deals with the "Scope of the Co-operation". Clause 3.1 deals with Vergnet's obligations which include in clause 3.1 (ii) an obligation "to forward to the Authority (FEA) all necessary reports and technical descriptions that may further the Authority's efforts to progress the project." Clause 3.1 (vi) requires Vergnet to liaise with all of the Authority's staff, consultants or representatives regarding regulatory, statutory or technical compliance of the project."
The parties also signed a Deed relating to Confidential Information. This document also formed part of the Contract between the parties. Clause 2 sets out the obligations of each party in relation to the use and disclosure of confidential information. Clause 2.1 states that the parties agree to use the confidential information only for the Business Purposes. Clause 2.2 states that neither party will, without the prior written consent of the other, disclose confidential information to any third party for any reason whatsoever. Clause 2.3(a) states that neither party will, without the prior written consent of the other, develop, employ, exploit or in manner whatsoever use the confidential information of the other party other than for the Business Purposes.
Clause 4.1 made arrangements for the return by each party of confidential information. It stated:
"Either party (the Disclosing Party) may give notice in writing at any time to the other party (the Receiving Party) requiring that any part of the Confidential Information belonging to the Disclosing Party disclosed pursuant to the MOU or this Deed to the Receiving Party and any copies thereof be either returned or destroyed. Such return or destruction is to be combined with a notice to the Disclosing Party to the effect that upon such return or destruction the Receiving Party has not knowingly retained in its possession or under its control, either directly or indirectly, any Confidential Information or copies thereof."
Clause 6.1 provides that all Confidential Information belonging to the Disclosing Party is acknowledged by the Receiving Party to be the property of the Disclosing Party and disclosure does not confer any rights in the Confidential Information to the Receiving Party.
Clause 6.2 states:
"No licence is granted or implied by either party disclosing Confidential Information to the other party under any trade secrets, patents or copyright."
Confidential Information is defined in the Deed as meaning:
"Any and all information (whether written, oral, in the form of plans, diagrams and drawings, or in any other form) given by Vergnet and (FEA) to each other in connection with the Business Purposes."
The expression Business Purposes is defined in paragraph C of the Introduction to the Deed as:
"To support the Authority's (FEA) efforts to exploit major energy sources to produce electricity in this instance through renewable energy at the least costs method. FEA welcomes proponents like Vergnet to develop and construct at the proposed project site Butoni, Sigatoka, a wind turbine generating facility composed of 37 GEV MP (32M, 275 kW) and to be known as the 10 MW Butoni Wind Farm Project."
Another document forming part of the Contract was Schedule 5.12 Mechanical, Electrical Drawings, Designs and Building Designs. The Schedule stated that:
"All design, engineering and investigation work (including but not limited to software, systems and processes) developed by the Contractor (Vergnet) prior to the Project will remain the copyright and Intellectual Property of the Contractor. Each party will allow use and access of the information and/or IP belonging to that party from the Project provided a request is received from the other party, consent of which cannot be unreasonably withheld."
Schedule 5.15 of the Contract documents deals with the Training Program. Under the agreement training for FEA work teams and designated staff was assumed by Vergnet throughout the commissioning period and by Vergnet Pacific or agent for the first two years of operation. More importantly, the Schedule provides that training will focus on the following topics:
"
● Principles and operating characteristics of the GEV MP;
● Review and analyses of the mechanical and electrical components of the GEV MP wind turbine.
● Review of the automatic functions: installation and operations of the software, interaction with the turbine, identification, analysis and resolution of shortcomings and other troubleshooting matters;
● Identification of electrical and hydraulic malfunctions, replacement of parts and components;
● Turbine manoeuvres including connections, erecting and tilt-down operations and security functions."
Schedule 5.5 of the Contract documents deals with manufacturers and places of manufacture of components required to the project. All the components listed in paragraph 5.5.1 are shown as manufactured by suppliers located in France but for two that are to come from suppliers in Italy.
The schedule also deals with inspections and clause 5.5.2 states:
"The contractor (Vergnet) shall make available for inspection by the Principal (FEA), or the Principal's representative, all of the major components of the Wind Turbine Generator (WTG) during its manufacture including but not necessarily limited to all of the items in the table (in para 5.5.1). When (FEA) is satisfied that a representative sample (approximately 10% of the total number of WTGs) of the components of the WTG have been satisfactorily inspected, (Vergnet) may issue a Factory Test Certificate (FTC) for that WTG. The contractor will make any changes to the WTG arising out of the inspection process if the component does not meet the specifications provided and will provide a FTC for each subsequent WTG upon its completion."
Schedule 5.7 of the Contract documents deals with the work scope matrix. The table outlines the involvement of the parties in the tasks listed, but not the responsibilities or custody in the role. It is interesting to note that the Wind Turbine Generator (WTG) assembly on site involves both Vergnet and FEA. Furthermore checking conformity of the works with the contract is also a joint task.
During the course of construction a dispute arose between the parties in relation to the taxes payable in Fiji. Part of the dispute related to payment of NRMWT on the transaction under the Contract.
Between 11 May and 9 July 2007 correspondence on the issue passed between the Defendant and the firm KPMG which was acting for the Plaintiff as tax adviser at the time. Two of those letters are significant in the sense that they reveal the Plaintiff's initial position in the dispute.
First, a letter dated 20 June 2007 from KPMG addressed to the Defendant. The issue of an objection to NRMWT was addressed on a without prejudice basis. Usually the marking "without prejudice" would ensure that the letter was not adduced as evidence in these proceedings without the consent of both parties. Since the document was voluntarily exhibited by the Plaintiff in its supporting affidavit and as no objection was raised by the Defendant, I have taken the view that the correspondence has been adduced as evidence with the consent of both parties. It is not necessary for me to determine whether it constituted a genuine attempt to settle the dispute.
In that letter under the heading "Withholding tax", the following appeared:
"We concur with the general principle that withholding tax is applicable at the rate of 15 percent on the supply of services by Vergnet SA of France.
However, we object to your calculations that the total amount of Euro 8,313,935-71 (FJD 18,073,773-27 @ 0.46) in respect of Stages 1 to 4 wholly relate to the supply of services (with nil value appropriated towards the cost of turbine inclusive in the contract amount) and enclose Form 2 detailing the same."
Secondly, in a subsequent letter dated 9 July 2007 from KPMG to the Defendant the position in respect of NRMWT calculations is clarified. This letter is also marked "without prejudice". For the reasons set out above it is assumed that the correspondence was adduced as evidence by consent. This letter sets out the view of the Plaintiff's tax advisers and so far as is relevant states:
"We advise that we act as tax advisers in respect of our above named client.
Further to our discussions, we provide the following information in respect of our client for which we seek your confirmation of withholding tax treatment.
We advise that a contract was entered into between our client's parent company – Vergnet SA of France and the Fiji Electricity Authority for the supply and installation of thirty seven turbines for the discounted contract sum of Euro 11,542,030.
We further clarify that the discounted contract sum is made up of the following components:
● Imported goods (turbines) – subject
to import duty and VAT as applicable €10,452,720
● Services supplied by Vergnet SA
of France € 308,490
● Services supplied locally by
Vergnet Fiji branch € 780,820
----------------
Total contract price €11,542,030
----------------
....
Hence we understand that 15 percent withholding tax shall apply only in respect of payments of services to Vergnet SA of France.
We respectfully seek your confirmation of our understanding with regards to the calculations of withholding tax."
Further correspondence then passed between the Solicitors for the Plaintiff and the Defendant between 27 September and 12 October 2007. Most of this correspondence was also exhibited to the affidavit in support filed by the Plaintiff.
To enable the project to be officially opened on the scheduled date, the parties reached a without prejudice compromise concerning the payment of NRMWT. This was based on the assumption that the Contract contained a goods and a services component. For the purposes of the interim compromise, the Defendant assessed the contract value to be apportioned as 70% for goods and 30% for services. In Fiji dollars the total contract price was $25,091,370.00. Accepting the Defendant's assessment for the present purposes, $17,563,959.00 was the value of the goods component and $7,527,411.00 was the value of the services component. The assessed break-up of the services component was $1,697,435.00 for locally provided services (and therefore subject to Fiji income tax) and off-shore services were valued at $5,829,976.00. NRMWT was assessed on this amount at 15% and as a result the amount in dispute is $874,496.41. This was done on the basis that the payment for off-shore services constituted a payment for know-how or a royalty payment.
The principal issue for determination is whether the payment for the overseas provided services component attracted a liability in respect of NRMWT as a know-how payment. The calculated apportionment between goods and services and the assessed apportionment between off-shore and locally provided services were not matters that were argued before me. The only question for determination was whether the Contract attracted a tax liability in the form of NRMWT. The Plaintiff claims that no distinction should be made in this case between the supply of goods and any services component under the Contract.
The tax in question was levied pursuant to section 8A of the Income Tax Act which states:
"(1) Notwithstanding anything to the contrary in the other provisions of this Act, there shall be paid a tax, to be known as "non-resident miscellaneous withholding tax" (NRMWT) in respect of the payments specified in subsection (2) at the rate of 15% of the gross amount payable.
(2) Such tax shall be payable in respect of:
(a) ....
(b) subject to sub-section 4, a know-how payment and any sum paid or credited for the management of or supervision in connection with the carrying on of a business
(c) ....
if the person in whose favour or to whom any such sums have been paid or credited is a non-resident.
(3) ....
(4) If a payment or credit referred to in subsection (2) (b) is made partly for any purpose other than those mentioned in that subsection, the Commissioner may, for the purpose of this subsection, determine to what extent the sum so paid or credited is for such other purpose.
(5) (g) ...."
It was not in dispute that the Plaintiff was a non-resident for the purposes of section 8A.
It was pursuant to section 8A (4) that the Defendant determined that the overseas provided services component under the Contract constituted a know-how payment. The Court must determine whether the off shore services included a "know-how" payment or any payment for the management of or supervision in connection with the carrying on of a business. In my opinion, if the answer to either question is yes, then the Plaintiff must fail in these proceedings. If the answer is no, then the outcome depends upon whether there is a royalty payment. The matter was argued on the basis that the only issue was whether the payment included a know-how payment or a royalty payment.
The starting point is the statutory definition of "know-how" payment in section 2 (1) of the Act:
"know-how payment means payment for any scientific, technical, commercial or industrial information, techniques, knowledge or assistance likely to assist in the carrying on of a business ...."
The Plaintiff's submission is clear. It claims that under the Contract FEA did not acquire any "scientific, technical, commercial or industrial information, techniques, knowledge or assistance likely to assist in the carrying on of a business" from the Plaintiff. It is submitted that the Plaintiff supplied a completed or installed product in the form of a wind farm package that comprised goods (wind turbine generators and other equipment) and services (e.g. design, packing, installation). The Plaintiff submitted that none of whatever services were supplied included the acquisition of know-how. Hence there was no know-how payment made by FEA under the contract.
The Plaintiff relied upon a number of authorities to illustrate the manner in which the Courts have explained the concept of "know-how".
Counsel for the Plaintiff referred me with considerable enthusiasm to two English Authorities. They were Moriarty (Inspector of Taxes) –v- Evans Medical Supplies Ltd [1957] 3 All E.R. 718 and Rolls-Royce Ltd v. Jeffrey (Inspector of Taxes) [1962 1 All E.R. 801. They were both decisions of the House of Lords and indicated the increasing prominence of know-how in taxation law. However they were both decided before the introduction of legislation in the form of the Finance Act 1968 (UK) which provided a definition of know-how. A subsequent definition of know-how was introduced by the Income and Corporation Taxes Act 1970 which stated that know-how was any industrial information and techniques likely to assist in the manufacture or processing of goods or materials. It is clear that the definition in the Fiji legislation is wider in terms than the definition in the 1970 English legislation. The authorities that were decided before the introduction of a statutory definition of know-how can be of only extremely limited assistance. Prior to the introduction of statutory definitions, the expression "know-how" almost defied definition.
The Plaintiff submitted that in any event know-how does not include incidental knowledge acquired or gained to get the wind farm started. It was submitted that the passing of know-how was not the principal component of the Contract and that any "dribs and drabs" of knowledge should not alter the nature of the contract. It submitted that whatever services were supplied by Vergnet SA did not constitute know-how.
It was accepted by the parties that the Defendant's position was set out in its letter dated 12 October 2007 addressed to the Plaintiff's Solicitors.
The Defendant's submission is that it was entitled and in fact bound, in construing the taxation consequences of agreements entered into by tax payers, to rely upon the documents that formed part of the agreement to which the taxpayer was a party. The Defendant claims that the contractual material shows that the payments to be made by FEA included payments that relate to components or elements of the definition of "know how". The Defendant points out that the Contract provided for design and supervision services by Vergnet. The Contract also provided for the supply of confidential information, drawings, data, reports, calculations and test certificates. The Contract also provided for training by the Plaintiff for the benefit of FEA staff. The Defendant asserts that payment was for far more than simply the supply and installation of turbines.
The Defendant relies on the decision in Ricketts v Commissioner of Inland Revenue (1988) 10 NZTC 5,00 and submits that this case is authority for the proposition that to qualify as know-how payments, it is only necessary to establish that such payments were made in response to the provision of services requiring special skills and expertise.
The principles governing the interpretation of a tax provision were conveniently summarised by Gibbs J in Western Australian Trustee Executor and Agency Company Limited v Commissioner of State Taxation of the State of Western Australia [1980] HCA 50; (1980) 147 C.L.R 119 at page 26:
"The principles of construction applicable to an Act which imposes a tax or duty are set out in Anderson v Commissioner of Taxes (Vict) [1937] HCA 24; (1937) 57 C.L.R 233 at page 243. The established rule that no tax can be imposed on a subject by an Act of Parliament without words which clearly show an intention to lay the burden upon him does not mean that the court will strive to find loopholes where none are apparent; the words of the Act must be given a fair and reasonable construction, without leaning one way or the other. However, although, if the terms of the Act plainly impose the tax they should be given effect, equally if they do not reveal a clear intention to do so the liability should not be inferred from ambiguous words."
The words in section 8A clearly convey the intention that a withholding tax is imposed on a non-resident in respect of a know-how payment. Under the section liability for the tax is imposed on the person to whom the payment is to be made. The tax is payable by the person who makes the payment.
Section 8A (4) uses clear and unambiguous words that enable the Defendant to determine whether a payment payable to a non resident includes a payment for purposes other than know-how and if so to what extent is the payment for those other purposes.
It is clearly accepted by both parties that the payment due to the Plaintiff by the FEA under the contract is not solely a payment in respect of goods. The Plaintiff submits that the principal purpose of the contract is to make a payment for the supply of a finished product in the form of an installed wind farm. It submits that any information or knowledge acquired is only incidental and that as such does not alter the principal purpose which in reality is the only purpose of the contract. There was, it says, no payment for know-how.
On the other hand, the Defendant says that the payment made by FEA included payment for the acquisition of information and knowledge of a technical nature which falls within the definition of a "know-how" payment. As a result there are payments made for services and pursuant to section 8A (4) it is entitled to make a determination as to what extent the payment relates to know-how.
I have no hesitation in concluding that section 8A (4) does allow the Defendant to make such a determination. He has calculated that the payment for the purpose of supplying goods represents 70% of the total payment. He has therefore determined that for the purposes of the tax liability of the 30% services component of the payment, approximately 70% was a know-how payment to the non-resident.
The question is then whether the Defendant correctly concluded that any information or knowledge that was acquired by FEA under the contract can be classified as know-how. In other words, has any knowledge or information passed to FEA under the Contract which falls within the definition of know-how in section 2 of the Act.
The Plaintiff submits that any information or knowledge that has passed to FEA is not know-how but is general information that is no different from the information that the purchaser of a new car receives by way of an owner's manual.
The Defendant submits that the knowledge and information which under the various documents that constitute the Contract passes to FEA represents know-how and is caught by the definition.
After carefully considering the contents of the various documents, the relevant sections of some of which I have made reference to, and the definition, I have concluded that the Defendant was correct when he determined that the payment made by FEA included a payment for knowledge and information of sufficient technical nature to constitute a payment for know-how. It was considerably less than the payment for goods, but there was nevertheless sufficient information and knowledge acquired by FEA under the contractual documents for the Defendant to conclude that the payment included a payment for know-how.
I accept that this was not a contract where the Plaintiff agreed to supply the necessary know-how for constructing and installing a wind farm. I also accept that the information and knowledge acquired under the Contract may not have been sufficient to enable FEA to construct another wind farm. However, there was nevertheless information and knowledge of a technical nature that was acquired by FEA pursuant to the contract documents that would assist it in the carrying on of its business.
It is obvious that a mechanical device such as a wind turbine generator could reveal its workings to any qualified technician employed by FEA once delivered and during installation. Such information could be derived by studying the technical information provided by the Plaintiff and by physical examination during assembly and installation. What might also be detectable by such a person from these same sources was the process of manufacture of its component parts. In both cases, know-how has been acquired by FEA.
In the Deed relating to confidential information dated 9 March 2005 and signed by the Plaintiff and FEA, it is stated in paragraph A of the Introduction that:
"Vergnet is leading in the world market for the development and manufacture of equipment and power generation and water supply in rural and isolated sites. It also operates in medium power wind energy with a range of wind turbines from 5 to 270kw."
In paragraph D of the Introduction it is clearly stated that for the purposes of developing and constructing a wind turbine generating facility at Butoni (Sigatoka), the parties will be divulging information secret to their business to each other. The Deed goes on to set out the obligations of the parties in respect of that information.
The Contract documents, when read together, in my view involve the acquisition by FEA of some knowledge and information of a technical nature that had been developed by Vergnet. The documents also indicate that the information and knowledge thus acquired was able to be used by FEA for its business purposes. The fact that the Contract provides that property in and ownership of that information or knowledge remains with Vergnet does not alter the fact that the Contract included a payment for know-how.
Further, the Plaintiff was obliged under the contract documents to train FEA staff in relation to topics that must of necessity have included both confidential and non-confidential information of a technical nature.
These clauses are designed to set out the arrangements for the acquisition by FEA of technical information and knowledge that may not be protected as intellectual property but which will assist it in carrying on its business.
I am satisfied that the knowledge and information that has been acquired by FEA in accordance with the various contract documents, whether incidentally, confidentially or by way of training, does constitute know-how. The intangible nature of know-how, which distinguishes it from physical plans and drawings, re-enforces this conclusion. I am satisfied that what FEA ultimately acquired from the Plaintiff was more than simply the physical assets that made up the wind farm and more than just the knowledge necessary to press a button to start up the wind farm. I am satisfied that it also acquired technical information, knowledge and assistance of value that assisted it further in the carrying on of its business purposes as defined in the Contract.
This leaves the question of whether the payment is caught by the Royalty Withholding Tax (RWT) under section 10A of the Income Tax Act.
As the Defendant correctly pointed out in the letter dated 12 October 2007, section 8A (i) commences with the expression "notwithstanding anything to the contrary in the other provisions of the Act". As a result section 8A will prevail over section 10A. This means that section 10A will not apply in the event that a NRMWT under section 8A is to be imposed, applying the presumption against double taxation. However if for any reason section 8A has no application then section 10A may apply.
Although I have concluded that part of the payment under the Contract is for the purpose of know-how under sub section 2 of section 8A, I shall consider the applicability of section 10A in the event that I am mistaken concerning the applicability of section 8A.
Section 10A states:
"(1) Notwithstanding section 11, there shall be paid a tax to be known as a "royalty withholding tax" equal to 15% of any royalty.
(1A) In this section "royalties" means payments of any kind to the extent to which they are made as consideration for:
(a)-(b) ...;
(c) the supply of scientific, technical, industrial or commercial knowledge or information; or
(d) the supply of any assistance which is given as a means of enabling the application or enjoyment of ... any such knowledge or information as mentioned in paragraph (c)."
The definition of know-how payment in section 2 of the Act can be distinguished from the transaction that is caught by section 10A (1A)(c). In the context of this case a know-how payment catches payment for the acquisition of technical knowledge or information which may not have been patented or otherwise protected as intellectual property. It is wider in meaning and casts a wider net than the royalty described in sub paragraph (c) of section 10A (1A).
In my opinion section 10A (1A) (c) is intended to catch payments made in respect of a contract which includes the supply of scientific, technical, industrial or commercial knowledge or information that is formally protected as intellectual property and does have as a result a narrower application. An example may be a licensing agreement permitting the use of knowledge or information by the licensee.
For the reasons already stated, I have concluded that the know-how component of the payment made under the Contract is not a royalty payment for the purposes of section 10A (1A) (c). As a result it is apparent that subsection (1A) (d) also has no application.
The Plaintiff has not succeeded and as a result the following orders are made in respect of the relief claimed by the Plaintiff:
W D Calanchini
JUDGE
16 July 2010
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