SRP (Hong Kong) Ltd v Fiji Revenue and Customs Authority [2015] FJHC 470; Review Action 03.2012 (24 June 2015)

IN THE TAX COURT
HIGH COURT OF FIJI
AT SUVA

Review Action No. 3 of 2012
High Court Action No. 8, 9 & 10 of 2012

IN THE MATTER of the Income Tax Act Chapter 201 and/or the Tax Administration Decree No. 50 of 2009

and

IN THE MATTER of Sections 17 and 82 of the Tax Administration Decree No. 50 of 2009

and

IN THE MATTER of an application for review by SRP (Hong Kong) Limited (Tax Identification Number 50-17602-0-9)

BETWEEN:

SRP (HONG KONG) LIMITED

AND:

FIJI REVENUE AND CUSTOMS AUTHORITY of National Revenue and Customs Complex, Queen Elizabeth Drive, Nasese, Suva

Appearance: Ms Alexandra L with Mr Knight P; Counsels instructed by Cromptons Barristers & Solicitors for the Applicant
Mr Ravono, Legal Officer of Fiji Revenue and Customs Authority for the Respondent

Date of Judgment: 24 June 2015

JUDGMENT

[1] The Appellant in this matter first made an application for review against the decision of the Respondent to the Tax Tribunal and by the Interlocutory decision by the Tax Tribunal dated 27 November 2012, the matter was referred to this court's jurisdiction pursuant to Section 81 (2) (b) of the Tax Administration Decree after notifying the Respondent. Along with this matter the Case Nos. 9 of 2012 and 10 of 2012 (Tax Tribunal Case Nos. 4 and 5) was also referred to this court's jurisdiction under similar applications, as such the parties agreed that the Judgment in this appeal shall be binding over Case Nos. 4 and 5 of 2012, and High Court Case Reference is Case Nos. 9 of 2012 and 10 of 2012.

[2] Accordingly, the Applications filed for Review before the Tax Tribunal are the same applications before me by the 3 Applicants namely ARP (Hong Kong) Limited, JRP (Hong Kong) Limited and SRP (Hong Kong) Limited which are identical.

[3] When the matter was taken up, it was stated by the Applicants' counsel that this matter should be heard only after the conclusion of the hearing of joint appeal filed by the 3 Applicants in the High Court Case No. 4 of 2012 in which the Judgment was delivered on 18 June 2015.

[4] The Applicant sought the following orders:

"1. To vary or set aside the decision of the Respondent dated 15 March 2012 (Objection Decision) wholly disallowing the Objection to Assessment made by the Applicant dated 21 May 2010 and lodged with the Respondent on 21 May 2010. The Objection to Assessment was filed in relation to the Notice of Assessment for the income year ended 31 December 2009 issued by the Respondent on 17 December 2009 (Assessment) assessing the Applicant, as a partner of RB Patel & Co. (RBC) for taxation on proceeds (Proceeds) received by the Applicant, pursuant to Section 11(u) of the Income Tax Act Cap 201 (Act) and Section 11 of the Act in general including subsection 11(t), for an assignment of its contractual rights under the management agreement (Management Agreement) with RB Patel Group Limited (RBG) to FHL Retailing Limited (FHLR);

2. That the Respondent pay to the Applicant the costs of this Application for Review; and

3. Such further and other orders as the Tribunal may deem just".

[5] THE GROUNDS of Application were as follows:

"1. THAT the Objection Decision was served on the Applicant's tax agent outside the statutory time frame provided in Section 16(7) of the Tax Administration Decree 2009 (TAD).

2. THAT the Respondent's assessment of the Applicant is incorrect and the Proceeds are not taxable under Section 11(u) of the Act or Section 11 of the Act in general, including subsections 11(s) and 11(t), and in particular:

(a) Section 11(u) of the Act should not apply to deem the Proceeds to be included as "total income" under Section 11 of the Act because:

(i) Section 11(u) provides that the following two types of payments shall be included as "total income" under the Act:

(A) Know-how payments; or

(B) Amounts paid for the management or supervision of the carrying on of a business;

(ii) The Proceeds were not a know-how payment because know-how payments require the passing of knowledge rather than a mere contractual right. The Proceeds were instead consideration for the assignment of contractual rights (including the right to perform future services) under the Management Agreement;

(iii) The Proceeds were not paid for the management or supervision of carrying on a business because they were not paid in consideration for any services performed by RBC;

(b) Section 11(s) of the Act should not apply to deem the Proceeds to be included as "total income" under Section 11 of the Act because:

(i) Section 11(s) deems "any royalty or other like payment dependent upon production from, or the use of, any real or personal property, whether or not such royalty or other payment is an installment of the purchase price of any property" to be income;

(ii) The proceeds were received for the assignment of RBC's contractual rights to provide management services under the Management Agreement, and do not therefore come within the scope of Section 11(s);

(c) Section 11(t) of the Act should not apply to deem the Proceeds to be included as "total income" under Section 11 of the Act because:

(i) Section 11(t) applies to any payments received by a person for improvements on land or to a building from another person to whom a right to use or occupy has been granted by that person;

(ii) The assignment of contractual rights that relate to the Proceeds do not involve the right to use or occupy a land or building;

(d) The Proceeds were consideration for the realization of a capital asset:

(i) The Act does not tax profits or gains or a capital nature;

(ii) Because the rights being surrendered under the Management Agreement were a fundamental and intricate part of the framework or structure from which RBC had been deriving its income for the last 10 years, the Management Agreement was a capital asset;

(iii) The manner in which the amount payable for the transfer of an asset is calculated should not affect or dictate the nature of the payment itself;

(iv) The amount received is consideration for the realization of a capital asset and therefore should be regarded as a capital receipt;

(v) FHLR has treated the amount paid to RBC by way of Proceeds as an affair of capital, and is understood not have taken a tax deduction for or in respect of that amount;

(vi) The services which were previously provided by RBC to RBG under the Management Agreement continue to be provided by FHLR with the fees paid by RBG for those services being taxable in the hands of FHLR.

(e) No penalties should be imposed because the Proceeds are not taxable under Section 11(u) of the Act or Section 11 of the Act in general including subsections 11(s) and 11(t)".

The Applicant also reserved the right, if required, to amend or provide additional grounds of review in the event the Respondent serves on the Applicant a statement pursuant to Section 83(1) (b) of the Tax Amendment Decree (TAD) and/or provides any other documents pursuant to Section 83(1) (c) of the TAD, the Applicants stated. The Respondent urged to include Section 11(j) after this application was made and I have made my determination on this issue in the paragraph No. 7 of this Judgment.

[6] This application is for review against the decision by the Respondent on the assessment of the Applicant as a partner in RB Patel & Co (New Zealand Company) for taxation on proceeds received by them in relation to the transfer of their contractual rights under a management agreement with RB Patel Group Limited (RBG) by novation to FHL Retailing Limited (FHLR) in the income year ended 31 December 2009.

[7] The Applicants were assessed by the Respondent by letter dated 17 December 2009. In the notices of assessment, the Respondent stated that the proceeds are taxable under Section 11(u) of the Income Tax Act Cap 201 (the "Act"), but are also income under Section 11 and under Sections 11(s) and 11(t) of the Act. The Respondent no longer relies on Sections 11(s) and (t) and so it is only Section 11(u) and Section 11 to be considered. The Respondent subsequently pleaded Section 11(j) (on 17 September 2012). I have considered the submissions made by both parties as to whether Section 11(j) which was not considered at the time of the assessment could be brought in as a new ground. The Applicants strongly objected to bringing in Section 11(j) as a new ground by the Respondent. I considered the case of Federal Commissioner of Taxation vs. Australia and New Zealand Savings Bank Ltd (1994) HCA 58; (1994) 181 CLR 466.

It is specifically stated in the said case, The Commissioner will be required to give proper notice to the taxpayer and where appropriate, will be directed to furnish particulars........In this matter, assessments were made on a different basis and now the Respondent cannot bring in Section 11(j) as a new alternative ground since it will be pre-judicial to the Applicants' case. All arguments were based on Section 11; 11(u); 11(s) and 11(t) later the Respondent submitted that it do not rely on Section 11(s) and 11(t). In support of my finding, I cite Kettleman vs. Hansel Properties Limited [1987] AC 189 at pg. 220 which was referred in Fiji case Suva Fork Lift Hire Limited vs. Sun Insurance Company Limited [2012] FJHC 1328; HBC 354 of 2009 (unreported decided on 23 August 2012). In Kettleman case House of Lords stated:

"who have no longer afford to show the same indulgence towards the negligence conduct of litigation as was perhaps possible in more leisured aged. There will be cases in which justice will be better served by allowing the consequences of the negligence of the lawyers to fall upon their own heads rather than by allowing an amendment at a very late stage of the proceedings".

In this matter the objection decision was made on 15 March 2012 on the objection made by the Applicant on 21 May 2010. There was adequate time for the Respondent to raise this issue at the early stages before the assessments were made. In fairness to the Applicants, I deny to allow the Respondent to rely on in Section 11(j) as a new alternative ground for the determination and I hold in favour of the Plaintiff.

[8] The Applicants lodged their Notices of Objection to the assessments with the Respondent on 21 May 2010. The Respondent issued its Objection Decision wholly disallowing the objections, on 15 March 2012. There are no material differences in fact pleaded by the Applicants in this case.

[9] The Respondent's objection decision states that the payment received by the Applicants for the transfer of their rights and interests under the Management Agreement is:

(a) income under Section 11 generally (ordinary concepts);

(b) a "know-how" payment, or a sum paid or credited for the management of or supervision in connection with the carrying on a business under Section 11(u) of the Act as a management fee.

[10] This court has to look into the background of the Management Agreement before considering the issues raised by the Applicants which was addressed in the paragraph hereinafter. These proceedings are the culmination of a long running income tax dispute between the applicants and the Respondent. This case arises out of the same set of facts as the Share Sale Case No. 4 of 2012 heard before this Court in October of 2013 and the Judgment was delivered on 18 June 2015, and findings of this court on Section 11 is relevant to this case.

History

(a) The Patel family business was established in the 1930s by Mr Ranchhodbhai Patel (RB Patel). Initially it was a family partnership between RB Patel and his brother Mr Keshavhai Patel. The brothers separated out their business interests in the 1970s and RB Patel established RB Patel (Fiji Is) Limited to hold his wholesaling and retailing business. The company also had investment properties in Fiji.

(b) From 1972 on RB Patel established a number of supermarkets throughout Fiji, he also acquired other investment properties. His older sons Jayantilal, Ambalal and Hematlal joined him in the business. As each son came into the business RB Patel established different companies to hold their respective interests. The sons had varying shareholdings in the different companies to reflect the work they were actually doing.

(c) RB Patel's youngest son Surendra had joined the business by about 1979. His older brothers had interests in companies established before he joined and as such he did not have an equal interest in the companies.

(d) After the first two coups in Fiji, in around 1987 or 1988, the Patel brothers moved their families (wives and children) to New Zealand. The brothers came back to work in Fiji. RB Patel moved to New Zealand in 1989 but he did not like it. He came back to Fiji and stayed here until he died in 2004.

(e) On moving to New Zealand, the brothers each established a New Zealand holding company to hold their individual family interests in the Fiji business (at this time still held by the various trading companies). It was stated by the Applicants that the holding companies were set up in New Zealand simply because the family was now based in New Zealand. Later, for New Zealand tax reasons the holding company structure moved to Hong Kong, who are the Applicants in this matter and the 4 Hong Kong Companies established a Partnership in New Zealand as RB Patel and Co.

(f) The sons of Patel wanted to bring their children into the business as their father had done. On 10 June 1999, RB Patel Group entered into a management agreement with a New Zealand based partnership RB Patel & Co.:

(i) The Management Agreement provided that the New Zealand Partnership to provide managerial services for the businesses carried on by RBG "Supermarkets and wholesaling and retailing of merchandise in several centers in Fiji" as stated by the Applicant. However, as I found in my Judgment in Case No. 4 of 2012 it was not for this purpose but for the purpose of carrying on and carrying out the business in Fiji with a view to make maximum profits for the partners of RB Patel & Co. in New Zealand;

(ii) The Management Agreement gave the Partnership, control over the business and practically running of those businesses, in other words carrying on and carrying out of the business of RB Patel Group Limited, in its entirety.

Evidence and Conclusions
11. At the outset, I state the evidence and the documents before me are considered together since the evidence basically supported by the documents. Surendra Patel sworn an Affidavit and gave oral evidence before this court which I summarise as follows including the documentary evidence. Patel explained the history of the company. Copy of the New Zealand Partnership agreement and the variation of the Partnership Deed was tendered as Exhibit P(A) and P(B):

(i) The witness stated that the Management Agreement allowed him and his brothers the opportunity to bring their New Zealand based children into the business and that was the purpose of the Management Agreement;

(ii) He stated that due to the riots in Suva in 2000 – Patel family decided it needed to share the ownership of the company to protect the company, specifically considering the Blueprint issued by the Government for the Protection of Fijian and Rotuman rights and interests and the advancement of their development dated 17 July 2000. This document was tendered by the witness as Exhibit 'D'. However, I don't agree that there was threat to the company by the Blueprint and that was the reason for transfer of shares. The inference this court can make is that the main reason for sharing the ownership was to make a profit on the share sale and continue the business under the Management Agreement with New Zealand Partnership Company. I have given my conclusions on this in my Judgment of Case No. 4 of 2012 on 18/06/2015;

(iii) The two of the witness's brothers decided to retire and the family made the decision to sell down its majority interest in RBG the witness stated;

(iv) The witness stated decision was made to list RB Patel Group Limited (RBG) on the stock exchange in order to broaden its share ownership to include indigenous Fijians. RBG was listed on the South Pacific Stock Exchange in 2001. The management fees received from RB Patel Group Limited for the year ended 31 December 2000 was tendered by the witness marked Exhibit P(C);

(v) Fijian Holdings Limited became the majority shareholder of RBG in April 2008. Shortly before that occurred on 26 March 2008, FHLR entered into an option agreement with the Partnership where the Applicants were the partners. This agreement proves that the through the Management Agreement the Manager (RB Patel Co.) was not only entrusted in the management, they had the full control over the business. I specifically refer to Clause 3.4 of the agreement and reproduce the same:

"3.4 Option Price – The Option Price shall be determined as follows:

(a) If the Option Exercise Notice is served on or before the third anniversary of the Acquisition Completion Date, then the Option Price shall be FJ$7,000,000.00 (plus VAT, if any);

(b) If the Option Exercise Notice is served after the third anniversary of the Acquisition Completion Date but on or before the fifth anniversary of the Acquisition Completion Date, then the Option Price shall be FJ$8,000,000.00 (plus VAT, if any); and

(c) If the Option Exercise Notice is served after the fifth anniversary of the Acquisition Completion Date, then the Option Price shall be FJ$10,000,000.00 (plus VAT, if any);

plus, in each case, the Incentive Amount (if any) calculated in accordance with Clause 3.5.

3.5 Incentive Amount – The Incentive Amount will be agreed between the Manager and the Purchaser in writing, acting in good faith, within two years of the Acquisition Completion Date, and will be added to and payable as part of the Option Price provided that:

(a) If the Option Exercise Notice is served pursuant to Clause 3.4(a), that the Purchaser has received or is entitled to receive at least a 13% per annum dividend yield on its Total Investment in respect of the financial Year of the Company ending closest to the third anniversary of the Acquisition Completion Date (the "Third Year post-Acquisition"); and

(b) If the Option Exercise Notice is served pursuant to Clause 3.4(b), that the Purchaser has received or is entitled to receive at least a 13% per annum dividend yield on its Total Investment for the Third Year post-Acquisition; and

(c) If the Option Exercise Notice is served pursuant to Clause 3.4(c ), that the Purchaser has received or is entitled to receive at least a 15% per annum dividend yield on its Total Investment in respect of the financial Year of the Company ending closest to the fifth anniversary of the Acquisition Completion Date (the "Fifth Year post-Acquisition").

For the purpose of this clause, the dividend yield shall be deemed to include ninety five percent (95%) of all profits earned in the relevant financial year that are available for distribution, whether or not they have been paid or declared as a dividend. I find the Management Agreement and Option Agreement both are for the benefit of the Manager (RB Patel & Co. New Zealand) to carry on the business and entitling to the significant amount of the profits of RBG by the Applicants' partners;

(vi) The witness told the Court that, after Fijian Holdings Limited (Retail) (FHLR) acquired its interest in RBG. In early 2009, the FHLR board was taken over by military appointees wanted to undo everything the previous board had done, including getting rid of the management of RBG. Patel told the Court that this was a difficult time, with threats, deportation orders and a departure prohibition order being made against him. This evidence is unfounded. This court is of the view, having noted the Management Agreement was one sided which was drafted for the purpose of controlling the business of RBG by Patel family, being the largest shareholder the board of FHLR wanted to get control over the management of the business which is a justifiable decision. I am surprised to note when the shares were purchased by FHLR why they did not inquire into the Management Agreement, which shows the caliber of the Board. Although this issue is not before the court and the relevant authorities should make inquiries in this regard and find out the wrongdoers who assisted in the purchase putting FHLR in quandary. It is abundantly clear that the Applicants' sale of shares whilst keeping the Management Agreement intact is to earn considerable profit by way of Management fees and other disbursements. On what grounds FHLR decided to purchase the shares of RBG; which was not a viable venture to earn profits is a question to be asked. This is a clear violation of using public funds to cater the Applicants needs of a business. As such the FHLR Board in 2009 whether it was a military or otherwise made a decision to correct the decision of the previous board who acted against the interest of FHLR cannot be blamed by the witness. The only alternative available for the Board in 2009 was to exercise the rights under Optional Agreement to safeguard the interest of FHLR. The witness tendered the correspondence between FHLR and the RBG as Exhibits P(G) to P(J) which were taken into consideration by this court;

[vii] On 22 October 2009, FHLR gave formal notice to the Partnership that it wished to exercise its rights under the Option Agreement to acquire the Partnership's rights under the Management Agreement and tendered the said letter as Exhibit ('J'). Patel told the Court in oral evidence that the Partnership could not refuse to sell the Management Agreement, when FHLR required the Partnership to sell the Management Agreement. I do not believe on this evidence since it was not substantiated, final outcome was the Manager received what they wanted in terms of Clauses 3.4 and 3.5 of the Management Agreement as stated in the paragraph 11(v) of this Judgment;

(vii) The Option price was fixed but there was to be an incentive amount that needed to be agreed between the parties. The witness stated FHLR came up with the incentive price and the Partnership accepted this as they thought it was fair. The total price paid was FJD 8.3 million. The Management Agreement 15 year term with the right to review for further 15 years since they wanted to get away from a profitable business witness stated. However, in the Clause 14 of the Management Agreement, it was for 15 years the witness admitted in cross examination and I note the witness's evidence that FHLR suggested the price of 8.3 million is unfounded; without any request or negotiations is unsubstantiated;

(ix) On 29 October 2009, the Partnership's rights and interest under the Management Agreement were transferred to FHLR by way of a novation;

(x) At the option exercise date, the Management Agreement still had 5 years to run. It also included a right to renew, by agreement between the parties, for a further 15 years. The Management Company continued to receive management fees under the Management Agreement. The witness expected that FHLR pays taxes on its management fees which I don't agree. During the cross examination, the witness admitted that the Partnership R B Patel & Co. New Zealand Company was not registered for tax purposes in Fiji and lodged the relevant Partnership Tax Returns. The Applicants too have declared the management fees received and lodged the Income Tax Returns, the witness admitted;

(xi) There was a technical consultancy agreement signed between FHLR and Pacific Management Consulting LP (PMC) in relation to the management of RBG (Exhibit 'L');

(xii) The Technical consultancy agreement was a separate agreement between FHLR and Pacific Management Consulting LP. The witness was asked whether the Partnership was still in control of RBG through this new agreement. Patel's answer was 'no' PMC is a limited partnership and has different partners. However, on perusal of the Supplementary Bundle of Documents filed by the Respondent on 10 September 2014, under the New Zealand Companies Office, Pacific Management Consultancy was registered on 15 October 2009 two weeks before the Technical Consultancy Agreement and the Novation Agreement was signed by the Applicants;

(xiii) During cross-examination, witness admitted Partners in the Technical Consultancy Agreement are companies duly registered in New Zealand. However, the Respondent's Supplementary Bundle of Documents New Zealand Companies office extract of Registration was filed. The extract was generated on 19 July 2013 and it shows that the shareholders in Pacific Management Limited are Surendra Kumar Patel, Jainthilal Patel. Company Directors are Prasann Patel, Surendra Kumar Patel. The witness Surendra Kumar Patel had purposely suppressed that the consultancy companies relationship to the Patel family, and that he was a Director of Pacific Consultants for obvious reasons. Once again, it is to have the control over RBG Business, and I conclude the witness purposely lied to this court by stating the Partnership did not have control over the Management of RBG through this company when the composition of the consultancy company was by Patel and related companies

[12] Having considered the evidence by Surendra Kumar Patel, I have made certain conclusions. Patel had sworn an Affidavit in evidence and gave oral evidence before this court. I have concluded in the preceding paragraphs the evidence of Patel cannot be accepted in its totality. His evidence was wage and on several issues he contradicted his evidence in chief. I do not consider him as a credible witness although certain part of his evidence was accepted. However, the witness's demeanor do not satisfy this court to consider him as a credible witness, I conclude.

[13] Before considering the actual issues now, I consider the evidence of Navitalai Biukoto who is now the Principal Auditor of the Respondent. He stated:

(i) the Applicants' objections in relation to the Respondent's assessments were based on the sum of 8.3 million paid to the Applicants.

(ii) the Applicants' decision was disallowed, the sale of the Management Contract is assessable under Section 11 of the Income Tax Act. The sum of 8.3 million was calculated taking into consideration the present value of the future cash flows from the Management Agreement as income. The witness stated the resident tax rate was applied the Respondent deemed that the Applicants carried on their management role through the permanent establishment in Fiji by virtue of Article 5 of the Fiji and New Zealand Double Tax Treaty. I agree with this evidence considering all the material before me.

(iii) the witness stated that he did not carry out the audit of the Applicants and reviewed the Applicants objections and he did not consider Section 11(j) at that stage and it was considered after independent legal advice was received. I have already concluded that this court will not consider Section 11(j) for the determination of this case.

[14] Now, I will consider the following issues:

(a) The payment of 8.3 million falls within the perview of Section 11 of the Income Tax Act?

(b) Whether Section 11(u) can be applied by the Respondent?

[15] The Respondent's position was that 8.3 million payment falls within the purview of Sections 11 and 11(u).

[16] I have already concluded in the Judgment of the Appeal No. 4 of 2012 on 18 June 2015 that the Applicants through their New Zealand Company entered into the Management Agreement with a view to making substantial profits by carrying on and carrying out of the business of RB Patel Group Limited. The Applicants' submissions fail.

[17] I agree with the Respondent that 8.3 million was paid to the Applicants for the Novation of the Management Agreement and the said payment is the Applicants' ordinary income by virtue of Section 11 of the Income Tax Act. I have already concluded in the said Judgment the background to the Management Agreement was to carry on and carry out of the business in Fiji. In the present matter the sum of 8.3 million was paid to the Applicants on Novation of the Management Agreement on the basis that future income generated through the Management Agreement to the Applicants. I have determined in the Judgment in Case No. 4 of 2012, that sale of the shares of the Applicants is an ordinary income under Section 11 of the Income Tax Act. For the said determination, I have considered the case authorities FCTU Myer Emporium Ltd (1987) 163 CLR 1990 at 209, Californian Copper Syndicate vs. Harris [1904] 5TC 159, which are applicable to this matter too, and conclude the payment of 8.3 million after signing the novation agreement was an ordinary income under Section 11. The principles applied in cases of FCT vs. Cobling [1990] FCA 297; (1990) 22 FCR 42 Samji vs. Commissioner of Inland Revenue (1993) FJHC 41 support my conclusions, and favour the Respondent's arguments.

[18] I also considered the principles elaborated in Allied Mills Industries Pty Ltd vs. FCT [1994] HCA 58; (1994) 181 CLR 466 and Commissioner of Taxes (Vic) vs. Phillips (1936) HCA 11; (1936) 55 CLR 144 and conclude as follows:

(a) the sum of 8.3 million paid to the Applicants is arrived at, after considering the future income of the Applicants under the Management Agreement.

(b) in any event, Management Agreement was a contract to perform managerial services and it cannot be considered as a capital asset of the Applicants'. I further state that the Applicants from the inception had the motive of carrying on and carrying out of the business of RBG with a view to have a substantial share of the income under the terms of the Management Agreement which contained unfair terms. This court cannot allow dubious acts of the Applicants to claim the 8.3 million as a disposal of a capital asset claiming that the Management Agreement was a capital asset and I hold in favour of the Respondent.

(c) further, it is my conclusion that the Novation of the Management Agreement cannot be treated as Capital Asset disposal since the lump sum payment was calculated on the basis considering the future income to be derived under the Management Agreement. As submitted by the Respondent, I apply the principles elaborated in Moneymen Pty Ltd vs. Federal Commissioner of Taxation [1990] FCA 486; 91 ATC 4019. This case was relied upon by the Applicant but it does not favour the Applicants. By making calculation on the said basis the Applicants had received a lump sum payment as an income, I conclude.

(d) further, I too have taken into consideration that although the Management Agreement was given up, the Applicant executed a Consultancy Agreement with FHLR at a lower payment and the witness attempted to convince this court that the Manager was reasonable. When all matters taken into consideration on payment of the 8.3 million there is no benefit accrued to FHLR by lowering the fees under Consultancy Agreement. The Applicants' have received their future income in advance, I observe. I accept the evidence of Biukoto of the Respondent.

[19] As stated in the preceding paragraphs and the Judgment delivered in Case No. 4 of 2012. I conclude and determine the 8.3 million payment is income which falls in the ambit of Section 11 of the Income Tax Act and I hold in favour of the Respondent, as such there is no necessity to consider whether the payment of 8.3 million falls within the purview of Section 11(u). However, for the completeness of this Judgment, I address the applicability of Section 11(u).

[20] Section 11(u) of the Income Tax Act states:

"any know-how payment and any sum paid or credited for the management for or supervision in connection with the carrying on of a business, to the extent that such payment or credit does not constitute reimbursement of expenditure that is –

(i) of a kind that is deductible under this Act; and

(ii) incurred in relation to the payment or credit by the person to whom the payment or credit is made;

Provided that, where the payment or credit is made partly for any purpose other than those mentioned in sub-paragraphs (i) and (ii), the Commissioner may, for the purposes of this paragraph, determine to what extent the sum so paid or credited is for such other purposes";

Know-how payment is defined in Section 2 of the Act which states:

15. "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 or in the manufacture of processing of goods or materials or in the working of a mine, oil well or other source of mineral deposits (including the searching for, discovery, or testing of deposits or the winning of access thereto) or in the carrying out of any agricultural, forestry or fishing operations".

The Applicants submitted that Section 11(u) is a wrong provision and Section 8A should be the correct provision. Section 8A and the interpretation in Section 2(i) of the Act was quoted:

"Non-resident means a person who or a company which is not a resident";

"Resident means –

(a) a person other than a Company who resides in Fiji and includes a person –

(i) whose domicile in Fiji, unless Commissioner is satisfied that his permanent place of abode is outside Fiji;

(ii) who has actually been in Fiji, continuously or intermittently during more than one half of the income year, unless the Commissioner is satisfied that his usual place of abode is outside Fiji and that he does not intend to take up residence in Fiji;

(iii) in the case of a Company, a Company which is incorporated in Fiji or in the case of a Company not incorporated in Fiji or in the case of a Company not incorporated in Fiji and either its practical management and control in Fiji, or its voting power controlled by shareholders who are residents".

The Applicants submitted that assessments made by the Respondent are contrary to law and the Respondent seeks to recover from wrong taxpayer. I don't agree with the submission for the following reasons:

1. I have already concluded the payment of 8.3 million is correctly assessed under Section 11 of the Income Tax Act as an income.

2. The facts established in this case shows that $8.3 million was paid to the Applicants for Novation of the Management Agreement is a know-how payment for the Applicants' technical, commercial knowledge of the business and the payment was for the carrying on the management of the business.

I conclude that in case of Ricketts vs Commissioner of Inland Revenue (1988) 10 NZ TC 5, 001 established the proposition that is 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 in this instance the expertise in management and control of supermarket business and I hold that the Respondent's assessment decisions on the Applicants are correct under Section 11(u).

Accordingly, I conclude:

(1) Ground (a) of the Applicants' application fails as stated in the preceding paragraphs.

(2) Ground (b) was not an issue at the hearing.

(3) Ground (c) was not an issue at the hearing.

(4) The conclusions were made in the preceding paragraphs in favour of the Respondent that proceeds relieved on the Novation of the Management Agreement is not realization of the capital assets thus Ground (d) fails.

(5) That the proceeds are taxable under Section 11 and 11(u) of the Act as such penalties can be imposed by the Respondent and the Ground (e) of the application fails.

(6) There is no unreasonable request for discovery by the Respondent and the Respondent has the right for such discovery, I conclude.

Accordingly, I determine that the payment of $8.3 million to the Applicants falls within the purview of Section 11 and 11(u) as per decision by the Respondent and the Applicants fail and further state this Judgment is binding over Tax Case Nos. 9 and 10 of 2012.

Orders of the Court:

(1) Application for review dismissed, accordingly dismissed, accordingly case Nos. 9 of 2012 and 10 of 2012 are also dismissed..

(2) The Applicant of this Case and the Applicants in the Case Nos. 9 and 10 of 2012 are ordered to pay $5,000.00 each totaling to $15,000.00, costs summarily assessed to the Respondent within 30 days of this Judgment.

Delivered at Suva this 24th Day of June 2015.

C. KOTIGALAGE
JUDGE