Commissioner of Income Tax v Carreras Group Ltd
| Jurisdiction | Jamaica |
| Judge | White, J.A.,Ross J.A.,Campbell J.A.(Ag.) |
| Judgment Date | 27 July 1978 |
| Neutral Citation | JM 1984 CA 25 |
| Docket Number | Civil Appeal No. 41 of 1982 |
| Court | Court of Appeal (Jamaica) |
| Date | 27 July 1978 |
Court of Appeal
White, J.A.; Ross J.A.; Campbell J.A (Ag.)
Civil Appeal No. 41 of 1982
Mr. H. Hamilton and Mrs. Claudette Batts for the appellant.
Mrs. A. Hudson-Phillips for the respondent.
Income tax - Non-resident company was trading through a permanent establishment when it used the facilities of the respondent, a local company, to manufacture, warehouse, package and ship cigarettes to countries in the CARICOM area. Whether Commissioner of Income Tax was correct to raise assessments in respect of chargeable income from a trade or business carried on in Jamaica.
Held: Appeal dismissed. Evidence did not support claim that non-resident company had a permanent establishment in Jamaica as defined by the Double Taxation relief (Taxes On Income) (United Kingdom) Order, 1973, Article 4, arrangements between companies were at arm's length.
I have read the drafts of the judgments of Ross and Campbell, JJ, A. I agree with their reasoning and conclusion on the substantive question which was argued before us. This substantive question was whether the appellant Commissioner of Income Tax, on the basis of the facts known to him, was correct to raise assessments in respect of chargeable income from a trade or business carried on in Jamaica, where, it was argued, a non-resident company was trading through a permanent establishment when it used the facilities of the respondent Carreras Group Limited, a local company to manufacture, warehouse, package and ship cigarettes to countries in the Caricom area.
In the result, the court uphold the judgment of the learned, the Revenue Court that the non-resident, given the circumstances of this case, was not trading through a permanent establishment within meaning of Articles 4 and 5 of the Double Taxation Relief (Taxes on Income (United Kingdom) Order, 1973.
The appeal is accordingly dismissed. The judgment of the learned judge of the Revenue Court is affirmed. The costs consequently awarded to the respondent, are to be taxed, if not agreed.
In 1962 Carreras of Jamaica, Limited (hereinafter referred to as Carreras No. 1) commenced business in Jamaica as a manufacturer of cigarettes under licence from the trademark owners. It continued to do so until the end of October, 1973, when there was a re-organization of the business and Carreras No. 1 changed its name to Carreras Group Limited (i.e. the respondent); it ceased the manufacture of cigarettes at the end of October 1973, and became a holding company which held all the shares in a new company, Carreras of Jamaica Limited (hereinafter referred to as Carreras No. 2). The manufacture of cigarettes was taken over by Carreras No. 2 as from the beginning of November, 1973.
Sometime in 1975 the Commissioner of Income Tax the appellant, undertook an audit of the cigarette manufacturing operation at Twickenham Park in Spanish Town, St. Catherine. As a consequence of that audit and based on information available to the appellant from the records of the company, the appellant took the view: (1) that royalties were being credited to the account of the United Kingdom Company Carreras Rothmans Limited and (2) that a sum described as “net proceeds” derived from the sale of cigarettes in the Eastern Caribbean was also being credited to the account of Carreras Rothmans Limited.
On that basis, the appellant concluded that Carreras Rothmans Limited was carrying on a trade through a permanent establishment in Jamaica and consequently, that the preferential rates of tax provided for in the Jamaica/United Kingdom Double Tax Treaty (which is to be found in the Jamaica Gazette Supplement 1973 No. 140) no longer applied to it, and he assessed that company through the respondent on the combined profits consisting of the royalties and the “net proceeds” at the standard rate of 45 percent.
Objections were filed in accordance with the provisions of the Income Tax Act and there were meetings and there were meetings between the parties. At some stage the company pointed out to the appellant that the so-called “net proceeds” which had been credited to Carreras Rothmans were in fact destined for Tobacco Exporters International (hereinafter referred to as T. E. I.) and requested that the assessments be amended on the basis of profits did not belong to Carreras Rothmans but to T. E. I., and that in any event T. E. I., was not trading through a permanent establishment, and so was protected by the Jamaican/United Kingdom Double Tax Treaty.
The appellant then wrote to the respondent on January 13, 1977, requesting it to furnish information to substantiate its claim that the net proceeds credited to the account of Carreras Rothmans were, properly attributable to T. E. I. The respondent through its chief executive officer, Mr. Saulter replied within 10 days promising, to supply the information and stating that some of it had to be obtained from the United Kingdom. The respondent failed to supply the information and in October, 1979, the appellant issued a notice of decision confirming the assessments on the basis that royalties “net proceeds” were all attributable to a trade being carried on in Jamaica through a permanent establishment by a non-resident.
The respondent appealed against that decision and that appeal was heard in the Revenue Court. At the hearing of that appeal several witnesses were called by the respondent and they testified that:
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(1) Carreras No. 1 had changed its name to Carreras Group Limited;
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(2) Carreras Croup Limited had ceased manufacturing cigarettes from October 31, 1973;
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(3) Carreras No. 2 commenced the manufacture of cigarettes on November 1, 1973, until some time in 1977 when there was a merger between Carreras No. 2 and B & J.B. Machado under the new name of Cigarette Company of Jamaica Limited.
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(4) T.E.I. was a subsidiary of Rothmans International and so was Carreras Rothmans Limited;
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(5) Carreras Rothmans was, under a licensing agreement, entitled to the use of certain trade marks and to the payment of royalties for the same;
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(6) Carreras Group Limited was partly owned by Carreras Rothmans but the latter was not the majority shareholder as it held only 48 percent of the shares and the other 52 percent remained in Jamaican hands;
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(7) T.E.I. had a marketing arrangement in the Eastern Caribbean for the marketing of certain brands of cigarettes; T.E.I. from time to time secured purchasers in the Eastern Caribbean and to meet the demands of its customers it entered. into an arrangement with Carreras No. 1 & 2 whereby cigarettes would be manufactured. in Jamaica to the order of T.E.I then shipped to the Eastern Caribbean and the proceeds of sale would be remitted to Carreras No. 2 who would deduct therefrom its manufacturing cost, based partly on a fixed sum. of $10, 000 and partly on the overheads involved in the manufacture of cigarettes for T.E.I. and designed to fluctuate with the volume of cigarettes produced. The balance the “net proceeds” - was then credited to Carreras Rothmans Limited for T.EI., by the Jamaican company;
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(8) This procedure was an accounting convenience whereby all payments to any of the U.K. companies were funneled through the Carreras Rothmans account and payment to a local. company through Carreras Group Limited. Further, the local companies were not obliged to fill orders for T.E.I., the arrangement between the local company and T.E.I. was a common practice of international tobacco traders of ordering cigarettes from a manufacturing source closest to the target market. This concept, was known as “sourcing”;
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(9) The method used in filing orders was that:
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(a) cigarettes were manufactured to the order of T.E.I., and were separately and specially packaged
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(b) the local company never kept in its warehouse in Jamaica a stock from which the orders of T.E.I., were filled,
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(c) each order was manufactured and then passed through the Government excise warehouse for export to the Eastern Caribbean; the cigarettes remained the property of the local company until it was put on board the ship for the Eastern Caribbean;
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(d) the local company was not obliged to supply the cigarettes although it did in fact supply them.
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(10) T. E. I., did not maintain in Jamaica a factory, office, branch, workshop, place of management - this evidence was led in order to show that T. E. I had no fixed place of business in Jamaica.
It is to be noted that the appellant at the hearing in the Revenue Court decided not to lead any evidence, and consequently the only evidence before the learned judge was that led in support of the respondent's case. Although the appellant did not call evidence, he filed a statement of the case the principal facts relevant to the appeal were set out for the information of the learned judge, and most of those facts were admitted by the other side.
At the end of the hearing the learned judge of the Revenue Court gave an oral judgment allowing the appeal of Carreras Group Limited and it is from this judgment that the Commissioner of Income Tax has appealed to this court
His grounds of appeal are:
“(1) That the learned trial judge erred and/or misdirected himself in law in holding that the non-resident was not trading through a permanent establishment within the meaning of Articles 4 and 5 of the Double Taxation Relief (Taxes or Income) (United Kingdom) Order 1972.
(2) That the learned trial judge erred and/or misdirected himself in law in rejecting the definition of permanent establishment provided in the commentary to the operation and Organization for Economic Co-operation and Development model convention on which the Jamaica/United Kingdom Treaty is based and holding that a permanent establishment required that some representative or employee of the non-resident be present in the island or...
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