Fan Milk Limited v Commissioner-General (High Court)

CASE BRIEF

FAN MILK LIMITED v. COMMISSIONER GENERAL, GHANA REVENUE AUTHORITY

Court: High Court of Justice, Commercial Division, Accra
Suit No: CM/TAX/0004/18
Date of Judgment: 29th April, 2019
Judge: Her Ladyship Mrs. Angelina Mensah-Homiah J

FLYNOTE

Revenue Law – Tax assessment – Withholding tax – Re-characterisation of payments – Whether payments described as “discounts” were properly re-characterised as “commissions” subject to withholding tax – General anti-avoidance rule – Section 34 (112) of Income Tax Act, 2015 (Act 896)/Internal Revenue Act 2000 (Act 592) – Sections 116(1)(v) and 117(3) of Act 896 – Tax avoidance scheme – Held: Payments were commissions disguised as discounts; proper re-characterisation; withholding tax liability upheld.

Taxation – Discounts versus commissions – Distinction – Whether cash payments to distributors at end of month based on volume of sales constitute discounts or commissions – No price reduction reflected – Fixed selling prices controlled by manufacturer – Tax invoice requirements – Value Added Tax Regulations, 2016 (L.I. 2243) – Held: Payments were commissions, not discounts; no genuine price reduction occurred.

Practice and Procedure – Tax appeals – Preliminary objection – Payment of objection deposit under Section 42(5) of Act 915 and Order 54 Rule 4 of C.I. 47 – Whether taxpayer who paid 30% objection deposit must pay additional 25% before appeal heard – Purposive interpretation – Held: Single payment requirement; 30% paid under Section 42(5) satisfies Order 54 Rule 4 requirement.

Burden of Proof – Section 92 of Revenue Administration Act, 2016 (Act 915) – Burden on taxpayer to show compliance with tax law provisions – Tax avoidance scheme – Appellant failed to discharge burden.

FACTS

1. The Appellant (Fan Milk Limited) is a company engaged in production and distribution of dairy, frozen yoghurt and juices.
2. Tax Audit (2014-2016): The Respondent (Commissioner-General, GRA) conducted a tax audit of Appellant’s operations for accounting periods 2014-2016.
3. Assessment (GH₵7,655,676.22): The Respondent assessed withholding tax liability of GH₵7,655,676.22 against the Appellant for failure to withhold taxes from recipients of what Appellant termed “discounts.”
4. Appellant’s Business Model: The Appellant manufactured products purchased directly by independent business entities (distributors) who:
   • Purchased products from their own resources
   • Operated from their own outlets/depots
   • Were given 8-day credit terms (after initial upfront payment)
   • Received monthly cash payments based on volume of purchases
   • Were restricted to selling at fixed prices determined by Appellant
   • Did not add their own margins

1. The “Discount” Arrangement:
   • Distributors made full payment for products purchased
   • At end of each month, Appellant calculated and paid amounts based on total purchases
   • Payments described by Appellant as “discounts”
   • Payments not deducted from invoice prices at time of sale
   • No price adjustments reflected in Appellant’s books
   • Formula for calculation set out in Trade Terms Contract for Agents (Exhibit FM3)

1. Respondent’s Finding: The Respondent re-characterized the “discounts” as “commissions” subject to withholding tax under Section 116(1)(v) of Act 896.
2. Objection: Appellant filed objection and paid 30% of assessed tax (GH₵2,215,391.66) as required under Section 42(5)(b) of Act 915.
3. Objection Dismissed: Respondent dismissed objection, maintaining the assessment.
4. Appeal Filed: Appellant filed notice of appeal to High Court.
5. Preliminary Objection: Respondent raised preliminary issue that Appellant had not complied with Order 54 Rule 4(1) of C.I. 47 requiring payment of 25% before appeal could be heard.

ISSUES

Preliminary Issue: Whether the Appellant satisfied statutory pre-conditions for lodging appeal (whether payment of 30% under Section 42(5) satisfies Order 54 Rule 4 requirement of 25%).

Substantive Issues:

1. Whether the Respondent re-characterised the cash payment or the relationship between Appellant and its distributors.
2. Whether GRA erred in disallowing “discounts” and re-classifying them as “commissions.”
3. Whether GRA erred in imposing withholding tax liability of GH₵7,655,676.22 based on the re-characterisation.
4. Whether GRA erred in ignoring its own practice of treating discounts as exempt from tax as confirmed by Practice Notes issued 6th October 2016.

ARGUMENTS

Appellant’s Arguments

Preliminary Issue:

• Paid 30% (GH₵2,215,391.66) of disputed tax under Section 42(5)(b) of Act 915
• This exceeds 25% required under Order 54 Rule 4
• Should not be required to pay additional 25% (total 55%)
• Statutory precondition satisfied

Ground A – No Principal/Agency Relationship:

• Cited Black’s Law Dictionary definition of “Agency” as fiduciary relationship
• Distributors are independent business entities who:
  • Purchase from own resources
  • Own/operate their own outlets independently
  • Finance their own operations
  • Are free to sell products of other manufacturers
  • Look for their own customers
• Discounts computed monthly based on total purchases
• No reporting requirements between parties
• Court should focus on substance over form
• Cited: Attorney General v Balkan Energy [2012] 2 SCGLR 998 – substance over form

Grounds B, C & D – Discounts Not Commissions:

• Black’s Law Dictionary: Commission is “fee paid to agent or employee for particular transaction”
• Validity of commission depends on existence of agent or employee
• Discount does not depend on agency/employment relationship
• Practice Note on Withholding Taxes: discounts (cash or trade) not subject to withholding tax
• Section 116(1)(a)(v) and Section 133(1) of Act 896 do not include “discounts”
• For payments to be subject to withholding tax, must qualify as “service fee”
• Discounts are not “service fees,” “professional, technical or consultancy fees”
• Practice Note defines “service” – does not include discounts
• Tax statutes must be strictly construed: Multichoice Ghana Ltd v Commissioner, IRS [2011] 2 SCGLR 783
• Apply ejusdem generis rule
• Attempt to classify discounts as service fees overstretches statutory definition
• Section 45 of VAT Act permits adjustment of invoice values
• Good tax record spanning decades
• Would have complied if any legal obligation indicated
• Cannot be retrospectively punished for act that was not an offence
• Respondent abused discretion contrary to Articles 23 and 296 of Constitution
• Effect deprives Appellant of property contrary to Article 18(1) of Constitution
• Tax law and Practice Note silent on where discounts must appear on invoices
• Section 26 of Evidence Act – Respondent estopped from raising further issues
• Allegation of tax avoidance unfortunate

Respondent’s Arguments

Preliminary Issue:

• Appellant must demonstrate compliance with Order 54 Rule 4(1)
• Failed to pay 25% required before appeal can be heard
• Appeal incompetent and should be dismissed

Ground A:

• Sections 34, 99, 112 of relevant Acts clothe Respondent with authority to re-characterize arrangements
• Did not describe relationship as principal-agent but re-characterized cash payments as commission
• Black’s Law Dictionary: cash discount is deduction for immediate payment
• Cash discount paid by Appellant not deducted from sales prices
• Not indicated on sales invoices as required by Regulation 21 of L.I. 2243
• Did not result in sale price reduction
• No adjustments in Appellant’s books
• Exhibit FM3 (Trade Terms Contract for Agents) does not disclose names, dates, signatures
• Cited Indian case: MIS Indian Piston Ltd v Tamil Nadu [1974] 33 STC 742 – distinguishing cash discount from trade discount
• Arrangement is tax avoidance scheme disguising commission as discount
• Audit showed no benefits to customers/distributors from trade discount

Ground B:

• Payments made at end of month, not at time of sale
• Not indicated on sales invoices
• Not deducted from gross sales
• Audit examined invoices, books, statements, accounts, contracts

Ground C:

• Key distributors restricted to fixed selling price, not their own margin
• Make full payment for products
• Based on volume, Appellant applies formula in Exhibit FM3
• Not cash or trade discount
• Obligation to withhold tax not removed by labeling as “discounts”
• Section 117(3): Appellant must pay taxes it should have withheld

Ground D:

• Invoice doesn’t reflect cash discounts to distributors
• Distributors sell at predetermined prices set by Appellant
• Without markups, cash discounts are commissions
• Letter dated 24th November 2017 explained rationale
• Attempt to mis-describe payments to evade tax
• Section 92(1): Burden on taxpayer to show compliance – Appellant failed
• Invited Court to dismiss appeal

HOLDING

Preliminary Issue: Appellant satisfied statutory pre-conditions. 30% payment under Section 42(5) satisfies Order 54 Rule 4 requirement.

Substantive Issues:

1. Respondent properly re-characterized payments as commissions (by inference recognizing principal-agent relationship)
2. No error in re-classifying “discounts” as “commissions”
3. No error in imposing withholding tax liability of GH₵7,655,676.22
4. No error regarding Practice Notes – they don’t override statutory provisions

APPEAL DISMISSED IN ITS ENTIRETY.

Order: Appellant to pay remaining 70% of withheld taxes (GH₵5,440,284.56) for 2014-2016. After payment, entitled to recover from distributors/agents. Costs of GH₵10,000 awarded to Respondent.

REASONING

Preliminary Issue – Single Payment Requirement

Court’s Analysis:

The Court addressed whether taxpayer who paid 30% objection deposit must pay additional 25% before appeal heard (total 55%).

Finding: This would be unfair to person who files objection before appeal.

Purposive Interpretation Applied:

“These two provisions must be interpreted with a purposive approach. It appears from these two provisions that the law maker intended that before a person who is dissatisfied with a tax assessment is given any hearing, whether at first instance or by way of appeal, a reasonable portion of the disputed tax liability is to be paid, that is, 25% or 30% respectively as the case may be.”

Distinction Made:

1. If NO objection filed → Person filing appeal under Order 54 Rule 1 must pay 25%
2. If objection filed and 30% paid → The 30% payment satisfies Order 54 Rule 4 requirement; no additional 25% required

Issue 1 – Re-characterisation of Payments

Court’s Finding: Respondent properly re-characterised payments as commissions, which by inference required recognising principal-agent relationship.

Key Legal Principle:

Commission is remuneration paid to agent. From Government Milk Scheme v. Assistant Commissioner of Income Tax [2006] 281 ITR (A.T.) 0088:

“For a payment to fall within the category of commission, there must be a relationship of principal and agent. The Commission is a compensation to an agent for services rendered… calculated on a percentage basis on the amount of the transaction or the profits to the principal.”

Distinction Between Discount and Commission:

Discount: “A reduction from the full amount or value of something” (Black’s Law Dictionary)

• Cash discount: Seller’s price deduction for immediate cash payment
• Trade discount: Routine reduction from regular/established price

Key Accounting Principle:

• Seller records cash discount with debit to sales discounts account
• Credit purchaser’s account
• Results in reduction to expense/cost recorded in inventory

Court’s Analysis of Evidence:

1. No Price Reduction: Payments did not lead to any price reduction before or after sales
2. No Accounting Adjustments: Respondent found no price adjustments in Appellant’s books; Appellant failed to demonstrate necessary adjustments were made
3. Control of Prices: Evidence showed Appellant controls prices at which distributors sell to customers – distributors don’t add margins
4. Payment Based on Volume: Distributors receive payments at month-end based on volume of sales
5. Wrong Tag: “The bitter truth is that the payments made to the distributors at the end of each month’s sales, which did not result in any price reduction, cannot by any stretch of imagination, be described as a cash or trade discount, they are commissions.”

Critical Finding:

“If the Appellant had given cash discounts, and had recorded the same in the usual way, there would not have been any basis for the Respondent to re-characterise them as commissions.”

Exhibit FM3 Significance:

The Trade Terms Contract for Agents “governs the relationship between the Appellant and its Distributors.” The document itself describes them as “agents.”

“The Appellant, by its exhibit FM3 disguised those commissions as discounts.”

Authority: Section 34 of Act 896 (General Anti-Avoidance Rule) permits Commissioner-General to re-characterize arrangements whose form does not reflect substance.

Issue 2 – Tax Invoice Requirements

Court’s Finding: Tax laws DO require discounts to be stated on sales/tax invoices.

L.I. 2243 Applicability:

Appellant argued L.I. 2243 (effective 3rd August 2016) doesn’t apply to transactions before that date (audit covered 2014-2016).

Court’s Response – Retrospective Application:

From Fenuku & Anor v John-Teye & Anor [2001-2002] SCGLR 985:

“The general rule was that statutes, other than those which are merely declaratory, or which related to matters of procedure or of evidence, were prima facie prospective… In general, the Courts would regard as retrospective any statute which operated on cases or facts coming into existence before its commencement in the sense that it affected, even if for future only, the character or consequences of transactions purely entered into.”

Procedural Law is Retrospective:

“Going by the general position that procedural law is retrospective, then L.I 2243 which is procedural in nature, and which has its basis on the substantive tax law, can operate as such.”

Pre-L.I. 2243 Requirements:

Even before L.I. 2243, Section 41(1) of Act 870 required issuance of tax invoice/sales receipt.

“If a tax invoice is to be issued, then the entire transaction must be recorded and the applicable taxes indicated. For instance, if a cash discount is given at the time of sale, it affects the gross amount of the transaction and this must reflect on the tax invoice.”

Critical Finding:

“The true position is that even before the coming into force of L.I 2243, discounts were to be recorded on tax invoices as they affected sales made. A taxable person could not pick and choose what to put on a tax invoice.”

Appellant’s Failure:

Appellant failed to show:

• Cash discounts recorded in tax invoices before or after L.I. 2243
• Price adjustments after payment of “discounts”

Conclusion:

“The irresistible conclusion is that the commissions were disguised as discounts to avoid the payment of withholding tax by the recipients, i.e. the Distributers or agents of the Appellant.”

Issue 3 – Withholding Tax Liability

Statutory Framework:

Act 592 (for earlier period):

• Section 87(1): Withholding agent must pay withheld tax within 15 days
• Section 88(1): Agent who fails to withhold personally liable for amount; entitled to recover from payee

Act 896:

• Section 116(1)(v): Resident person shall withhold tax on commission to sales agent
• Section 117(3): Agent who fails to withhold shall pay tax that should have been withheld
• Section 117(5): Agent entitled to recover from withholdee after payment

Court’s Finding:

GH₵7,655,676.22 represents taxes Appellant should have withheld from commissions but failed to withhold by “camouflaging the payments as ‘discounts.'”

“After unmasking the true nature of the payments made by the Appellant to its distributors and re-characterising the same, the Appellant is enjoined to pay the assessed withholding taxes for the Tax Audit period.”

Appellant’s Rights:

Appellant entitled to exercise rights under Section 117(5) – recover from distributors/agents after payment.

Issue 4 – Practice Notes

Practice Note dated 6th October 2016:

Defines “service” and types of services subject to withholding tax. Does NOT include “discounts.”

Court’s Finding:

Appellant correct that discounts not listed as subject to withholding tax and are not “service fees.”

HOWEVER:

“The practice Note cannot override the provisions in Section 116 (1) (a) (v) of Act 896, under which ‘commissions to agents’ are subject to withholding tax.”

Critical Distinction:

Respondent did NOT disallow discounts. Respondent re-characterised the cash payments as commissions.

“The Respondent has not disallowed discounts, it re-characterised the cash payments as commissions. The Respondent duly re-characterised the masqueraded discounts, as commissions, and treated them as any other commissions payable to agents. By law, such commissions are subject to withholding tax.”

Constitutional Arguments Rejected

Article 23 & 296 – Failure to Act Fairly:

Court rejected argument that Respondent acted unfairly or capriciously.

Court’s Finding:

• Respondent acted within Section 34(1) of Act 896 (re-characterisation power)
• Appellant duly notified via Tax Audit report
• Appellant exercised right of objection under Section 42 and given hearing
• Appellant could not adduce cogent reasons to offset Tax Audit findings

Tax Avoidance Scheme

Court’s Finding:

“The arrangement between the Appellant and its Distributors/Agents is indeed a tax avoidance scheme in favour of the recipients of the monthly payments.”

Elements Established:

1. Payments labelled “discounts” but didn’t result in price reductions
2. Not recorded on invoices or in books as discounts
3. Distributors restricted to fixed prices (no markups)
4. Payments based on volume at month-end
5. Purpose: Avoid withholding tax obligations

Burden of Proof

Section 92(1) of Act 915:

Burden on taxpayer to show compliance with tax law provisions.

Court’s Finding:

“The Appellant has not demonstrated that it has complied with Section 116 (1), (v) of Act 915, and so the burden of proof has not been discharged. Rather, the Respondent has satisfied the court that its acts in re-characterising the arrangement between the Appellant and its Distributors/Agents is in compliance with the tax law.”

RATIO DECIDENDI

1. Purposive Interpretation – Payment Requirements: When Section 42(5)(b) of Act 915 requires 30% payment for objection and Order 54 Rule 4 requires 25% for appeal, a taxpayer who already paid 30% need not pay additional 25%. The two provisions must be interpreted purposively as requiring a single payment of the higher percentage to access either administrative or judicial review.
2. Substance Over Form – Tax Characterization: The substance of a transaction, not its label, determines tax treatment. Payments described as “discounts” but which do not result in actual price reductions and are not recorded as discounts in accounting books are properly re-characterized as commissions if they meet the characteristics of commission payments.
3. Elements of Genuine Discount: For a payment to qualify as a genuine discount exempt from withholding tax:
   • Must result in actual price reduction
   • Must be reflected on sales invoices
   • Must be properly recorded in accounting books with appropriate adjustments
   • Cannot be mere end-of-period payments based on volume
4. General Anti-Avoidance Rule Application: Under Section 34 of Act 896, the Commissioner-General has authority to re-characterize arrangements that constitute tax avoidance schemes, particularly where form does not reflect substance. This power extends to arrangements where one type of payment (commission) is disguised as another (discount) to avoid tax obligations.
5. Tax Invoice Requirements – Retrospective Application: Procedural tax regulations (such as L.I. 2243 on tax invoice requirements) apply retrospectively because they relate to matters of procedure. Even before specific regulations, substantive tax law requiring tax invoices implicitly required all transaction elements including discounts to be recorded.
6. Withholding Tax Liability: A withholding agent who fails to withhold tax by disguising commissions as discounts is personally liable for the tax that should have been withheld, but is entitled to recover the amount from the payees (distributors/agents) after payment to GRA.
7. Practice Notes Subordinate to Statute: Practice notes issued by the Commissioner-General under Section 100 of Act 915 cannot override express statutory provisions. While practice notes confirm discounts are not subject to withholding tax, they do not prevent re-characterization of payments that are not genuine discounts.
8. Burden of Proof in Tax Appeals: Under Section 92(1) of Act 915, the taxpayer bears the burden of proving compliance with tax law provisions. Failure to produce evidence of proper discount treatment (invoice records, accounting adjustments) results in failure to discharge this burden.
9. Fixed Pricing Indicates Agency: Where a manufacturer controls the prices at which distributors sell products to end customers, preventing distributors from adding their own margins, and pays monthly amounts based on sales volume, this indicates an agency relationship rather than independent distribution, and the payments constitute commissions, not discounts.
10. Strict Construction – Tax Statutes: Tax statutes must be strictly construed. However, strict construction does not prevent proper application of anti-avoidance provisions to arrangements whose form does not reflect their substance.