S v Board of Inland Revenue
| Jurisdiction | Trinidad & Tobago |
| Judge | Barnes, J.,Burke, J.,Dean-Maharaj, J. |
| Judgment Date | 17 October 1991 |
| Court | Tax Appeal Board (Trinidad and Tobago) |
| Docket Number | Nos. I 11 - I 12 of 1988 |
| Date | 17 October 1991 |
Tax Appeal Board
Barnes, J.; Burke, J.; Dean-Maharaj, J.
Nos. I 11 - I 12 of 1988
Mr. Martin Daly, S.C. and Mr. Mark Morgan for appellant
Mrs. M. A. Robinson-Walters and Miss Gillian Wolffe for respondent
Revenue law - Income tax — Appeal against assessment to income tax and unemployment levy — Claim for outside engineering services allowed but subject to limitation of 1% of outgoings provided by Chap 75:01 10(1)(b) — Outside engineering services do not fall within s. 10(1)(b) on basis of evidence and proper interpretation of definition of “management charges” at s. 2(1) of Chap 75:01 — Appeal allowed.
This is an appeal against assessments to income tax and unemployment levy for the year of income 1979. On the 10th September 1980 the appellant, an engineer by profession, had filed a return which included income as one of the partners in the engineering firm of S and Partners, hereinafter referred to as “the partnership”. The chargeable income according to the return was $272,761 which had taken account of an income of $242.557 which represented 75% of the income of the partnership.
By letter dated 8th October, 1985 which instituted a tax audit on the partnership for the year 1979, the respondent sought information from the appellant's accountants with respect to payments for “outside engineering services” and other related matters. This information was supplied by letter of 31st October, 1985 and following a telephone request by the tax auditor, the appellant's accountants provided by letter dated 20.11.85 documentation in support of payments for outside engineering services.
Among the documents produced to the respondent were copies of invoices issued by E, a U.K. firm of consulting engineers and by E (West Indies), consulting engineers of Nassau, Bahamas, hereinafter referred to as “E (UK)” and “E (W.I.)” respectively.
By letter of 17th December, 1985 and in respect of certain payments to E (W.I.), the respondent informed the appellant's accountants of its proposal, arising from the tax audit, to disallow expenses claimed for outside engineering services on the basis that they represented payments to a non-resident in respect of management charges and were therefore subject to withholding tax, and no evidence was seen of any deduction in respect of withholding tax from the said payments. The relevant sections of Chap. 75:01 are sections 12 (i) and 51(d) which read::
“12. In ascertaining the chargeable income of any person for any year of income, no deduction shall be allowed from the income in respect of –
xxx sxx xxx xxx
(i) payments within the meaning of section 51. unless the payer has accounted for and paid over withholding tax to the Board.”
“51. In section 49 and 56 –
“payment” means a payment without any deductions whatsoever, other than a distribution, not, being a payment to which section 99 applies with respect to –
xxx xxx xxx xxx
(d) management. charges or charges for the provision of personal. services and technical and managerial skills;”
By letter of 18th December, 1985 from the appellant's accountants, the proposed disallowance was disputed and after further correspondence, the claim was disallowed and audit reports with explanations and Notices of Assessment dated 31st December, 1985 were served on the appellant. The appellant's objection against the assessments to income tax and unemployment levy, is dated 17th January, 1986.
Barely within the two year period permitted to the respondent for disposing of an objection i.e. on 15th January, 1988 the respondent communicated its decision to vary the assessments by allowing the claim for outside engineering services, but subject to a limitation of 1% of the outgoings provided by section 10(1)(b) of 75:01 as under –
“10. (1) In computing the income of any person for a year of income from any source specified in section 5 for the purpose of ascertaining the chargeable income of a person for that year, there shall be allowed to that person all outgoings and expenses wholly and exclusively incurred during the year of income by that person in the production of the income from that source, so however that –
xxxx xxxx xxxx xxxx xxxx
(b) in the case of outgoings and expenses in respect of arrangment charges paid to or for the benefit of a person not resident in Trinidad and Tobago and to every non-resident company (such person or company not being engaged in a trade or business in Trinidad and Tobago giving rise to such management charges) the expenses allowable shall, subject to subsection (2), be the amount of the management charges: or one per cent of the outgoings and expenses (exclusive of such management charges) allowed under this section and section 11(1), other than paragraph (a) or (b) thereof, whichever is the lesser;”
We here observe that the grounds for adjusting the appellant's return by varying the assessments were different from the grounds first raised by the auditor and which had given rise to the appellant's formal objection.
The effect of the adjusted assessment was to disallow $1,173,288 in calculating the partnership income and in relation to his share of $879,966 (75%), the amount disallowed increased his chargeable income from $273,781 to $1,153,747.
The statement of reasons to be advanced in support of the appeal made by
Notice of 11th February, 1988 appears at paras Nos.8-14 of the Notice of Appeal., on record, as under
“8. The re-assessment of the appellant's Income Tax liability of the 15th January, 1988 is on an entirely different basis to the assessment of the 31st December, 1985 and was made over six years from the date of the return and by reason thereof is barred by the provisions of section 89 of the Act.
9. The appellant will also object that the re-assessment cannot be made or enforced. The re-assessment is out of time having purported to be made more that 12 months after service of the objection referred to in paragraph 6 hereof.
10. The payments of $1,267,120.00 do not amount in law to management charges and accordingly the limits stipulated by section 10(1)(b) of the Act are of no application.
11. If, which is denied, the said payments of $1,267,120.00 or any part thereof amounted in law to management charges then the payments of $1,227,291.00, being part of the said sum of $1,267,120.00, were payments to individuals, firms or companies who were engaged in a trade or business in Trinidad and Tobago during the year of income 1979.
PARTICULARS
i.
Payments to “A”
$ 25,438.00$
910.00
ii.
Payments to Sub-surface explorations
$ 27,701.00
2,474.00
$ 55,613.00
iii.
Payments to “B”
$ 1,239.22
$ 2,649.00
$ 3,888.21
iv.
Payment to “E”
586,974.37
$ 140,845.94
$1,063,046.99
$1,790,867.30
v.
Local payments
19,164.13
SUB-T0TAL
$1,870,442.65
Less Recovered expenses/reversals
$ 44,119.10
$ 590,154.77
$ 8,877.79
$ 643,151.66
TOTAL
$1,227,290.99
12. The sum of $39,829.00, being part of the said sum of $1,267,120.00, represents payments of outgoings and expenses wholly and exclusively incurred during the year of income 1979 by the Partnership in the production of the appellant's income and as such constitutes an allowable deduction in the computation of the appellant's chargeable income for the year 1979. The said payments arose outside Trinidad and Tobago and therefore no withholding tax is payable on the same.
PARTICULARS
i.
Payment to C of the United Kingdom
$ 17,089.09
ii.
Payment to D of Barbados
22,740.00
TOTAL
$ 39.829.09
13. In the alternative if, which is denied, the said payments of $1,267,120.00 or any part thereof, amounted in law to management charges then these charges were in respect of services which could not reasonably be expected to be acquired and performed in Trinidad and Tobago in the year of income. In the circumstances the appellant will seek the exercise of the discretion contained in section 10(2) of the Act. 14. The re-assessment of Income Tax referred to in paragraph 7 hereof is arbitrary, unreasonable and unjustifiable.”
In para. 15 of the respondent's statement of case dated 5th November, 1990 record) the respondent's contentions were stated as under
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(a) that it was of opinion that the appellant had been assessed at a lesser amount than that which ought to have been charged and it accordingly assessed him to such further amount as to the best of its judgment ought to have been charged.
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(b) that the variation to the assessment was validly made within the provisions of the Income Tax Act.
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(c) that the payments for foreign engineering services are management charges paid to non residents and are within the definition set out in the Income Tax Act and as such are within the limitations imposed by s. 10(1)(b).
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(d) That the payments did not arise outside of Trinidad and Tobago as contended by the appellant.”
At the hearing, the issue that emerged is whether on a correct interpretation of the definition section relating to “management charges” pursuant to section 10(1)(b) of the Income Tax Act Chap. 75:01, the respondent has properly disallowed the sum of $1,173,288 in computing the partnership income. It will therefore be necessary to consider the evidence as to the nature of the charges made by the disputed payments.
The definition of “management charges” in section 2(1) of Chap 75:01
“Management charges” means charges made for the provision of management services and includes charges made for the provision of personal services and technical and managerial skills;”
Evidence was given by S, the appellant, the main partner in the Partnership; and for the respondent by R, who at the time was on the staff of the...
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