“What the law does not prohibit it usually allows”- Justice Suzan Abinyo
Judge: Justice Suzan Abinyo, Commercial Court
Date of the Decision: 23rd December, 2024
Counsel for Appellant: (ABMAK Associates, Advocates & Legal Consultants)
- Mr. Denis Kusaasira jointly with Mr. Festus Akunobera,
- Mr. Joshua Byabashaija, and Mr. Steven Kabuye
Counsel for Respondent: (The Legal Services & Board Affairs Dpt., URA)
- Ms. Catherine Donovan Kyokunda jointly with;
- Mr. Tonny Kalungi,
- Ms. Diana Prida Praff,
- Ms. Barbara Ajambo Nahone,
- Ms. Gloria Akatuhurira, and
- Ms. Charlotte Katutu
Background of the Case
This is a consolidated appeal brought under section 28 of the Tax Appeals Tribunal Act, Cap 341 against two decisions of the Tax Appeals Tribunal in TAT Application No. 26 of 2010 and TAT Application No. 28 of 2010. In the first Application, the Appellant herein was challenging an income tax assessment of US$ 404,925,000 by URA arising out of a Sale and Purchase Agreement (SPA), wherein the Appellant sold its share in Production Sharing Agreements (PSAs) and a Joint Operating Agreement (JOA) to Tullow Uganda Limited (hereinafter called “Tullow”) in which the Tribunal found in favour of the Respondent.
In the second Applicant of TAT Application No. 28 of 2010, the Appellant herein was challenging an income tax assessment of US$ 30,000,000 by URA arising out of a settlement amount of US$ 100,000,000, paid to the Appellant in relation to a contingent amount under a Sale and Purchase Agreement to satisfy and discharge Tullow's obligations, in which the Tribunal found in favour of the Respondent.
Heritage and Energy Africa entered into Production Sharing Agreements with the Government of Uganda in relation to Exploration Areas 1 & 3A (hereinafter jointly referred to as the “Exploration Areas”) in the Albertine Graben, and were accordingly granted licenses for petroleum exploration, development, and production. Energy Africa later sold its interests to Tullow (U) Ltd, pursuant to which, the Appellant and Tullow each held equal (50%) participating interests in the exploration areas.
One of the terms in the Joint Operating Agreement between the Appellant and Tullow was that in the event the Appellant wished to dispose of its 50% interest, Tullow had a right of pre-emption and later on Tullow exercised its right of pre-emption with the result that the Appellant and Tullow entered into a Sale and Purchase Agreement dated 26th January 2010.
The total consideration for the purchase of the two exploration areas was US$ 1,450,000,000 being a base purchase price of US$ 1,350,000,000, and a contingency amount of US$ 100,000,000.
Grounds of this Appeal
1. TAT erred in law in its decision that section 79(g) of the Income Tax Act applied.
2. TAT erred in law when it held that section 79(s) of the Income Tax Act applied.
3. TAT erred in law when it disallowed the addition of the admitted and agreed exploration cost of US$ 150,000,000 to the cost base in calculating the capital gain.
4. TAT erred in law in failing to hold that there could be no tax liability by virtue of the “Convention between the Gov’t of Mauritius and Gov’t of Uganda for avoidance of Double Taxation and the Prevention of Fiscal evasion with respect to Taxes on Income” and section 88 of the Income Tax Act, even if there would otherwise have been a tax liability.
5. TAT erred in law when it failed to properly evaluate the evidence before it and thereby came to the wrong conclusion that was due.
6. TAT erred in law when it held that the assessments were validly issued.
Court’s Determination of the Appeal
In this Appeal, Justice Susan Abinyo observed as follows;
While deciding on the duty of court in this Appeal, the learned judge stated that court derives its powers from section 28(3) of the TAT Act, Cap. 341, in hearing and determining an appeal, which arose from the decision of the TAT, and it is from the same that she continued to make orders as stated below.
She also stated in her decision that what amounts to a question of law has been decided in a plethora of cases, and the phrase “an error of law” refers to instances where there is no evidence to support a finding or where the evidence contradicts the finding or where the only reasonable conclusion contradicts the finding. [see:Edwards v Bairstow [1956] AC 14].
A Preliminary Objection was raised on Ground 5 of the Appeal that it was general and inconcise; the learned judge held that following the settled position of the law decided in a plethora of cases on what amounts to the phrase “an error of law” and that the grounds of appeal must be stated with precision and clarity to illustrate the error, the Court therefore found that Ground 5 of the appeal was stated in general terms, which does not either point out or illustrate the error with precision, and hence P.O upheld. [see: Hwang Sung Ltd v M & D Timber Merchants, S.C.C.A No. 2 of 2018].
Resolution of Ground 1
TAT erred in law in its decision that section 79(g) of the Income Tax Act applied.
The learned judge reproduced Section 79 (g) of the ITA for emphasis to indicate that;
“Income is derived from sources in Uganda to the extent to which it is derived from the disposal of an interest in immovable property located in Uganda or from the disposal of a share in a company the property of which consists directly or indirectly principally of an interest or interests in such immovable property, where the interest or share is a business asset.” [Emphasis added]
Justice Abinyo was fully persuaded by the decision in Samwiri Kibuuka Vs Eriya Lugeya Lubanga, HCMA 0656 of 2005, (arising out of HCCS No. 0384 of 2001), in which, Lameck N. Mukasa. J (as he then was) stated that it is trite law of statutory construction that where there is a specific legislative provision and a general provision on a particular matter or procedure, the specific provision takes precedence over the general provision."
She moved ahead to decide that in the given circumstances of this appeal, the specific law on the tax in question was the Income Tax Act, Cap.338, and the specific law that governed petroleum exploration, and production was the Petroleum (Exploration and Production) Act, Cap. 161. Accordingly, the rules of statutory interpretation require that words in a statute must be given a plain meaning unless the words and or language used are unclear and ambiguous, and that the sections in a statute should be construed in its entirety. [see: Cape Brandy Syndicate Vs Inland Revenue Commissioners [1921] 1KB 64 at p.71, and Uganda Revenue Authority Vs Kajura, Civil Appeal No. 9 of 2015[2017] UGSC 63]
Following the above, the Court found that the phrase “interest in immovable property” as provided under s. 79(g) of the ITA is a technical term in the context of petroleum activities, and the ordinary meaning may be misleading in the context of petroleum operations. The judge was fortified in this finding with the persuasive decision in the High Court of Australia; The King Vs Wilson and Another; Ex parte. [1934] pg. 234, where Court held that: “The rules of interpretation require us to take expressions in their context and to construe them with proper regard to the subject matter with which the instrument deals and the objects it seeks to achieve, to arrive at the meaning attached to them by those who use them. She added that to ascertain this meaning the compound expression must be taken and not its disintegrated parts.”
It should also be noted that court stated that it’s trite law that it is not permissible to interpret a word in accordance with its definition in another statute and more so when the same is not dealing with the cognate subject. [See Africa Broadcasting (U) Limited Vs Uganda Revenue Authority (Civil Appeal 52 of 2020) [2024] UGCommC 326, which cited with approval the India Supreme Court decision in Tata Consultancy Services Vs State of Andhra Pradesh Case No. 2582 of 1992].
Court found the decision of the Tribunal that the Appellant sold a bundle of rights and the Appellant earned income to be proper, and it suffices to add that the said rights are divisible, cumulative in nature and therefore Court found that the contention by the Appellant that they sold their assigned rights in the exploration licence to Tullow is tenable.
The phrase “interest in immovable property” is neither defined in the Income Tax Act, Cap. 338 nor the Petroleum (Exploration and Production) Act, Cap 161. Court stated that it’s trite law that tax legislation is strictly applied and interpreted according to the language with no implied meaning or presumptions. [See: URA Vs Siraje Hassan Kajura & Ors, S.C.C.A, No.9 of 2015; Attorney General Vs Bugishu Coffee Marketing Association Ltd [1963] EA 39 at pg. 41, and Cape Brandy Syndicate Vs Inland Revenue Commissioners [1921] 1KB 64 at p.71].
The Court adopted the ordinary and natural meaning of the term licence as to mean “Permission, usually revocable, to commit some act that would otherwise be unlawful.” [See: Black’s Law Dictionary, 9th edition pg. 1004]. Accordingly, this Court finds that the SPA, PSA and JOA granted the Appellant exclusive rights to explore petroleum in the exploration areas however, these rights were not absolute since each activity required the approval of the Government and the renewal of licences from time to time. In other words, when the terms of the exploration licences and the PSAs are construed, having regard to the provisions of the Petroleum (Exploration, Development and Production) Act, it becomes clear that neither the licenses nor the PSAs grant the holder of an exploration licence any interest in land.
Court also established that the reference by the tribunal to exploration areas of the Albertine Graben as “pieces of land” after the Tribunal had cautioned itself on the rules of statutory interpretation but decided to adopt the meaning of the phrase “interest in immovable property” with regard to the DTA, which is not the specific law on the subject and therefore the tribunal ought to have known that in petroleum activities, Blocks are not delineated pieces of land but are created under the petroleum law for regulatory and administrative purposes. [see: Bailey, Diggory, and Luke Norbury Bennion on Statutory Interpretation, 7th Edn pg. 533] on the proposition of law that if a word or phrase has a technical meaning in relation to a particular expertise, it is to be given its technical meaning unless the contrary intention appears.
Therefore, Court determined that the phrase “interest in immovable property” as provided under s.79(g) of the ITA, and its interpretation by the Tribunal in regard to Article 6.2 of the DTA, was misconstrued by the Tribunal and therefore Ground 1 of the appeal succeeded on that basis.
Resolution of Ground 2
TAT erred in law when it held that section 79(s) of the Income Tax Act applied.
Section 79(s) of ITA provides that; “Income is derived from sources in Uganda to the extent to which it is attributable to any other activity which occurs in Uganda, including an activity conducted through a branch in Uganda.“ [Emphasis added]
I have taken into further consideration the rules of statutory interpretation that tax legislation is strictly applied and interpreted according to the language with no implied meaning or presumptions and that the sections in a statute should be construed in its entirety. [See Cape Brandy Syndicate Vs Inland Revenue 15 Commissioners, and Uganda Revenue Authority Vs Kajura, (supra)]
The Court found that where s.79(h) of the ITA would apply, which is not the case here, and therefore Court held that the Tribunal’s application of s.79(s) as a residual provision was proper, hence Court concluded that the exploration licences that were primarily concerned with exploration operations, which involved surveying, testing and drilling in the exploration areas, constituted activities carried out by the Appellant within the meaning of s.79(s) of the ITA, from which the Appellant gained income, which was taxable under the ITA and thus Ground 2 of appeal failed.
Resolution of Ground 3
TAT erred in law when it disallowed the addition of the admitted and agreed exploration cost of US$ 150,000,000 to the cost base in calculating the capital gain.
It is noteworthy that expenditure is classified and quantified for the purpose of determining the deductions to be taken by a taxpayer from the gross income, to arrive at chargeable income.
The well-established principle in section 4(1) of the Income Tax Act, Cap. 338 is that income tax is imposed not on gross income but on chargeable income.
Section 48 of the Income Tax Act, Cap 338, provides that capital gain is the amount by which the consideration received from the sale of an asset exceeds the cost base of an asset at the time of disposal. [Emphasis added]
Capital gains tax is therefore imposed not on consideration, but on gain. (i.e. the difference between consideration and the cost base, being the costs incurred to acquire and improve the asset)
Section 50(2) of the Income Tax Act, Cap. 338, defines a cost base of an asset purchased, produced, or constructed by the taxpayer, as the amount paid or incurred by the taxpayer in respect of the asset, including incidental expenditures of a capital nature incurred in acquiring the asset, and includes the market value at the date of acquisition of any consideration in kind given for the asset.
Court held that the exploitation costs of US$ 150,000,000 ought to have been added to the cost base in the computation of capital gains tax owing from the Appellant to the Respondent. This means that capital gains tax must be based on an amount that excludes impugned US$ 150,000,000 since this sum was part of cost base incurred by the Appellants; and therefore not taxable. Accordingly, this Court faulted the Tribunal for including the exploration costs to the cost base in calculating the capital gains tax; and yet at the scheduling proceedings the parties had agreed that the Applicant incurred exploration costs of US$ 150,000,000 [See: Kakooza JB Vs Electoral Commission & Anor [2008] KALR 138], where the Court noted that the most appropriate time to require a party to prove an admitted fact otherwise than by such admission would be at the pre-hearing scheduling conference, though the Court may exercise the discretion later in the proceedings). This Ground 3 of appeal succeeded.
Resolution of Ground 4
TAT erred in law in failing to hold that there could be no tax liability by virtue of the “Convention between the Gov’t of Mauritius and Gov’t of Uganda for avoidance of Double Taxation and the Prevention of Fiscal evasion with respect to Taxes on Income” and section 88 of the Income Tax Act, even if there would otherwise have been a tax liability.
It was also stated that according to section 88 (1) of the ITA, the Uganda - Mauritius DTA shall have effect as if the agreement was contained in the ITA, and under s.88 (2), the DTA takes precedence over any other law of Uganda to which Uganda is a party, to the extent of the inconsistent terms of an international agreement with the provisions of the ITA. In accordance with the OECD Commentary on the Model Tax Convention, the DTA operates only to exclude a tax liability that would have otherwise arisen under domestic law of the contracting state but does not impose a tax liability where none is imposed under domestic law. [See: Fowler Vs Commissioner for Her Majesty’s Revenue and Customs, (supra)]
In which the Court noted that the purpose of Double Taxation Agreements is to set out rules for resolving issues of double taxation that arise from the tax treatment adopted by each country’s domestic legislation by reference to a series of tests agreed by the Contracting States under the DTA.
In the given circumstances of this appeal, this Court does not fault the Tribunal in the applicability of the Double Taxation Agreement, which was signed between the Government of the Republic of Mauritius and the Government of the Republic of Uganda as required under section 88 of the ITA however, the phrase “permanent establishment” in the DTA was misconstrued by the Tribunal by failing to take into account the purpose of the DTA, which was for the avoidance of double taxation, and the prevention of fiscal evasion in regard to taxes on income.
From the reading of Article 14 of the DTA cited above, I find that under Article 14(2) of the Uganda - Mauritius DTA, (the equivalent of Article 13 of the Model Tax Convention of OECD), the Appellant had a permanent establishment in Uganda within the meaning of Article 5(2)(g) of the DTA therefore, the Uganda - Mauritius DTA would not provide relief against Uganda tax liability in respect of capital gains derived from the alienation of such movable property, which forms part of the business property of the Appellant's permanent establishment in Uganda. Accordingly, as the Tribunal rightly stated in its ruling above, that the government did not grant a tax relief and therefore the payment of the contingent amount was solely attributable to the permanent establishment in Uganda, and court upheld that decision of the tribunal.
This Ground 4 failed accordingly.
Resolution of Ground 6
Justice Abinyo in deciding this Ground, stated that one of the essential requirements of an effective tax collection system is certainty and consistency and this resonates with the proposition that tax is a creature of statute. [See: A.V Fernandez Vs State of Kerala (AIR 1957 SC 657)] She referred to the Tribunal’s ruling at pgs.60-64 where it held that: “The normal practice is that taxes are charged on income derived by the taxpayer. However, there are times when income may be taxable when it has actually not been received for instance when goods have been sold on credit, or rental income where provisional returns based on estimated receipts have been filed. The law does not expressly prohibit the Commissioner General from issuing an assessment when income has not been received. There is also no law that prohibits the Commissioner General from issuing an assessment before the taxpayer files a return... [What the law does not prohibit it usually allows.]
Court also stated that the Commissioner General testified that the Applicant was treaty shopping. It was registering in different jurisdictions in order to reduce its tax liability. Registration per se does not confer a taxpayer status on a person. It is the business activity or operations, offices, and incorporation of the person that confer taxpayer status. The judgment of the Commissioner General to issue an assessment when a return had not been filed and when the Applicant had sold its only asset and was about to leave the country, cannot amount to 'gross unreasonableness'. The Tribunal does not fault the judgment of the Commissioner General. The Commissioner General did not act dishonestly, vindictively or capriciously.
The judge took consideration of the rule of statutory interpretation that a section in a statute should be construed in its entirety, and having read the above sections together, the Court found that the phrase “subject to“ as provided under s.95(1) of the ITA, implies that the section referred to, which is s.96 takes precedence over this provision, therefore, this Court finds no fault with the decision of the Tribunal as above. The Commissioner exercised her discretionary powers in the assessment of the tax payable by the Appellant.
The judge also held that it is trite law that an instrument or document that purports to be in such form shall not be void by reason of any deviation from that form, which does not affect the substance of the instrument. [see: Cable Corporation (U) Ltd Versus Uganda Revenue Authority (Civil Appeal No 1 of 2011) 2011 UGCommC 88)]
Court held that Ground 6 of appeal failed because, although the Commissioner did not comply with the requirement of the 45 days' notice, this Court finds that the exercise of such discretion did not render the assessments invalid for want of form since the assessments were valid in substance.
In conclusion, Court made the following declarations and orders;
(a) The computation of the capital gains tax excludes the sum of US$ 150,000,000, which formed part of the cost base, and therefore not subject to tax.
(b) The Respondent shall compute the capital gains tax in accordance with the order in (1) above, and the Appellant shall be entitled to a refund of the excess sum in the contested amount herein.
(c) The computed amount in (2) above, and as required under section 31 (2) of the Tax Appeals Tribunal Act, the Respondent shall pay statutory interest to the Appellant on the excess tax at a rate of 2% per month, prescribed in section 123(4) of the Income Tax Act, from the date the Appellant paid the excess tax till the Respondent refunds the tax in full.
(d) The Appellant is awarded a quarter of the costs of this appeal, and in the Tax Appeals Tribunal.
(e) Interest on the costs in (4) above shall be at a rate of 6% per annum from the date of this judgment until payment in full.
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