James Shipping Line Ltd v Commissioner of Inland Revenue [2024] SBHC 63; HCSI-CAC 208 of 2020 (24 June 2024)

HIGH COURT OF SOLOMON ISLANDS

Case name:	James Shipping Line Ltd v Commissioner of Inland Revenue
Citation:
Date of decision:	24 June 2024
Parties:	James Shipping Line Limited v Commissioner of Inland Revenue, James Shipping Line Limited v Commissioner of Inland Revenue
Date of hearing:	10 May 2024
Court file number(s):	208 of 2020/ 209 of 2020
Jurisdiction:	Civil
Place of delivery:
Judge(s):	Lawry; PJ
On appeal from:
Order:	1. Both appeals are allowed. 2. The assessments by the Commissioner are set aside 3. The application for refunding tax is refused. 4. The costs of the Appellant are to be paid by the Respondent certified for King’s Counsel.
Representation:	Mr J Sullivan KC and Mr R Kingmele for the Appellant Ms F Fakarii for the Respondent
Catchwords:
Words and phrases:
Legislation cited:	Income Tax S 38, S 38(1), S 38 (2), S 38 C(1)S 84, S 50, S 85, S 90 (1), s 90(2)
Cases cited:	Cooke v The Charles A Volgeler Company [1900] UKLawRpAC 60; [1901] AC 102, Anderson v Commissioner of Taxes [1937] HCA 24, Brunton V Commissioner of Stamp Duties [1913] UKLawRpAC 22; [1913] AC 747, Attorney General v Milne [1914] UKLawRpAC 22; [1914] AC 765, Commissioners of Inland Revenue v His Grace the Duke of Westminster [1936]AC 1 24–25, Partington v Attorney-General [1869] LR 4, De Busshe v ALT [1878] UKLawRpCh 107; [1878] 8 ChD 286,

IN THE HIGH COURT OF SOLOMON ISLANDS
CIVIL JURISDICTION

Civil Appeal Case No. 208 of 2020

BETWEEN

JAMES SHIPPING LINE LIMITED
Appellant

AND:

COMMISSIONER OF INLAND REVENUE
Respondent

Civil Appeal Case No. 209 of 2020

BETWEEN

JAMES SHIPPING LINE LIMITED
Appellant

AND:

COMMISSIONER OF INLAND REVENUE
Respondent

Date of Hearing: 10 May 2024
Date of Decision: 24 June 2024

Counsel
Mr J Sullivan KC and R Kingmele for the Appellant
Ms F Fakarii for the Respondent

JUDGMENT

Introduction

1. James Shipping Line Limited [James Shipping] is a business incorporated in Solomon Islands carrying on work in Solomon Islands as an agent for ship owners whose ships are chartered to export logs from Solomon Islands. The Commissioner of Inland Revenue is a statutory public officer charged with the administration of the Income Tax Act.
2. On 20 March 2020 the Commissioner issued amended notices of assessment to James Shipping in respect of the period October to December 2017 and for 2018. The notices alleged that James Shipping had failed to deduct and remit withholding tax said to be required by section 38 of the Act. The basis of the requirement is said to be a liability to deduct and remit withholding tax in respect of payments of charter fees by charterers to or on behalf of ship owners as income from ships as defined in section 38 of the Act.
3. James Shipping objected to the assessments. The Commissioner disallowed the objections. James Shipping has appealed that determination.
4. Logging Companies fell logs and assemble them for export. Buyers of those logs are not resident in Solomon Islands. The buyers of the logs, the charterers of the ships and the owners of the ships are all non-resident so far as the Act is concerned. There is no dispute that the payments made by the buyers to the charterers for transporting the logs to their destination is a non-resident payment.
5. There is no dispute between counsel that non-resident payments from one non-resident to another non-resident are not taxable in Solomon Islands unless expressed made taxable by the clear unambiguous words of a Parliamentary statute. The discussion in Cooke v The Charles A Vogeler Company [1900] UKLawRpAC 60; [1901] AC 102 confirms that interpretation.

Income from Ships

6. In Anderson v Commissioner of Taxes [1937] HCA 24 the High Court of Australia emphasised the importance of clarity in taxing provisions in legislation. The Court, in considering the tax liability in the circumstances of that case, said:
   • “We are unable to accept this interpretation of the section. It appears to us to violate the principles of statutory construction. In Brunton v Commissioner of Stamp Duties [1913] UKLawRpAC 22; [1913] AC 747 at 760, Lord Parker of Waddington, speaking for the Privy Council, says: The intention to impose a tax or a duty, or to increase a tax or duty already imposed, must be shown by clear and unambiguous language and cannot be inferred from ambiguous words. This rule he again emphasised in Attorney-General v Milne [1914] UKLawRpAC 22; [1914] AC 765 at 781, where he said in the House of Lords: “The Finance Act is a taxing statute, and if the Crown claims a duty thereunder it must show that such duty is imposed by clear unambiguous words.”

The Court then referred to the Ormond Investment Co v Betts [1928] AC 143 approving the words of Lord Buckmaster: “a cardinal principal...a principle well known to the common law that has not been weakened and ought not to be weakened – namely that the imposition of a tax must be in plain terms.” Finally the Court referred to the words of Lord Atkinson who said: “It is well established and one is bound, in construing Revenue Acts, to give a fair and reasonable construction to their language without leaning to one side or the other, that no tax can be imposed on a subject by an Act of Parliament without words in it clearly showing an intention to lay the burden upon him that the words of the statute must be adhered to, and that so-called equitable constructions of them is not permissible.”
The Commissioner relies on section 38 of the Act in his assessment. The relevant parts of section 38 of the Act provide:

• 38. - (1) A person who pay non-resident income to a non-resident person shall deduct therefrom tax at the appropriate withholding rate specified in the Sixth Schedule in force at the date on which such income is payable and such income shall be deemed to be derived from Solomon Islands:
• Provided that where the Commissioner agrees with such non-resident person to accept an alternative arrangement for payment of the tax which may fall due under this section he may declare such non-resident person exempt in part or in whole from the provisions of this section.
• (2) In this section and the Sixth Schedule unless the context otherwise requires –
• "income from ships or aircraft" means the gross payments from the carriage of passengers who embark, or cargo or mail which is embarked, in Solomon Islands by any person who carries on the business of owners or charterer of ships or aircraft but shall not include the gross payments from the carriage of passengers who embark, or cargo or mail which is embarked in Solomon Islands solely as a result of transhipment, and where any ship of aircraft owned or chartered by a non-resident person calls at any place in Solomon Islands for the purpose of embarking cargo purchased by or on behalf of such person which has been manufactured, grown, mined, produced, harvested or felled within Solomon Islands or surrounding waters, then for the purpose of this section such person shall be deemed to be carrying on the business of owner or charterer of such ship or aircraft and shall be deemed to have received such income as the Commissioner considers just and reasonable...
• (3) For the purposes of this section income includes income that consists of – (e) income from ships or aircraft...”

7. Section 38(1) requires a person who pays non-resident income to a non-resident person to deduct and pay withholding tax on income from ships. Such income is deemed to be derived in Solomon Islands. The rather unwieldy definition of income from ships and aircraft in section 38 (2) can be broken down into three parts. For the purpose of exporting logs by ship the first part defines income from ships as meaning the gross payments from the carriage of cargo which is embarked in Solomon Islands by any person who carries on the business of owner or charterer of ships. The second part is to do with the exclusion of the liability for cargo that is in Solomon Islands only for transhipment. The third part includes in the definition of a person carrying on the business of owner or charterer of a ship someone who has purchased logs felled in Solomon Islands or has had logs purchased on their behalf. Where a ship is owned or chartered by such a person the Commissioner may deem that person to have received such income as the Commissioner considers just and reasonable.
8. This case does not concern transhipment. It does not concern the third part of the definition either as James Shipping is neither the owner nor charterer of such a ship. The ship owner in the present case has not purchased or had logs purchased in its behalf. The purpose of the third part is to confirm the liability to deduct and pay withholding tax even when the purchaser of the logs is the transporter of the logs. The Commissioner is able to assess the value of the cost of shipping the logs so that a buyer of logs who also owns or charters a ship is still liable for the withholding tax. An example of the sort of deemed income from the carriage of cargo under the third part may be where a foreign fishing vessel purchases fish extracted from the waters of Solomon Islands which are loaded on to the vessel the Commissioner may deem the ship owner to have received such income as the Commissioner considers just and reasonable. The third part therefore is not applicable in the circumstances of this appeal.
9. In the present case the buyer of the logs has either entered into a contract with the charterer of the ship to transport the logs or the buyer has sub chartered the ship from the charterer for that purpose. Gross payments are made for the carriage of logs by the charterer of the ships used to transport those logs from where they are loaded in Solomon Islands to their overseas destination. It is those gross payments that attract the withholding tax at the rate prescribed in the sixth schedule to the Act (5%).
10. Those who have harvested and sold the logs have done so on the basis that it is the buyer of the logs who pays for the freight of those logs. There is no dispute that those buyers are always non-resident. Parliament has intended that notwithstanding that the payment is made outside Solomon Islands to a non-resident by another non-resident, the definition in Section 38(2) requires withholding tax to be paid in Solomon Islands.
11. It follows that Section 38 requires the payer of the freight to deduct and pay withholding tax at the rate of 5% of the gross amount paid for transporting the logs. Payments by a charterer of a ship to the ship owner that are for the hire of the vessel could not be said to be gross payments from the carriage of cargo. They would be payments for the hire of the vessel irrespective of what may be earned from gross payments received from the carriage of cargo. The section is clear that what the payments for transporting logs require withholding tax to be paid, but payments for hire of the vessel do not. However there may be instances when the charterer makes payments to the owner for carrying goods. In those cases the charterer would be liable to withhold 5% of the fee for the carriage of the logs paid to the owner of the ship concerned. If the charterer failed to deduct that withholding tax and forward it to the Commissioner then the Commissioner could in those circumstances recover the tax but no penalty from the owner of the ship.

Could James Shipping be the payer or payee?

12. The Commissioner submits that the opening words of section 38(1) impose a requirement to deduct and pay the withholding tax on the person who pays the non-resident income. If that person is not in the Solomon Islands he submits the obligation is on their agent or deemed agent. While the first part of this submission is correct the second half plainly is not. Section 38(1) does not create a liability at all for either an agent or a deemed agent. Section 38(1) does not even refer to an agent. The Act does not make provision at all on a deemed agent. What is deemed is the income derived from Solomon Islands, being payment for freight loaded in Solomon Islands.
13. The Commissioner submits that James Shipping could be either the payer or the payee of the freight payments. On the evidence before me James Shipping could never be either payer or payee. Counsel for James Shipping submits that there is an absurdity in the Commissioner’s interpretation of section 38(1) of the Act. Which leads to an absurd result. He submits that on the Commissioner’s interpretation James Shipping is liable to deduct and remit tax from a payment that it did not make, out of moneys it has never had and from money’s it has never received in respect of a transaction to which it was not a party, of which it had no knowledge and was outside the scope of its authority.
14. Counsel correctly submits that the Court is bound to give effect to the words that Parliament had used but not in a way that leads to an absurd result. Counsel relied on the words set out in Coopers Brookes (Woollongong) Pty Ltd v Federal Commissioner of Taxation [1981] HCA 26. At paragraph 20, the High Court of Australia cited with approval, the words from the judgment of Justice Higgins, in Amalgamated Society of Engineers v Adelaide steamship Company Ltd [1920] HCA 54:
    • “the fundamental rule of interpretation, to which all others are subordinate, is that a statute is to be expounded, according to the intent of the Parliament that made it; and that intention has to be found by an examination of the language used in the statute as a whole. The question is, what does the language mean; and when we find what the language means, in its ordinary and natural sense, it is our duty to obey that meaning...”
15. At paragraph 22, the Court to said:
    • “there are statements of the rule which would confine the courts to the ordinary grammatical sense of the words used, unless that produces an absurdity or inconsistency“.
16. Finally, at paragraph 25, the court said:
    • “when the judge labels, the operation of the statute as “absurd”, “extraordinary”, “capricious”, “irrational”, or “obscure” he assigns a ground for concluding that the legislature could not have intended such an operation, and that an alternative interpretation must be preferred...It extends to any situation in which for good reason the operation of the statute on a literal reading does not conform to the legislative intent as ascertained from the provisions of the statute, including the policy which may be discerned from those provisions”
17. Counsel for James Shipping submitted that the Court must guard against interpreting the sections of the Act in a way that leads to an absurd result. On the material before me the charterer would generally be the payee. The buyer of the logs would be the payer. There may be some occasions when the charterer was the payer and the ship owner was the payee but generally that is not so.
18. There is no basis for the submission before me that James Shipping could be either the payer or the payee. James Shipping is the agent of the owner of the ships.

Penalties

19. Section 38C(1) provides:
    • “If a person fails to deduct tax as required under a tax deduction provision, the Commissioner may recover the tax from the recipient of the payment provided the total amount recovered does not exceed the tax that should have been deducted.”
20. This means that if a charterer who is required to deduct and pay withholding tax to the Commissioner has failed to deduct and pay that tax the Commissioner can recover the withholding tax from the recipient of such payments for freight but not the penalties. They are still payable by the payer of the payments for the freight. If payments for freight have been made to the charterer, the payer would be liable to deduct and pay the withholding tax and any penalty assessed for non-payment or late payment.
21. Section 84 allows Commissioner to impose penalties for failure to pay tax by the date it is due. Can it apply to the circumstances set out in section 38(C) (1)? The imposition of penalties on the payee pursuant to section 84 would be in conflict with the clear wording of section 38(C) (1). The discussion referred to in Anderson v Commissioner of Taxes requires the Court to resolve such ambiguity in favour of the tax payer. Section 84 is clearly in conflict with section 38(C) (1). For the purposes of this appeal the Commissioner was not entitled to impose penalties on the recipient of the payments for freight.

Liability of an agent

22. The Commissioner then poses the question. Is James Shipping deemed by the Act to be the agent of the charterer? The submission then suggests that if James Shipping is so deemed it is required to deduct 5% from the payment made by the charter to the owner of the ship. The submission then totally misinterprets the provision of section 38(1) of the Act. At paragraph 30 of the Commissioner’s submissions the charterer is deemed to be carrying on the business of owner or charterer and will be deemed to have received such income as the Commissioner considers is just and reasonable. This submission must relate to the third part of section 38(1). That only applies where the owner or charter is the buyer of the logs. It has nothing to do with the liability or otherwise of James Shipping as an agent. The Commissioner has put nothing forward to explain how James Shipping could possibly be the agent of the charterer. If James Shipping does not receive payment for the freight there is nothing from which it can make a deduction. The Commissioner submits that if James Shipping is not the person who should deduct the withholding tax the provisions are unworkable.
23. Whether or not the Act places difficulty on the Commissioner in recovering tax, the tax can only be payable in accordance with the clear wording of the legislation.
24. The Commissioner submits that prior to 2017 James Shipping paid the withholding tax therefore it must have been the payer or payee or at least have known what was paid for freight. That argument cannot succeed. The withholding tax liability must arise in accordance with the clear provisions of the Act. James Shipping says that it made payments calculated in a particular way on the wrong understanding that it had a liability to do so.
25. The Commissioner then argues that the charterer is the payer and the shipping owner is the payee. He then says that the shipping owner therefore is the agent of the payer and that James Shipping is the agent of the shipping owner which makes James Shipping the agent of the charterer. What then is the role of James Shipping?
26. The scope of that agency is set out in the evidence of Lee Jusueng filed on 13 April 2023. There is no authority given to James Shipping to pay the Commissioner on behalf of the ship owners.
27. James Shipping is the agent of the owner of the vessels coming into Solomon Islands to collect the logs that are to be transported. Its role is varied. It facilitates the process that allows the ship to enter Solomon Islands, collect the logs for the buyer and depart to deliver the logs to their destination. The logging company, referred to in the materials provided to me as the shipper supplies the logs that have been purchased. The buyer being a non-resident then pays the charterer for transporting the logs. The charterer pays the ship owner the charter fee for the vessel. The ship owner then pays James Shipping for its role in facilitating the process and it reimburses James Shipping for authorised expenditure in carrying out its role in facilitation.
28. The Commissioner then relies on section 50 of the Act which provides:
    • “50. The income of a non-resident person shall be assessed on, and the tax thereon charged on, such person either in his name or in the name of his trustee, guardian, curator, or committee or on any attorney, factor, agent, receiver, partner or manager.”
29. The Commissioner’s argument is that the owner is the agent of the charterer and further submits that James Shipping is the agent of the owner so the Commissioner submits that if the charterer fails to pay the withholding tax then the Commissioner may pursue the owner and if the owner fails then the Commissioner can require James Shipping to pay the tax. The chain must necessarily be longer than that as the charterer is usually not paying itself for the freight unless it is also the buyer of the logs.
30. The question then becomes whether the ship owner is the agent of the charterer. The Act does not define the word agent. There is nothing before me that shows any relationship between the charterer and James Shipping. Its relationship is with the ship owner. In section 50 the word agent is used in a list of other roles. The statutory interpretation principle of ejusdem generis is described in the Lexis Nexis glossary as follows:
    • “The principle of construction (or interpretation) of statutes and other documents that where specific words are followed by general words, the general words are limited to (or in other words, are ejusdem generis with) things of the same class as the specific ones.”
31. In section 50 the words trustee, guardian, curator all have very specific roles. The Committee would be limited in a similar way to the Constitution and rules governing their powers and duties. An attorney must be limited to the powers and duties of the deed providing a power of attorney. A factor would be limited to the specific powers involved in conducting the business of or being the broker for the principal. The receiver is limited to the powers of the receivership and a partner can only be liable for partnership debts. A manager has specific authority to act in accordance with the rules of the company or business. Putting to one side the use of the word ‘agent’, all the roles are ones where the nominated person has control of finances of the principal. It follows that agency must be read in a similarly narrow manner.
32. In The Commissioners of Inland Revenue v His Grace the Duke of Westminster [1936]AC 1 24–25, the House of Lords said:
    • “The subject is not taxable by inference or by analogy, but only by the plain words of a statute applicable to the facts of his case.”

The Court then adopted the words of Lord Cairns in Partington v Attorney-General [1869] LR 4 who said:

“If the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be.”

33. It follows that the interpretation of a taxing law must be construed narrowly. This applies equally to the provisions of section 38(1) and section 50 of the Act. What then is the limit of liability of an agent at common law? Firstly it is clear that if the principal is not liable then the agent could not be liable. So if the ship owner is not liable James Shipping is not liable.
34. The Commissioner has not explained how a ship owner can become the agent of the charterer. The obligation of the charterer cannot be assumed to have been passed on to the ship owner who is not the recipient of the freight charged for the carriage of the logs. There is simply a business transaction between two organisations or persons. That does not come close to creating an agency. I cannot find a basis to conclude that the ship owner is the agent of the charterer. It follows that the tax liability alleged to pass to the ship owner does not further pass to James Shipping. Even if that were not so there is no evidence before me that James Shipping would be authorised to make the payments on behalf of the ship owner. If it had the ship owner would be within its rights to say that it would not reimburse James Shipping for making an unauthorised payments.
35. The Commissioner submits that James Shipping does pay other sums to the Government and others on behalf of the ship owner, so why not pay the tax. Such an argument cannot succeed as payments made as an agent would need to be made in accordance with an authority to do so or specific requirements by the Act.
36. At common law if the ship owner is the agent for the charterer as submitted on behalf of the Commissioner, that responsibility cannot be passed on to a sub-agent. As long ago as 1878 in De Busshe v ALT [1878] UKLawRpCh 107; [1878] 8 ChD 286 the English Court of Appeal emphasised the rule that prevents an agent from establishing a relationship of principal and agent between his own principal and a third person. The Court said:
    • “an agent cannot without authority from his principal devolve upon another obligations to the principal which he has himself undertaken to do.”
37. Therefore if the ship owner was the agent of the charterer as claimed by the Commissioner he cannot pass on that responsibility to another. For the reasons set out above, as the Act is one that provides for the collection of revenue and allows for penalties and offences the provisions of the Act needs to be interpreted strictly.
38. Section 85 of the Act permits the Commissioner, in his discretion, by notice in writing to declare a person to be the agent of another person for the purpose of collection of taxes. However this only applies to persons who hold money on behalf of the principal and is limited to money held by the declared agent that is payable to the principal. There is no evidence that James Shipping held any money that was payable to the ship owner. Even if money was payable by the ship owner and the ship owner was the recipient of payments for freight (on the evidence before me the owner was seldom if ever the recipient of payments for freight) the Act would not make James Shipping liable for paying the withholding tax because it did not hold money to be paid to the ship owner. The payments are the other way around. The payments are from the ship owner to James Shipping.
39. Had Parliament intended that the responsibility can be passed from a charter to an owner and on to a company such as James Shipping it must do so clearly in the legislation. It has not made such a provision. This is the very situation that was so clearly described in The Commissioners of Inland Revenue v His Grace the Duke of Westminster. The Commissioner’s submission is that James Shipping is resident and has the ability to find out the information required to assess the tax therefore James Shipping can pay. This view is consistent with the Commissioner allegation that James Shipping has failed to make deductions and forward them even when there is no evidence that James Shipping ever received the funds for transporting logs so there is nothing from which such a deduction could be made.
40. It follows that the appeal must be allowed.
41. The determination of the Commissioner is set aside. James Shipping has no obligation to pay the withholding tax in respect of the gross payments from the carriage of cargo embarked in Solomon Islands. James Shipping is not the agent for the charterer for the purposes of the Act. James Shipping cannot be declared to be the agent of either the charterer or the ship owner for the purposes of the being liable to pay withholding tax for the payments of freight prescribed by the Act.

Repayment of tax paid

42. James Shipping submits that in the event that the appeal is successful then payments previously made totalling $52,120,930.14 should be refunded to them. Counsel says that the payments were made under a mistaken understanding of the law.
43. The application is made pursuant to section 90 of the Act which provides:
    • “90. - (1) If it is proved to the satisfaction of the Commissioner that any person has, in respect of any assessment for any year, paid tax, by deduction or otherwise, other than the tax deducted from a dividend paid to a non-resident person, in excess of the amount chargeable under this Act, such person shall be entitled to have the amount so paid in excess refunded:
      • Provided that where any tax is due and payable by such person in respect of any other assessment, the amount so paid in excess shall be applied towards the satisfaction of the amount so due and payable to the extent of such tax and the amount so applied shall not be refunded:
      • Provided further that where any liability under section 36 has yet to be determined in respect of the tax deducted from any dividend due or paid to such person, the Commissioner may withhold the repayment of any refund resulting from such dividend until the liability under section 36 is determined and secured to the satisfaction of the Commissioner.
      • (2) Every claim for repayment under this section shall be made within seven years after the expiry of the year to which the claim relates.”
44. Both Counsel accept that section 90 (2) limits claims for overpayment to seven years prior to the claim. Both parties agree that the alleged over payment is not a payment that James Shipping is entitled to retain as payments have been made on behalf of those who were required to deduct the withholding tax. Counsel for James Shipping has submitted that the amount should be paid to James Shipping who would in turn forward the refund to those on whose behalf at was paid. The Commissioner submits that even if there has been an overpayment, which is denied, the payment cannot be to James Shipping who only paid on behalf of others who were required to make the payments.
45. This submission is somewhat at odds with the submission that James Shipping was the party required to deduct withholding tax before paying for the cost of transporting logs. What was paid was not necessarily in excess of the amount chargeable under the Act. The issue would be who should have paid that tax.
46. What is clear is that the payments may have been made by James Shipping but they were made on behalf of others. That tax, on the evidence before me was payable to the Commissioner even if the person obliged to pay it has done so through James Shipping. There is no basis for me to conclude that tax has been paid in excess of the amount chargeable under the Act. Section 90 requires me to be satisfied on that issue. Accordingly there is no reason the tax should be refunded. As counsel for James Shipping accepted the money could not be kept by James Shipping it would need to be forwarded to those for whom it was paid, presumably the buyer of the logs, who would then need to return it to the Commissioner together with potential penalties. The application for an order pursuant to section 90 of the Act is refused.
47. The Respondent is to pay the costs of the Appellant of and accidental to both appeals and is certified for King’s Counsel.

Orders

1. Both appeals are allowed.
2. The assessments by the Commissioner are set aside
3. The application for refunding tax is refused.
4. The costs of the Appellant are to be paid by the Respondent certified for King’s Counsel.

By the Court
Hon. Justice Howard Lawry
Puisne Judge