Victoria Wines & Spirits Ltd v Ferrier-Watson [2011] FJHC 300; HBC236.2010L (26 May 2011)

IN THE HIGH COURT OF FIJI
AT LAUTOKA
CIVIL JURISDICTION

Civil Action No: HBC 236 of 2010L

BETWEEN :

VICTORIA WINES & SPIRITS LIMITED
Plaintiff

AND :

VALDA ADA FERRIER-WATSON
Defendant

INTERLOCUTORY JUDGMENT

Judgment of: Inoke J.

Counsel Appearing: Ms S Devan for the Plaintiff.
Dr M S Sahu Khan for the Defendant.

Solicitors: Neel Shivam Lawyers for the Plaintiff.
Sahu Khan & Sahu Khan for the Defendant.

Date of Hearing: 6 April 2011
Date of Judgment: 26 May 2011

INTRODUCTION

[1] The point for decision here is: in the absence of express provision in a lease agreement, who is to pay the Value Added Tax (VAT) chargeable on the rent?

THE BACKGROUND

[2] The Plaintiff leased the Defendant's premises and operated it as a liquor outlet. The parties had a disagreement as to the rent that was to be paid under their lease agreement and the Defendant threatened to evict the Plaintiff. The Defendant also granted an option to purchase the premises and the land which the Plaintiff attempted to exercise but the Defendant refused. On 31 December 2010, I granted an injunction, ex – parte, restraining the Defendant from dealing with the property and premises until further order. That judgment is reported in Victoria Wines & Spirits Ltd v Watson [2010] FJHC 569; HBC236.2010L (31 December 2010). This is my judgment after hearing the injunction application inter-partes.

THE INTER-PARTES HEARING

[3] The Ex-parte Motion was filed pursuant to Order 29 Rule 1 of the High Court Rules 1988. It sought the following orders:

1. That the Defendant and/or her servants or agents be restrained from further selling, transferring, mortgaging, alienating or otherwise dealing with the property in any manner whatsoever until the further Order of this Court.
   
2. The Defendant pay to the Plaintiff the costs of this Application on a full indemnity basis.
   

[4] The grounds of the application were set out in the supporting affidavit of the director of Victoria Wines. She says the company is the lessee of Ms Watson's freehold land CT No 10842 being lot 17 on DP 2776 in Nadi. The company operates its liquor store from there. The company and Ms Watson entered into a lease agreement on 7 November 2008 for a period of 10 years from 1 November with option to renew for a further 10 years. The lease also gave Victoria Wines an option to buy the property exercisable on or after 1 November 2010. The lease was drawn up by Ms Watson's then solicitors.

[5] The relationship began to sour in 2009. Ms Watson wanted some of the terms of the lease changed but Victoria Wines was not agreeable to the changes. She then claimed that the lease she signed on 7 November 2008 was not what she agreed to. The lease provided for the payment of rent of a fixed amount to be reviewed every two years but was silent as to whether it was to be inclusive or exclusive of Value Added Tax (VAT). That also led to another ongoing dispute and a letter of demand from Ms Watson's solicitors. Victoria Wines denied that it was liable for VAT and exercised its option to purchase by letter dated 25 May 2010. A further letter from the company was sent on 14 October 2010 advising Ms Watson that it was ready and willing to complete the purchase of the property. In response, by letter on 25 October 2010, Ms Watson's solicitors demanded that the company pay VAT on the rental and on the purchase price. The demand was not met so, on 26 November 2010, her solicitors gave notice of termination of the lease if the VAT on the rental was not paid by 9 December 2010 and the company to vacate the premises on 10 December 2010. Immediate action for vacant possession without further notice was to follow.

THE MAIN POINT FOR DETERMINATION

[6] The main issue for determination is whether the Plaintiff was obliged to pay VAT. The lease agreement was silent on the point. If the Plaintiff was not contractually or otherwise bound to pay the VAT then the Defendant has no grounds to evict the Plaintiff.

DETERMINATION OF THE MAIN POINT

[7] I think the point has been authoritatively decided by the Privy Council in The National Transport Authority v. Mauritius Secondary Industry Limited [2010] UKPC 31 on appeal from the Supreme Court of Mauritius:

[T]he background to the single issue that arises on this appeal: given (as explained below) that MSI was a taxable person and the letting was a taxable supply for VAT purposes, was the monthly rent of Rs 475,605 inclusive, or exclusive, of VAT? That issue depends ultimately on the terms of the contract made between the parties. In the English case of Lancaster v Bird (1998) 73Con LR 22, 26, Chadwick LJ referred to two earlier first-instance cases as illustrating-

"What might be thought to be self-evident, that the question whether or not the price for a building contract is inclusive or exclusive of value added tax must turn on the terms of the particular contract."

The same principle applies to a contract for letting immovable property. But where the written contract is completely silent, the court must examine the characteristics of the VAT charge which is the subject matter of the dispute.

[8] The VAT provisions of the Mauritius legislation as set out in the judgment are in the following terms:

"9. Charge to value added tax

(1) VAT shall be charged on any supply of goods or services made in Mauritius, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.

(2) VAT on any taxable supply is a liability of the person making the supply and becomes due at the time of supply.

. . .

10. Rate of VAT

VAT shall be charged at the rate specified in the Fourth Schedule [10%] at the material time] and shall be charged –

(a) on any taxable supply by reference to the value of the supply as determined under section 12 . . .

12. Value of taxable supplies

(1) For the purposes of this Act, the value of any taxable supply made by a taxable person shall, subject to the other provisions of this Act, be determined in accordance with the provisions of this section.

(2) If the supply is for a consideration in money, its value shall be taken to be such amount as, with the addition of the VAT chargeable, is equal to the consideration."

[9] Lord Walker in delivering the judgment of the Privy Council explained the law as set out in these provisions as follows:

7. In considering these provisions there are two interlocking points to be borne inmind. First, it is the person making the supply who is liable for VAT on the value of the supply that he makes. The ultimate burden of the tax falls on the consumer, but he is not personally liable for it to the Commissioner for Value Added Tax. The ultimate burden falls on the consumer simply because he is not acquiring it as a taxable person for use in a business of his own, and so there is no question of his passing on the burden by making supplies and obtaining a credit under section 21 of the 1998 Act. In this case MSI was a taxable person making a taxable supply in the course of its business, and NTA was in the position of the consumer. NTA was not liable for VAT to the Commissioner. Nor was it liable for VAT to MSI, except so far as the consideration which MSI was entitled to receive from NTA expressly excluded, or simply had to be treated as including, that VAT. This point was explained by Chadwick LJ in Lancaster v Bird (1998) 73 Con LR 22, 26, in a passage immediately following that already quoted:

"Normally of course it will be made clear expressly. It is in the interests of the builder who will be receiving the price to make it clear because, as between the builder and the Commissioners for Customs and Excise, the provisions now found in section 19(1) and (2) of the Value Added Tax Act 1994 require the recipient to account for value added tax on the basis that the consideration that he receives is such amount as equals the value of the goods or services provided plus value added tax. So if the builder fails to make it plain to the employer that he is stipulating for payment of value added tax in addition to the contract price, he will be left to account to the Revenue for the value added tax out of what he receives."

That applies, mutatis mutandis, to the present case.

8. Secondly, the provisions of section 12(1) and (2) are important because they explain how to ascertain the value of a supply, which is the amount on which VAT is to be charged at the appropriate rate (10% at the material time). Its effect can be stated by the formula S + 1/10S = C, where S is the value of the supply and C is the consideration. That is the case whether the supplier stipulates for an inclusive price (say Rs110,000) or for a basic price (say Rs100,000) "plus VAT". In either case the total consideration that the customer pays is Rs110,000, and so long as the rate of VAT remains at 10%, the formula embodied in section 12(2) produces the correct result. The function of section 12(2) is not to define "consideration". The amount of

the consideration is to be found by ascertaining the total that the customer actually pays for the supply. Then one must work back through the formula (recasting it, for simplicity, as S = 10/11 C) to find the amount on which VAT is payable at 10%.

[10] It is therefore necessary for me to examine the provisions of Fiji's Value Added Tax Decree 1991. The relevant provision of the Decree that imposes VAT is s 15(1):

15. Imposition of tax on supply

(1) Subject to the provisions of this Decree, the tax shall be charged in accordance with the provisions of this Decree at the rate of ten percent on the supply (but not including an exempt supply) in Fiji of goods and services on or after the 1st day of July 1992, by a registered person in the course or furtherance of a taxable activity carried on by that person, by reference to the value of that supply. (my emphasis)

[11] It is clear from s 15(1) that the legal obligation is on the supplier, in this case the Defendant. She has in fact put in an affidavit saying that she is registered for VAT. She annexed a letter from the Fiji Islands Revenue and Customs Authority dated 6 September 2006 notifying her that she had been registered under the Decree. Interestingly, the letter states:

You will be required to:

(A) Charge and account for Value Added Tax on all taxable supplies made in the conduct of your taxable activity from 1 January 2006.

[12] The letter, in my view, correctly states the law as provided by s 15(1) of the Decree and explained in The National Transport Authority v. Mauritius Secondary Industry Limited [2010] UKPC 31 which I respectfully accept as the law in Fiji.

[13] The end result is that the interim injunction which I granted on 31 December 2010 is to continue until final determination of this action.

THE ORIGINATING SUMMONS

[14] This action was started by Originating Summons which sought declarations that the Plaintiff is not liable to pay VAT on the purchase price of the property and on the rent as well as an order for specific performance of the option to purchase.

[15] As I have found that the Defendant is liable for VAT in the absence of an express provision in the lease agreement, the Plaintiff is entitled to a declaration that it is not liable to pay VAT on the rent. In other words, the rent stipulated in the lease agreement is VAT inclusive. I will therefore grant that declaration now. However, in so far as the VAT on the purchase price is concerned, I think the Plaintiff should wait until it proves that it is entitled to an order for specific performance. That will have to wait until I hear full submissions from both parties at the hearing of the Originating Summons.

COSTS

[16] The Plaintiff is entitled to its costs for the ex-parte and the inter-partes hearings which I set at $1,800.

ORDERS

[17] I therefore make the following orders:

1. The interim injunction granted on 31 December 2010 restraining the Defendant, her servants and agents from further selling, transferring, mortgaging, alienating or otherwise dealing with the property described in CT 10842 being Lot 17 on DP 2776 shall continue until final determination of this action or further order.
   
2. It is hereby declared that the Plaintiff is not liable for VAT on the rent payable under the lease agreement.
   
3. The Defendant shall pay the Defendant's costs of $1,800 within 21 days.
   
4. The Originating Summons is to be set down for hearing on a date convenient to counsel and the Court.
   

............................................................
Sosefo Inoke
Judge