Housing Finance Company of Uganda Limited v Uganda Revenue Authority (Application No. TAT 2/2006) [2007] UGTAT 3 (21 June 2007)

# THE REPUBLIC OF UGANDA

# IN THE MATTER OF TAX APPEALS TRIBUNAL

## REGISTRY AT KAMPALA

# IN THE MATTER OF AN APPLICATION NO. TAT 2/2006

# HOUSING FINANCE COMPANY OF UGANDA LTD APPLICANT

# VERSES

UGANDA REVENUE AUTHORITY RESPONDENT

QUORAM

1. Mr J lica Chairman

Member 2. Mr P. A. Namugowa

Member 3. Mr. G. W. Mugerwa

Representation of Parties

HFCU LTD (Applicant)

Represented by Mr James Nangwala assisted by Ms Margaret Mugabi

Uganda Revenue Authority (Respondent)

Represented by Kir. Ali Ssekatawa' and Mr Kenneth 01ara

# FINDINGS, OBSERVATIONS RULING AND AWARD OF THE TRIBUNAL.

## BACKGROUND

The Applicant namely the Housing Finance company of Uganda LTD, a financial institution duly licensed on 22/9/2004 under the Financial institution's Act of 2004, filed this Application with the Tribunal on the 17lh January, 2006 following the Respondent's taxation decision of 22in1 September, 2005 and after obtaining the Tribunal's clearance for the late filing of the Application communicated in the Tribunal Registrar's letter dated 20th December, 2005.

The Applicant had objected to the Respondents' VAT tax assessment amounting to shillings 2,427,486,928/= raised on the income earned by the Applicant as agent for administering credit sales under the following agreements:


- (a) The government of Uganda Namuwongo Housing project plots - (b) The government ofUganda pool houses - (c) National Housing and Construction Corporation pool houses.

The said assessment was a result of an investigation earned out by the Respondent on tire Applicant.

When the Application came up for hearing the following issues were agreed upon by both parties

Issues

- 1. Whether the services rendered by the Applicant to the government of Uganda and the National Housing and Construction Corporation (NHCC) in administering the credit sales of houses in respect of the three projects were financial services within the meaning ofthe VAT Act? - 2. Whether the earnings made by the Applicant for rendering the services in respect ofthe three projects was exempt from the Value Added Tax? - 3. The costs and other remedies

Further to the issues certain facts documents and witnesses were also agreed after which the parties made written submissions which are reproduced here below verbatim for ease of reference.

## SUBMISSIONS OF THE APPLICANT

It is the applicant's case that the Respondent made an arbitrary and illegal assessment against the applicant in the sum of Shs2,427,486,928/= being alleged Value Added Tax (VAT) on earnings made by the applicant out of services rendered by the applicant to Government of Uganda (GOU) and National Housing and Construction Corporation (NHCC) in respect of credit sale of houses. It is the contention ofthe respondent that the alleged assessment was justified as the earnings were made out of debt collection for GOU and NHCC.

## FACTS

It is not in dispute that the applicant is a financial institution duly licensed under the Financial Institutions Act as a credit Institution to transact financial institutions business. Refer to Exhibit Al which is a license issued to the Applicant. The applicant's business is duly regulated by Bank of Uganda. From the evidence adduced, the facts as stated in the statement of facts in support of the application appear not to be in dispute and accordingly they are incorporated herein by reference.

## ISSUES

1. Whether the services the applicant rendered to GOU and NHCC were financial services.



- Whether the services rendered by the Applicant to GOU and the NHCC in $2.$ administering the credit sale of houses in respect of the three projects were financial services within the meaning of the VAT Act. - $3.$ Whether the applicant is entitled to the remedies sought.

## ISSUE No. 1

Whether the services rendered by the Applicant to GOU and the NHCC in administering the credit sale of houses in respect of the three projects were financial services within the meaning of the VAT Act.

A resolution of the above issue is a question of both law and facts. At all material time. the Applicant supplied services as a contracted agent of the principal, to wit, GOU and/or NHCC. Under S. 13(1) of the Act, a supply of services made by a person as agent for another person being the principal is a supply by the principal. However, subsection (2) of the section removed the Applicant's services out of the ambit of an agent envisaged by the Respondent.

> "Subsection (1) does not apply to an agent's supply of services as agent to the principal".

The above subsection is interpreted to mean that when a supply is made by a person of his/her own services to a principal, then in that case, such a supply is not a supply by the principal, although it is made on behalf of the principal. At all material time in the performance of its obligations under exhibits A2, A4 and A6, the applicant was an independent contractor and performed its own skilled services, but as agent of the principal. It was not merely a commission agent. At no time did the applicant attempt to sell houses or identify potential purchasers on behalf of the principals for a commission. Had it done that, then its services would have fallen under S. $13(1)$ of the Act.

It is the applicant's case that in the execution of its obligations under the Exh. A2, A4 and A6 it performed financial services within the meaning of the VAT Act. Paragraph 2 (b) of the $2^{nd}$ schedule to the Act defines financial services to mean-

Granting, negotiating and dealing with loans, credit, credit guarantees $(i)$ and any security for money, including management of loans, credit or *credit guarantees by the grantor*". (Emphasis added)

The tribunal is invited to scrutinize the above sub-paragraph very carefully. The subparagraph has got 2 legs. There is the second leg which gives an additional list of services by the use of the term "*including*". The following are the services canvassed by the $1^{st}$ leg of the sub-paragraph:-

Granting loans, credit, credit guarantees


- Negotiating loans, credit, credit guarantees - Dealing with loans, credit and credit guarantees

Once the tribunal finds that the applicant performed any of the above services, it should hold that the applicant performed financial services.

It is submitted that the applicant, indeed dealt with credit and credit guarantees in respect of the credit sale of houses under Exh A2, A4 and A6. It is not in dispute that the above exhibits concerned credit sale of houses. Under the exhibits, the credit hereunder was passed over to the applicant to deal with. The credit became part of the applicant's portfolio. According to the evidence of applicant's witness No. 1, Mr. Patrick Kabonero, the applicant dealt with the said credit by performing the following:

- Opening accounts both for the principal and the credit purchasers - Causing the credit purchasers to guarantee repayment of credit by creation of mortgages between the purchasers and the applicant. Samples ofsuch mortgages are Exhs A3, A5 and A8. In essence creation of these mortgages was a credit guarantee for payment ofthe credit ex tended. - *•* Advising credit purchasers on how to pay

*i*

• In case of default, invoking recovery measures which included appointing debt collectors and disposing ofsecurities.

It was Mr. Kabonero evidence that dealing with, this credit was not different from tire way any other credit is handled. It is therefore submitted that on the evidence and law, the applicant performed financial services within the meaning of the phrase under the VAT Act.

As regards the 2nd leg ofthe subparagraph financial services includes:-

# *'Management ofloans, credit or credit guarantees by the grantor".*

The above definition covers the services carried out by the applicant on behalf of the GOU and NHCC. The applicant managed the loans/credit in respect of the sale of houses. It carried out the services as its own services as agent to the principal within the meaning of S.13 (2) of the VAT Act. Should the 2nd leg be interpreted to mean that the person to cany out the *''"Management ofloans, credit or credit guarantees"* must be the grantor of the loans, credit or credit guarantees, still the. applicant would fall within tire ambit of the meaning ascribed to the phrase as it executed the management ofthe loans or credit as agent of the grantor (GOU and NHCC). The applicant would therefore qualify to be a grantor ofthe credit on behalf of GOU and NHCC.



A supply is made as part of a person's business activities if the *supply is made by him or her as part of, or incidental to, any* independent economic activity he or she conducts, whatever the results of that activity.

In the same vein, the management of credit undertaken by the applicant on behalf of GOU and NHCC was an integral part of the main business of the applicant and was not merely debt collection as contended by the Respondent.

The case of Nell Gwynne House Maintenance Fund Trustees –Vs- Customs and Excise *Commissioners* [1999] 1 AII E. R. will assist the tribunal in holding that under S. 13(2) of the VAT Act the applicant managed the credit as agent of Gou and NHCC but the supply of the service was a supply by the applicant though performed as agent and was hence a financial service within the meaning in paragraph 2 (b) of the $2^{nd}$ schedule to the Act. On page 391, Lord Slynn of Hadley drew a distinction between the case where A pays B for services to be provided by B and a case where A puts B in funds so that B can arrange for $C$ to provide the services. In the former case it is the provision of services which constitute the supply and in the latter case it is the arranging for services to be provided which constitutes the supply.

Using the above analogy, GOU and NHCC appointed the applicant to manage the credit on their behalf. They passed on the portfolio (credit) to the applicant to administer as agent by inference and taking into account the specialised nature of the services. The applicant entered into mortgages with the creditors whereby the creditors were the mortgagors and the applicant was the mortgagee. Had the same services been performed in the same manner by GOU and NHCC, the same would no doubt have qualified as financial services within the meaning of the schedule. That the said services were performed by an agent to the principal did not remove them from the ambit of financial services.

Paragraph 2(b)(ii) of the $2^{nd}$ schedule further defines financial services to mean-

"Transactions concerning deposit and current accounts, payments," transfers, debts, Cheque and negotiable instruments".

It was Mr. Kabonero's evidence that in the performance of its obligations under Exhs A2, A4 and A6, the applicant opened a branch office in Namuwongo in respect of performing its obligations under A2, opened accounts for the credit purchasers, opened accounts for GOU and NHCC, made transfers whenever it was necessary, received deposits, caused creditors to apply for mortgages and received payments. These are the transactions envisaged in paragraph 2 (b) (ii) of the 2<sup>nd</sup> schedule to the VAT Act and which come


within the meaning of the phrase '*'financial services"* under the Act. The tribunal is humbly invited to dismiss the Respondent's contention that what the applicant performed was merely debt collection.

There are reasons for dismissing the respondent's contention as purely simplistic.

- In his evidence, the respondent's sole witness Assistant Commissioner David Tushabomwe confessed that he did not investigate the method employed by the applicant to perform its obligations under the agency agreement. He was of the view that investigating the method was not necessary. The witness had no means to ascertain whether in performing its obligations under the agency agreement, the applicant supplied financial services. The tribunal is invited to heavily criticize this officer for this laxity since the consequence of it has been too heavy on the applicant. The witness only investigated figures and not the services supplied leading to acquisition of the figures. - The said witness, who was the head of investigations, miss-appreciated the obligations of the applicant under the agency agreements. During cross examination he testified that he perceived the. applicant as having been a middleman in securing purchasers of houses for both GOU and NHCC and for that it was paid a commission. With this wrong perception, all actions of the respondent were undertaken on wrong advice and were hence high handed. - The applicant was still the collector of money due to GOU and NHCC even when the purchase of houses was on cash basis. For that it did not make any earning since it performed no services. Had the applicant been a mere debt collector, it would have earned money on any amount that passed through its hands.

The phrase debt collection is not defined by the VAT Act. Black's Law Dictionary 3rd Edition published by West publishing Co. 1933 tries to define "*collecting a debt or claim"* as follows.

> *"To collect a debt or claim is to obtain payment or liquidation ofit, either bypersonal solicitation or legalproceedings"*.

The definition says it all. A collector of a debt must physically go out to the debtor and demand for payment of what is due or institute legal proceedings to recover tire same. It is submitted that the services the applicant performed did not fall within the above meaning. Indeed there was evidence that the applicant would employ auctioneers (debt collectors) ifit became necessary.

The tribunal is invited to apply the strong principal enunciated in the case of Ramsay (W. T) Ltd. -Vs- Inland Revenue Commissioner [1981] <sup>1</sup> All E. R 865 and summarized in the case of MacNiven (Inspector of Taxes) -Vs- Westmoreland Investments Ltd. [2001] <sup>1</sup> All E. R 865. Lord Nicholls of Birkenhead summarized the principle as follows on page 868.



"the Court's duty is to determine the legal nature of the transaction in question then relate them to the fiscal legislation ... when it is sought to attach a tax consequence to a transaction, the task of the Courts is to ascertain the legal nature of the transaction. If that merges from a service or combination of transactions, intended to operate as such, it is that service or combination which may be regarded."

The tribunal is invited to look at the services or transactions that the applicant carried out, the very skilled nature of the services that the applicant performed in administering the credit passed on it by GOU and NHCC. The tribunal will come to the irresistible conclusion that the said services were financial services within the meaning of the VAT Act. The tribunal is urged to resolve the 1<sup>st</sup> issue in the affirmative.

## ISSUE 2

# Whether the earnings made by the Applicant for rendering the services in respect of the three projects was exempt from Value Added Tax

Resolution of this issue is purely a matter of law after making a finding on the $1^{st}$ issue. Under S. 19(1) of the VAT Act a supply of goods or services is an exempt supply if it is specified in the second schedule. It is the contention of the Applicant that it supplied financial services in execution of its obligations under the Agency Agreements. Paragraph $I(c)$ of the second schedule to the Act specifies financial services as an exempt supply. Should the tribunal agree with our submissions on the 1<sup>st</sup> issue, it will also resolve the $2^{nd}$ issue in the affirmative in favor of the Applicant.

#### ISSUE 3 **REMEDIES**

The Applicant prays that the tribunal makes the following findings/orders.

- That the services the Applicant supplied pursuant to the 3 Agency Agreements $(i)$ were financial services within the meaning of the VAT Act and therefore exempt from Value Added Tax. - $(ii)$ That the assessment made by the Respondent as alleged VAT on earnings made out of supply of the said services was erroneous and the same should be quashed. - That the Respondent should immediately refund to the Applicant a sum of $(iii)$ Shs. 728,246,078 deposited by the applicant with the respondent as 30% of the erroneously assessed VAT. - $(iv)$ That the Respondent should pay to the Applicant interest on the said deposit at the rate of 23% per annum compounded monthly with effect from the date the deposit was made - i.e. 23<sup>rd</sup> December 2005 until payment in full.

$(v)$ That the Respondent should pay to the Applicant all costs arising out of the erroneous assessments and the costs of these proceedings.

## THE RESPONDENT'S SUBMISSIONS

It is the respondent's case that the applicant engaged in activities that did not fall within the ambit of financial services and is therefore not covered by paragraph 1 (c) of schedule 2 of the VAT Act cap 349 and that the commission it received through the three agency contracts amounted to commission paid for debt collection services on behalf of the principals and is therefore liable to pay VAT as demanded by the respondent to the tune of 2,427,486,928 $=$

## Brief Facts.

The applicant is a financial institution duly licensed under the Financial Institutions Act. 2004 on the 22/9/2004. The respondent audited the applicant's tax affairs and issued an assessment of 5,491,436,753 = being VAT on commissions earned by the latter on sale of houses under 3 projects namely, the "Namuwongo project," "Government pool houses," and the "National Housing Pool houses." This assessment was objected to by the applicant and after protracted deliberations the assessment was revised to 2,427,486,928= to be paid by the applicant while the balance was to be paid by the principals namely. Government of Uganda and National Housing and Construction Corporation. (NHCC) The respondent contends that the said commissions earned by the applicant fall outside the realm of financial services envisaged under the VAT Act, and are incidental or ancillary to the supply of taxable services by the Government and NHCC.

### **ISSUES**

At the scheduling conference the following issues were formulated:

- 1. Whether the services rendered by the Government of Uganda and NHCC in administering the credit sale of the houses in respect of the three projects were financial services within the meaning of the VAT Act. - 2. Whether the earnings made by the applicant for rendering the services in respect of the three projects were exempt from VAT. - 3. Whether the parties are entitled to the remedies sought.

#### Issue No. 1

Whether the services rendered by the Government of Uganda and NHCC in administering the credit sale of the houses in respect of the three projects were financial services within the meaning of the VAT Act.

It is not in dispute that the nature of the contractual relationship between the applicant and the Government of Uganda was governed by agency agreements dated 6/3/91 and

$V_{111}$

23/9/94 and admitted in evidence as exhibit A2 and A4 respectively. The applicant also executed an agency agreement with NHCC dated 23/5/95.

These agreements briefly provided that:

- The Principals own the properties, plots, materials or houses to be advanced to the specific and identified classes of persons such as public servants or sitting tenants: - The applicant was to administer the collection of the proceeds from the sale of the aforementioned properties; - The applicant would not advance any of its own funds/monies to the beneficiaries: - The terms of the mortgages, e.g., amount of deposit, class of beneficiaries, time, mode and terms of repayment, interest rates among others, were defined by the principals with the proceeds being remitted to the principal; - The agent was to be paid a commission being a percentage of interest charged on the outstanding balance/credit. - The principal would continuously monitor the progress of the individual projects and the applicant would be permitted to execute mortgage agreements with the various purchasers/tenants.

We will at this point draw the attention of the Honorable Tribunal to the provisions of section 19 of the VAT Act Cap 349, which states that,

# "A supply of goods or services is an exempt supply if it is specified in the $2^{nd}$ Schedule."

The 2<sup>nd</sup> schedule specifies, among others, the supply of financial services as exempt supplies for the purpose of section 19.

- 1. The following services are specified as exempt supplies for the *Purpose of section 19 of the VAT Act:* - (c) The supply of financial services;

2. In this schedule-

## "Financial services" means-

- Granting, negotiating and dealing in loans, credit, credit $(i)$ guarantees and any security for money including the management of loans, credit or credit guarantees by the grantor. - *Transactions concerning deposit and current accounts,* $(ii)$ payments, transfers, debts, Cheque and other negotiable instruments other than debt collection and factoring.

It is our preliminary submission that the gist of this case lies squarely on what amounts to "financial services" within the meaning of the aforementioned section and whether the activities undertaken by the applicant amount to offering financial services within the meaning ascribed herein.

We invite the Honorable members of the Tribunal to consider the following authorities. In Opoya v Uganda (1967) E. A 75, it was held that,

"The duty of court in interpreting a statute is to put the words of the legislature honestly and faithfully in its plain and rational meaning according to its express and manifest intention"

Furthermore, in REIN v LANE (1867) 2 Q. B. 14 at page 151, it was held that, " It is now well settled that in construing an Act of parliament, courts of law will look at the context, the collocation and the object of the words relating to the matter in hand in order to interpret the meaning of the words according to what would appear to be conveyed by the use of the words... and will not in the treatment of the consecutive subsections in an Act isolate them from the others and give effect to each without regard to the others." $\cdot$

We take particular issue with the applicant's interpretation of section 19 and the $2^{nd}$ schedule and invite the Honorable Tribunal to agree with us that the above provision should be considered in its entirety as opposed to the strenuous breakdown of the same by the applicant. This Honorable Tribunal has a duty to interpret and construe the section plainly, in its rational meaning and in its context.

The Honorable tribunal is humbly urged to bear in mind the principle of interpretation of tax statutes as laid down in the celebrated case of CAPE BRANDY SYNDICATE V IRC [1921] K. B 64. In that case, it was held by Role J, that,

"In a taxing Act, one has to look merely at what is clearly said. There is no room for intendment; there is no room for equity about tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used."

It is therefore of paramount importance to look at the language used in the 2nd schedule and to note the following:

Paragraph 2 provides that-

'In this schedule-

"Financial services" means'

(a) The use of the word "*means*" in the schedule lends a restrictive and exclusionary meaning to the term "financial services." For the subject matter to benefit from this provision, it must fall squarely within the definition.

$\mathbf{X}$

The paragraph further provides that-

2. In this schedule-

"Financial services" means- 

- $(iii)$ Granting, negotiating and dealing in loans, credit, credit guarantees and any security for money including the management of loans, credit or credit guarantees by the grantor. - (b) In legislative drafting and in law, the use of the word "*and*" denotes conjunctive ness in nature and togetherness as opposed to the use of "or." This has received judicial pronouncement in this Honorable Tribunal and was confirmed by the court of appeal in TOTAL (U) LTD V URA CA NO. 6/2001 Justice

Twinomujuni, who upheld the Tribunal's findings that,

"The word 'and' does not create a third party category of a tax exemption, It is used conjunctively. It connotes togetherness."

Reference is also made to a text on "Statutory Interpretation" by F. A. R Benn ion, London, Butterworth's, 1984, at p 801,

"Lord Halsbury LC said in Mersey Docks and Harbor Board v Henderson $\{(1883)$ 13 App Case 595, at p 599. $\}$

'It certainly is not a satisfactory method of arriving at the meaning of a compound phrase to sever it into several parts, and to construe it by the separate meaning of each of such parts when severed.'

In considering what he called the 'triad' in the phrase 'efficiency, economy and safety of operation' in s 5 of the Transport (London) Act 1969, Lord Wilberforce said 'the triad must be taken as a whole'. {Bromley London borough Council v Greater London Council [1982] 1 All ER 129, at p 155.}

It is therefore our submission that for the applicant to qualify under the abovementioned schedule it should have fulfilled *all* the conditions stipulated in the schedule as opposed to only *any of them* and it is erroneous for the applicant to argue that any of the three conditions qualify the service as a financial service that is granting, negotiating and dealing with.

The question, therefore, is whether the applicant granted, negotiated and dealt with loans, credit, credit guarantees and any security for money including management of loans, credit or credit guarantees by the grantor.

## Did the applicant grant any loans?

The applicant's first witness, Mr. Kabonero Patrick, admitted during the hearing that the applicant did not grant any loans, credit or credit guarantees to its beneficiaries neither did the applicant advance any of its own funds or monies to the beneficiaries. He further stated that the applicant simply opened accounts for the beneficiaries, signed mortgage deeds, received the proceeds and deposited the same on the principal's accounts less the applicant's commission. Mr. Kabonero went on to state that principal was the disclosed owner of the properties, materials and funds (a fact borne out by the mortgage agreements marked A3 and A8) and that in the event of default by the beneficiaries, auctioneers are hired to recover the sums owed.

$X_1$

In addition, the agency agreement between the applicant and NHCC (Exhibit A6) provided that.

"The applicant is hereby appointed an agent for collecting of proceeds of sale of corporation houses and buildings... "

We therefore submit that the applicant did not grant these loans or credit but simply received proceeds of the sale of pool houses and handled the funds by simply disbursing to the developers such building materials as were necessary for the development of the said area of Namuwongo.

The applicant's second witness attested to the same and we invite the honorable tribunal to hold in our favor that the applicant did not grant any of its own loans or credit.

# Did the applicant negotiate any loans?

The other question to be asked is whether the applicant negotiated the loans, credit or credit guarantees.

It is clear from the terms of the three agency agreements that the principal dictated the terms of the "paper mortgages." Terms such as the amount of deposit, interest to be charged and the period of the repayments among others. See clause 2, and 3 of exhibit A6 and article 1 $(1.2)$ of exhibit A2 among others.

We submit that the applicant merely executed "*paper mortgages*" for the purposes of recovery and reconciliation but at no time did it negotiate any loans or credit on its behalf of any of its principals. This is further compounded by the letter to the respondent's Commissioner Internal Audit and Tax investigation dated 22/9/05 from NHCC (one of the principals) (exhibit R27) in which it stated that,

"As requested, please find details of properties paid through paper mortgages arrangement at HFCU Ltd... The concept of a paper mortgage is different from the real mortgage in that the applicant was appointed as an agent to collect the due sums of various properties as a financial institution and for that service $a$ commission or agency fee was paid to it. The paper mortgage was for a period of 5-15 years for the various properties depending on the purchasers' ability to *pay.* "

We therefore submit that in the absence of actual credit being advanced (granting) and considering that the applicant only operated paper mortgages as a means of collection, the applicant did not grant, negotiate and deal with the loans, credit and credit guarantees and hence no financial services offered.

The applicant in its submissions on page 5 has ironically and belatedly argued that:

"Should the 2<sup>nd</sup> leg be interpreted to mean that the person to carry out the management of loans, credit or credit guarantee must be the grantor of the loans, credit or credit guarantee, still the applicant would fall within the ambit of the meaning

xii

*ascribed Io the phrase as it executed the management ofthe loans or credit as agent of the grantor (Government andNHCC) "*

*We* submit in reply to this that:

**)**

- The wording of the section is to the effect that management of loans, credit or credit guarantees must be by the grantor and not the agent. - The applicant admits that the grantor is (Government & NHCC) and not itself. - The applicant has correctly submitted on page 2 under issue No. <sup>1</sup> that section 13 (2) ofthe VAT Act removed the applicant's services out of the ambit of an agent. S.13 (1) of the Act does not apply to an agent's supply ofservices to the principal. Therefore it cannot purport to *not* be an agent for purposes of S.13 and then claim to be an agent for purposes of S.19. That is an irony and a contradiction that must be rejected by this honorable Tribunal. - The applicant is a credit institution. Its Managing Director stated its sources of funds as deposits and interest among others. - The • The agency agreement (see exhibit A6) is specific and unambiguous, applicant is a collecting agent and not a grantor.

The applicant in a letter dated 29/8/05 objected through its tax consultant (see exhibit All) to the VAT assessment of 3,836,913,389= arguing that they were not agents for the Government of Uganda and the latter would have to bear that VAT burden. This prompted a-revision of the assessment by the respondent to the tax in dispute. The respondent relied on section 13 of the Act in its argument, however in an ironic twist of events, the applicant now relies on section 19 and the 2nd schedule to claim that they are agents so as to evade paying VAT on the commissions earned alleging that they were offering a financial service by granting, negotiating and managing the loans and credit. We have clearly shown that they were not the grantors ofthe loans and credit and implore this tribunal not to permit the applicant to rely on both sections to avoid liability for VAT on the commissions earned.

Therefore the applicant cannot claim to be grantor now. It is an agent whose obligations are clearly spelt out in the agreement and tire tax assessed is tire portion of the commission earned by the applicant.

#### The applicant cited authorities to wit,

British Airways Pic vs. Customs *&* Excise Commissioners [1990] STC 643; Nell Gwyn House Maintenance Fund Trustees Vs Customs and Excise Commissioners [1999] <sup>1</sup> All ER; Ramsay (W. T) Vs Inland Revenue Commissioner [1981] All ER 865. These authorities bolster the respondent's case in as far as:

1. The transaction must be looked at as a whole.

**II** 2. Court should look at tire substance of the transaction considering its commercial nature and the test put applied in Nell Gwyn house case is that in determining whether what would otherwise be two supplies should be regarded as a single supply, the court has to ask itself whether one element is an integral part of the other... the court must consider "what is the time and substantial nature ofthe consideration given to the payment."

It s the respondent's case that the nature and substance ofthe whole transaction is that.

- 1. The taxable supply is one of land and houses by NHCC/Government of Uganda, which have accepted the same and paid. - 2. The applicant operated "paper mortgages" for collection of credit due. - 3. The applicant earned a commission for the collection of services given to the principal. - 4. The applicant's services are akin/ancillary/incidental to the supply of land/houses/materials by the Government of Uganda/NHCC and hence taxable. See Trolley's Value Added Tax 1992-93, Robert. Wareham, at pages 14-17.

(ii) ".. .except debt collection and factoring'<sup>1</sup>

The Act specifically excludes debt collection.

*"Financial services" mecms-*

*(f Transactions concerning deposit and current accounts, payments, transfers; debts, Cheque and other negotiable instruments other than debt collection andfactoring.*

A debt is not defined in the Act, however, Osborn's concise law.dictionary 8th Edition defines it as.

*"A sum ofmoney due from one person to another"*

Osborn's dictionary also defines Credit as-

*"(I) The time which a creditor will allow his debtor in which to pay the total, or the total amount which he willpermit to be borrowed or owed. "*

It is clear from the applicant's evidence and documents that in all its transactions there is credit/money/loan being advanced between two parties. Furthermore;

- *•* It's undisputed that the properties/credit belongs to Government of Uganda or NHCC. - That the tenants are public servants or other specified categories. - That the principal offered the houses on credit to the tenants. - That the applicant was to collect the due sums from the tenants.

xiv

*<sup>2.</sup> In this schedule-*


- That the applicant did not use its money either to advance to the beneficiaries or reimburse the principal. - That the applicant only passes on the money collected less its commission to the principal. - That the applicant appoints its auctioneers in circumstances of non-compliance with the terms of repayment and even attaches and re-sales properties to realize the principal's dues. - That where no recovery is made or where the tenants pay 100% before and no outstanding balance remains the applicant is not entitled to a commission.

We therefore submit that the above set of facts put the applicant's case within the realm of debt collection/factoring because the import and meaning of section 19 and the 2<sup>nd</sup> schedule is to the effect that the person (applicant in this case) must be the grantor of the credit or money and where he collects and is not the grantor, then it amounts to debt collection which in this case attracts VAT.

In circumstances therefore where you collect credit that you did not grant but which belong to a $3^{rd}$ party, you are merely a debt collector, agent or commission agent and as such must be taxable. If the honorable tribunal accepts the applicant's submissions, it will be setting a very dangerous precedent since it would imply that if anyone negotiates a loan, credit or credit guarantee, earns a commission deals with a loan or manages the same, in whatever circumstances, then it's not taxable yet the import of the Act specifically relates to a granting, negotiating, dealing and includes managing loans for the transaction to qualify as a financial service.

We also invite the honorable Tribunal to consider whether any other taxable entity such as a registered auctioneer, firm of advocates, court brokers or commission agents could not perform the services that the applicant refers to as financial services. What peculiar financial services were involved or offered?

The activities listed on page (4) of the applicant's submission can be done by the above listed entities. There is, therefore, no financial service as such within the meaning of the Act.

In all we pray that this honorable court be pleased to find that section 19 and the $2^{nd}$ schedule must be read together and in so doing, compel the applicant to pay VAT on the commission it earned and to further hold that in light of the same, the applicant did not offer financial services within the meaning of VAT Act and hence is liable.

#### ISSUE No.2

Whether the earnings made by the applicant for rendering the services in respect of the three projects were exempt from VAT.

Section 4 of the VAT Act provides that,

"A tax, to be known as value added tax, shall be charged in accordance with this Act on:"


#### *(a) every taxable supply in Uganda made by a taxable person;*

It is clear from this mandatory provision and from the evidence of the respondent's witness, Mr. Tushabomwe David, that the VAT law is supply-based. If a person makes a supply that is not zero-rated then it's liable to tax. The applicant in this case clearly made a taxable supply akin to the supply of land made by the Government and NHCC and earned a commission, which is not a financial service and is therefore taxable.

During the trial, the applicant alluded to the fact that it is governed by the Financial Institutions Act and supervised by Bank of Uganda, which has never queried the above transaction. We submit that the VAT Act takes precedence over the Financial Institutions Act under section 78A relating to VAT issues hence what amounts to a financial service for purposes ofthe financial institution Act is not necessarily the same for VAT purposes. We therefore submit that the test should be one ofsection <sup>19</sup> and the 2nd schedule of the VAT Act

It is our considered opinion that if issue <sup>1</sup> is resolved in our favor then the applicant's earnings are not exempt from VAT and should be compelled to pay VAT on the commissions earned pursuant to sections 4, 18(1), (4), 19(1) and the 2nd schedule.

#### REMEDIES

**)**

The respondent prays that:

- 1. The application be dismissed - 2. The assessment is upheld with further interest as computed from time of assessment till payment in full. - Costs ofthe suit be met by the applicant.

#### SUBMISSION FOR THE APPLICANT IN REJOINDER

In rejoinder to the submissions of the respondent, the applicant adds that the interpretation by the respondent of the phrase *financial services* in tine second schedule to the VAT Act in respect to the services the Applicant rendered as agent to the 2 principals amounts to a miss-conception. The services were not services of an agent for the principle but were services of an agent to the principal.

In legislative drafting, a comma is employed to separate items for purposes of creating clarity. The Tribunal is referred to Thornton's Legislative Drafting published by London Butterworth at page 36 for aid. It is usual to separate the last 2 items in a series of items by the use of tire words and or, or. It is a question of the context in which either of tire words is used and use of either may not act to destroy tine separation of the items. In reference to the meaning ascribed to the phrase *financial services,* granting, negotiating and dealing are separate activities and must be interpreted as such. At the same time loans, credit, credit guarantees and any security for money are in the same vein separate

services. If the interpretation adopted by counsel for the respondent is to be adopted, it would lead to an absurdity. Such an interpretation would mean that an activity is not complete unless it involves granting, negotiating or dealing. An activity may be fully complete as a grant without necessarily involving negotiation or dealing. In this particular case there was no evidence that Government or National Housing negotiated credit with the respective purchasers. Dealing connotes a continuous activity. There was no evidence that it was the normal business of Government to deal in sale of houses. Yet there was evidence that it was the normal business of the applicant to deal in credit and securities for money. There was evidence that the services the applicant rendered to the 2 principals was part of its normal services of dealing and management of Ioans, credit and securities for money. Clearly the applicant's services were financial services within the meaning of the phrase under the Act. The respondent's interpretation yvliich tend to mean that Ioans, credit, credit guarantees and mean one and the same thing for the use of the word and should be rejected as being absurd. The casejaf'Total Uganda Limited v Uganda Revenue Authority cited by the respondent was properly decided considering tire subject matter in dispute and the particular phrase that was being interpreted. The court was merely looking at 2 taxes and not activities or services like it is in this case.

The Applicant reiterates it earlier submissions and prayers.

## OBSERVATIONS, FINDINGS, RULING AND AWARD OF THE TRIBUNAL.

The Tribunal has considered at length the facts,. written submission, the quoted laws documentation, decided cases as well as the oral evidence adduced by both parties and now wishes to make the following observations, findings, ruling and award:

- 1. The Tribunal observes that both parties have agreed that the Applicant is financial institution duly registered as such under the Financial Institutions Act 2004. - 2. It is noted that the parties agree that the income upon which tire dispute arose is that which the Applicant earned under the three agency agreements enumerated in the background above and apparently there is no dispute regarding the amount of the earnings in question. - 3. The disagreement appears to be on the tax treatment of those earnings in the hands of the Applicant, that is whether the said earning qualify to be exempt or taxable under the VAT Act. - 4. The Tribunal further finds that the numbering and arrangement of the agreed issues by both parties differed as seen from the submission of both parties indicating that were not numbered in the same order. However the subject matter was adequately addressed by both parties. The Tribunal will now deal with the agreed issues one after the other as follows:

## Issue Number one

**)**

Whether the service rendered by the Application to the Government of Uganda and National Housing and Construction Corporation in administering the credit sales of

XVII


houses in respect of the three projects were financial services with in the meaning of the VAT Act.

The resolution of this issue is the main thrust of the dispute as the other issues hinge on it. The Tribunal rules on this issue as follows;

1. The Applicant rendered services to two principles namely the Government of Uganda and the National Housing and Construction Corporation under the under the three agreements it had signed with each of them and earned income there from.

Section 13 of the VAT Act relates to what a supply by an agent is or is not. Subsection (1) states that "A supply of goods or services made by a person as agent for another person being the principals is supply by the principal".

Subsection (2) states "Subsection (1) does not apply to an agent's supply of services as agent to tine Principal." The question that needs to be answered is whether the Applicant supplied the services as "agent for another person being the principal then such a supply when a supply is made by a person of his/ her services to a principal, that it was an independent contractor who performed if <sup>s</sup> own skilled services as agent ofthe principals and was not merely a commission agent, and further that it did not attempt to sell houses or identify potential purchasers on behalf ofthe principals for a commission which action would have made its services fall under sub section 13 (10 of the VAT Act. The Applicant argues that the services it offered to its principals were financial services that fall to be exempt under section 19 (1) to the VAT Act which requires that such an exempt supply be specified in the second schedule to the Act. The Respondent on the other hand argues that the services that the Applicant provided were mere debt collection services which are not financial services envisaged under the VAT Act and listed in the second schedule of the Act. Both parlies have argued extensively over the taxation or the exemption of these services.

The Tribunal finds that the services that were performed by the Applicant went further than mere debt collection. The unchallenged submission of the Applicant that it for example set up a branch office at Namuwongo whereby the loan Applicant opened up Accounts, signed mortgage agreements with Applicant, which agreement is managed as banking financial Institution and which branch is still operation up to day. These and other activities performed by the applicant were akin or part of or indicated to its activities as' a Financial Institution; The Applicant therefore not mere executed paper Mortgages as claimed by the respondent.

The applicant appear to have missed the submission'of the applicant regarding sub section 13 (2) of the Act. The applicant submitted that subsection (2) removed the applicants service out of the ambit of an agent envisaged by the respondent. If<sup>s</sup> clear from the statements that were removed by the said subsection (2) were those envisaged by the respondent. What were these services? The tribunal finds that they were what the respondent terms mere collection services. The applicant goes on to argue that subsection (2) is interpreted to mean that when a supply is made by a person of his / her service to a principle, then in that case, then such a supply is not a supply by tin principal, although it

xviii


is made on behalf of the principal. Subsection (1) uses the words as agent for another person being the principals the tribunal believes that there is difference in interpreting these two phases as used in the Act, and aggress with the Applicant that the supply in subsection (2) is not a supply by the principle although its made on behalf of the principal.

The Tribunal also agrees with the Applicant's submission that the meaning ascribed to the phrase ''financial service", namely that of granting, negotiating, and dealing are separate activities and must be interpreted as such. An activity must be completed as grant without necessary involving negotiations or dealing. The Tribunal is convinced that the evidence on the record indicates that the service rendered by the Applicant in deed opened a branch in Namuwongo not only to deal with sales of plots, but offer other bank services which has enabled to be operational up to now. The Tribunal therefore rules in favour of the Applicant in this issue.

## Issue Number 2

Whether the earning made by the Applicant for rendering the service in respect of the three projects was exempt was from Value Added Taxes?

Having found in issue in number <sup>1</sup> that the services rendered by tire Applicant to its three principals were financial services, the Tribunal inevitably comes to the conclusion that the said earnings would not fall to be assed to VAT as they are exempted under that 19 of the VAT Act, and further they are specially listed under schedule 2 (1) (c) of the Act. This issue too is ruled in favoured ofthe Applicant.

## Issue Number 3

The Tribunal make the following orders:

- 1. The assessment be quashed - 2. The respondent to refund to the Applicant the sum of shs 728,240,078/= deposit by the Applicant as 30% ofthe disputed as VAT Tax. - 3. Similarly tire respondent to pay interest on the above sum effect from the date the deposit was made until payment in full. - 4. The Respondent to pay to the Applicant the cost ofthe Applicant.

lit day of. Mr. J. Iica **& ■w;** Chairman ated at Kampala this Mr. Member ^-Mr. P. A. MHemiJei Certifiec^ckf'rrect **.^....2067 /** . W. Mu^erwa

P. OkumnRinga Deputy Registrar Technical

## THE REPUBLIC OF UGANDA

## IN THE TAX APPEALS TRIBUNAL AT KAMPALA

## **APPLICATION NO TAT 2 OF 2006**

#### IN THE MATTER OF:

**HOUSING FINANCE CO. (U) LTD....................................**

#### **VERSUS**

#### **UGANDA REVENUE AUTHORITY....................................**

#### DECREE

This application coming before the honourable members of the Tribunal Mr. J lica, Mr. P. A Namugowa and Mr. G. W. Mugerwa for final disposal.

#### IT IS HEREBY DECREED AS FOLLOWS:

- 1. The assessment be quashed. - 2. The Applicant be refunded the sum of shs $728,240,078$ deposit by the Applicant as 30% of the disputed VAT. - 3. The Respondent to pay interest on the above sum effective from the date the deposit was made till payment in full. - 4. The Respondent to pay to the Applicant the costs of the application.

DATED under my hand and seal of the $\triangle$ Tax Appeals Tribunal this ....................................

**VEN 2007**

Drawn and filed by: Legal Services & Board Affairs Department Uganda Revenue Authority P. O. Box 7279 Kampala.