Emerald Holdings Ltd v Commissioner of Inland Revenue [2009] FJVATT 2; Appeal 007 of 2007 (16 February 2009)

IN THE VALUE ADDED TAX TRIBUNAL OF FIJI
AT SUVA

(Appeal No. 7 of 2007)

IN THE MATTER of an Appeal to the Value Added Tax Tribunal

BETWEEN:

EMERALD HOLDINGS LTD.
Appellant

AND:

THE COMMISSIONER OF INLAND REVENUE
Respondent

R. Newton and S. Singh for the Appellant
M. Scott and F. Gavidi for the Respondent

Date of Hearing: 22^nd October, 2008
Date of Final Submissions: 29^th October, 2008
Date of Judgment: 16^th February, 2009

JUDGMENT

This is an Appeal against a decision of the Commissioner of Inland Revenue. The Notice of Appeal states the decision appealed against in the following terms:

"that the decision of the Commissioner of Inland Revenue dated 30 January 2007, disallowing in part the objection by the appellant to the following assessment:

Notice of Amended Assessment No. 1 in respect of value added tax for the taxable period 02/2003 issued on 10 January 2007 and as summarised in letter dated 18 January 2007 from Fiji Islands Customs and Revenue Authority to G.H Whiteside and Co. dated 18 January 2007."

This was filed on 5^th March 2007. The Tribunal could not locate any letter dated 18 January, 2007 from FIRCA to G.H. Whiteside. It is apparently the letter dated 11^th January 2007 (Item 21 in the Agreed Bundle of Documents) that is being referred to.

The Grounds of Appeal, as stated, are to say the least cumbersome. They consist mostly of references to various correspondence between the parties and assertions on facts and law.

The Statement of Agreed Facts and Issues, filed on 8^th February, 2008 follows the same genre, reciting various correspondence and assertions. However, it is the Agreed Issues that is relevant to the proceedings. These are stated as follows:

10) Whether the said property was sold as a going concern?

11) Whether the said property was in fact a going concern at the time of completion of sale?

12) Whether the sale of the said property involved the supply of a taxable activity as a going concern so as to constitute a zero rated supply as defined in the second schedule to the VAT Decree.

13) Whether the Commissioner erred in reversing the input tax received by the appellant for value added tax payable in respect of the said supply.

This Judgment will, as agreed between the parties, consider whether the appellant bought the property known as Mokusiga Island Resort as a "going concern." If it was a going concern then, under the Second Schedule, subsection 8, of the VAT Decree 1991 it would be zero rated. According to the scheme of the decree, as a zero rated supply it would not be, to put it simply, Vatable (see section 15(2) of the decree). In this case, however, it is apparent that the VAT issue is not simply the imposition or otherwise of the tax on the actual transaction or supply.

This is indirectly gleaned firstly, from the Statement of Response filed by the Respondent on 24th (?) June 2007. The response, inter alia, states:

Para 2: "The Respondent maintains that the appellant bought Mokusiga Island Resort as a going concern; therefore it is a zero rated supply under paragraph 8 of the Second Schedule of the Vat Decree.

Para 3: The Respondent further states that since it is a zero rated supply the appellant should not have claimed input tax.

Para 5: The appellant on the 24^th of March 2003 lodged its February 2003 vat return in which it included the $127, 272.73 input tax claim. The responded processed the return and mistakenly refunded the appellant.

Para 6: The respondent later on discovered the mistake when the appellant (?) sold the property.

Para 7: The respondent then reversed the assessment.

Appellant counsel refers to the issue in paragraphs 5 and 6 of its Submissions (Outline Submissions of Appellant, tendered in Court on 22 October, 2008).

Para 5: The appellant lodged a VAT return in February 2003 in which input tax of $127,272.73 was claimed in respect of the purchase of the resort –

Para 6: FIRCA (then) disallowed input VAT of $127,223.73 for which it had earlier received a refund –

Both parties did not dwell on how the assessment or amended assessment was generated. It was not easily discernable from the voluminous documentations filed. As far as the parties are concerned the critical issue for determination is whether the said property was sold as a going concern.

The Evidence

The appellant called four (4) witnesses. Three of these witnesses filed written statements and were cross examined on these. The major witness was Mr. Bruce Sutton, a chartered account who is a partner in KPMG. He was the receiver of the Mokusiga Island Resort prior to its sale by FDB to the appellant. According to Mr. Sutton, as receiver, he ran the resort as a going concern. He was not present nor involved in the final settlement due to delays. He ran the resort until December 2002. The settlement took place sometime in February 2003. Mr. Sutton had terminated all but three employees of the resort in December 2002. He could not recall whether he transferred the Liquor, Hotel and other licences held by the resort to the new owners.

Mr. Sutton was shown a letter (item 10, Agreed Bundle of Documents) dated 17 January, 2003. He acknowledged he wrote this letter to Josefa Vakalala of the Inland Revenue Division of FIRCA. The letter referred to the sale and purchase between the parties and a letter from Mr. Vakalala to G.H. Whiteside dated 26/08/02 (Item 6, Agreed Bundle of Documents). In the letter Mr. Sutton provides details leading to the sale of Mokusiga Island Resort. The gist of the letter was that the principal purpose of the Receiver was to allow the resort to continue trading as a going concern. It was still operating as a going concern when the Sale and Purchase Agreement was entered into. The sale included the buildings and all major plant and equipment. All bookings post sale were to be cancelled as the buyers proposed to carry out renovations before recommencing the operations of the Resort.

Mr. Sutton was also referred to the Sale and Purchase Agreement (Item 4, Agreed Bundle of Documents) He was referred to Section 23 of the Agreement dealing with "Additional Matters". He acknowledged that as per the agreement they were to "maintain the integrity of the said property and the Resort" (23.2(a)) They were also to "maintain and keep in good working order and condition the said property with its past practice" (23.2(b)). At the date of Settlement the vendor was to "Pass Over to the Purchaser a list of all its business connections including the names and identities of wholesalers that it or the Resort has dealt with over the past 3 years from the date of this Agreement including their contact details" (23.2(d)). Section 23.2(i) also required, inter alia, the Vendor to provide "information queries or questions they may have in relation to the said property and the Resort with the object of assisting the Purchaser for planning and renovation work intended to be carried out on the said property immediately after the date of Settlement ..."

The next witness was Mr. Satish Parshottam, the solicitor for the appellant. He made a written statement which was tendered. He had the care and carriage of negotiations for the appellant company for the purchase of Mokusiga Island Resort and incidental matters. According to him he "proceeded to settlement on the basis of vacant possession," and that "the business at Mokusiga Island Resort had ceased to operate." The settlement took place at the Titles Office. He had a representative on site at the Resort. Mr. Parshottam was not involved in the VAT returns nor issues regarding Liquor and other licences. He had no knowledge when Bamboo Beach Resort acquired the Hotel and other licences. He acknowledged that customer lists, business connections etc, as per Section 23.2 of the Sale and Purchase Agreement were acquired.

The next two witnesses were one Oblin Raisele and Samisoni Toganivalu. Their statements in English were tendered. It was evident in cross examination that they were not as conversant in the English language as their written statements suggested. It was not clear whether Oblin Raisele was actually terminated or continued to work for Mokusigas until it was closed for repairs and resumed operating as Bamboo Beach Resort.

The Submissions,

The only issue for determination is whether Mokusigas Island Resort was sold as a going concern. This has been the crux of the submissions from both parties. The authorities cited are known to both parties and the Tribunal does not need to dwell on them at length.

The Tribunal will first consider the submissions of the appellant. According to learned Appellant counsel "By mid January 2003 the business had ceased, staff had been laid off except for 3 security guards, and food and beverage supplies had been removed by the receivers. Under the sale and purchase agreement the appellant was entitled to vacant possession and FDB was obliged to cancel all guest bookings (para 2 of submissions) According to him the "supply" occurred on 14 February, 2003. Input tax of $127,272.33 was claimed in respect of the purchase of the resort in February 2003. FIRCA subsequently disallowed the input VAT and the appellant paid the amount with penalties under protest.

Appellant counsel further submits that the taxable activity was not supplied as a going concern since "the relevant going concern had ceased to exist and was incapable of being transferred as such (submissions para 12). Further, that it is irrelevant that a going concern had formally been carried on at the property (para 15, page 8 of submissions). He further submits that the sale and purchase agreement makes no provision for the transfer of goodwill or a going concern (para 15? page 8 - problem of numbering?) No provision was made for the transfer of the liquor licence or the hotel licence. The vendor was required to terminate all employees with no obligation on the appellant to rehire them (para 15). He further claims that "The resort business had been moribund for a long period of time and what little business remained had ceased no later than 20 January 2003 when the staff were terminated" (para 16 page 9).

The Respondent's essential submission on facts may be surmised from the first paragraph of page 2 of its submissions (filed on 29 October, 2008). It is stated as follows: "The relevant activity was run as a resort. The owners were placed in receivership. The activity ceased to receive guests in mid January 2003. It then needed repairs. Staffs were laid off and supplies cancelled. It was transferred with vacant possession in March, 2003. It was then not operating."

The Legal Principles

The submissions on the law by both parties could have been more focused on the factual matrix they both asserted. One such issue was the question of "vacant possession." How relevant is "vacant possession," whatever it meant to each party, to the issue of a "going concern". Section 8 of the Sale and Purchase Agreement deals with possession. At paragraph 8 it is stated: "The vendor shall hand over vacant possession of the said property to the Purchaser on the Date of Settlement". Further paragraph 8.2 states: "The vendor shall take steps to cancel any guest accommodation bookings that relate to the period past the Date of Settlement and in the event the vendor is unable to cancel the same then alternative accommodation arrangement will be made as agreed to by the parties ... at another tourist resort in Fiji."

In evidence it was also suggested that staff were terminated. Further, that food and beverages were packed up and taken away. It was not clarified whether these were taken by the receivers or the new owners who were operating another resort in Fiji. Was all these what constituted vacant possession? More critically was this sufficient to suggest that the Mokusiga Resort was "closed down or ceased to exist."

In his submissions learned counsel for the Appellant has extracted the meaning of the term "as a going concern" from various cases without considering the substantive issues dealt by the cases. The case of Variety Leisure Corporation -v- Commissioner of Inland Revenue (1988)10 NZTC 5, 255), submitted in its list of authorities, for example, the High Court of New Zealand was considering the sale of bare land, subject to lease. The Court ruled it was not a business or undertaking in the usual sense. Further, the Court stated that a winding-up petition was not the appropriate place for the resolution of disputes under the Goods and Services Tax (NZ).

In Allen Yacht Charters Limited -v- Commissioner of Inland Revenue, another case cited, the issue was whether the yacht charter activity was a "taxable activity" and whether, on the facts before the Court, in each a supply of a "taxable activity" as a going concern was made. The other cases submitted do not assist the appellant, especially as regards its contention that the transfer of the resort was a mere transfer of assets.

The Tribunal found the 1999 CCH New Zealand Goods and Services Tax Guide, attached to respondent's submissions, helpful in determining the issues before it. According to the CCH Guide (p 6, 054) the Courts consider the following in determining what is "a going concern":

1. the transfer of an actual business activity as opposed to a capital asset structure.

2. the placing of the recipient in the position of being able to conduct the same business as the supplier did.

Some of the indicia considered by the Courts in New Zealand include "goodwill." An express assignment of goodwill is strong evidence of a transfer of business, but the absence of such an assignment is not conclusive" (p13 - 440). The intention of the parties, though not decisive is relevant. The Courts also consider that it "is fundamental to the acquisition of a business as a going concern that there be a handing over from the vendor to purchaser of current business records and at least a perusal of financial accounts (p6101). The preservation of the enterprise pending settlement, and the transferee's use of the property are also important criteria to consider.

As the learned Appellant counsel has submitted the issue of whether what was supplied was a going concern is a mixed question of fact and law. Under Section 59(2) of the