Sheena Flowers (Pvt) Ltd and Charlotte Flowers (Pvt) Ltd and Jomawena (Pvt) Ltd and Luxaflor Roses (Pvt) Ltd and JH Butler Farms (Pvt) Ltd and Sarah Flowers (Pvt) Ltd and Millar Brothers (Pvt) Ltd v The Commissioner General, Zimbabwe Revenue Authority

### Preamble
HH 427-12
CASE N0. FA02/06
SHEENA FLOWERS (PVT)(LTD)
and
CHARLOTTE FLOWERS (PVT) LTD
---------


==============================

SHEENA FLOWERS (PVT)(LTD)
and
CHARLOTTE FLOWERS (PVT) LTD
and
JOMAWENA (PVT) LTD
and
LUXAFLOR ROSES (PVT) LTD
and
JH BUTLER FARMS (PVT) LTD
and
SARAH FLOWERS (PVT) LTD
and
MILLAR BROTHERS (PVT) LTD
versus
THE COMMISSIONER GENERAL
ZIMBABWE REVENUE AUTHORITY

HIGH COURT OF ZIMBABWE
HLATSHWAYO J
HARARE, 12 October 2012

SPECIAL COURT FOR INCOME TAX APPEALS

Mr. T Biti, for the appellants
Mr. A. B. C Chinake, for the respondent

HLATSHWAYO J: The above appeals are all centred on the decision of the respondent refusing to allow as permissible deductions in terms of section 15(2)(gg) of the Income Tax Act [Cap 23:06] certain expenditures incurred by the appellants. To the extent that there are minimal disputes of fact and to the extent that the issues of law raised are the same, it was agreed to consolidate the matters and to issue a single judgment covering all the appellants.

BACKGROUND

The background to these matters is generally set out in the appellant’s cases. Appellants are companies with limited liability according to the laws of Zimbabwe. Their main business is horticulture, focused on the growing of flowers and exporting cut flower stems to external markets. Many expenses are incurred in the process of exportation of the flowers, and these include special packaging, air-freight, port fees and agents’ commissions. It is a trade practice to employ marketing agents, for instance Lianchi Flower Exporters
 employed by appellants Millar Brothers Limited, who use their expertise to decide the best market destination for the flowers, organise the most appropriate method of transportation of such flowers and advise on selling arrangements. Such agents are employed on an informal basis without any long term agreement between the grower and agent, who is simply notified once any shipment has been dispatched. The rates of commission vary from agent to agent. The responsibility of the agent is focused on disposal of the shipment to prospective buyers, who in turn use the services of the agents to identify sellers and advise on their requirements on a regular basis. The flowers remain the property of the grower.

The respondent has objected to:

a) any deduction based on special packaging; b) air-freight and port expenses associated with export of flowers. This is so in particular in the case of *Luxaflor Roses (Pvt) Ltd*, and c) deduction of commission and marketing charges paid to agents. This is so in the majority of appellants.

In *Sheena Flowers (Pvt) Ltd, Charlotte Flowers P/L, Sarah Flowers P/L, Jomawena Enterprises and JH Butler Farms P/L* the objections were couched as follows: a) agent’s commission and marketing charges paid to agents were for the purpose of seeking markets for the flowers outside Zimbabwe and qualify for the double deduction;
b) airfreight charges are a necessary expense incurred for the purpose of increasing the demand for the flower exports and therefore qualify for the allowance. The costs are incurred to ensure that the flowers reach the overseas markets timeously and in an acceptable condition and thereby increasing the demand for the flowers.

The issue, therefore, is whether packaging expenses, air-freight costs, commissioning and marketing charges are acceptable charges for the purposes of section 15(2)(gg) of the Act.

The respondent accepted the above stating of the cases.


THE LAW

Section 15(2)(gg) allows the taxpayer the benefit of a deduction in respect of the amount of any export market development expenditure incurred by the taxpayer in the year of assessment, together with an amount equal to 100% of such expenditure, in other words, a double deduction. The term “export market development expenditure” is defined in this section as follows:

“For the purposes of this paragraph—

“export market development expenditure” means expenditure, not being expenditure of a capital nature, that is proved to the satisfaction of the Commissioner to have been incurred wholly or exclusively for the purpose of seeking opportunities for the export of goods from Zimbabwe or of creating or increasing the demand for such exports and, without derogation from the generality of the foregoing, includes expenditure for any one or more of the following purposes—

(i) research into, or the obtaining of information relating to, markets outside Zimbabwe;

(ii) research into the packaging or presentation of goods for sale outside Zimbabwe;

(iii) advertising goods outside Zimbabwe or otherwise securing publicity outside Zimbabwe for goods;

(iv) soliciting business outside Zimbabwe or participating in trade fairs;

(v) investigating or preparing information, designs, estimates or other material for the purpose of submitting tenders for the sale or supply of goods outside Zimbabwe;

(vi) bringing prospective buyers to Zimbabwe from outside Zimbabwe;

(vii) providing samples of goods to persons outside Zimbabwe;

“goods” means anything that has, in Zimbabwe, been manufactured, produced, grown, assembled, bottled, canned, packed, graded, processed or otherwise dealt with in such manner as the Commissioner may approve.

Mr Biti for the appellants submitted that the payment of agents and air-freight charges associated with export of flowers “creates and increases the demand for such exports”. In para 3.1.6 of his heads, he sought to establish the intention of the legislature in coming up with s 15(2)(gg) of the Income Tax Act and concluded that “the legislative intention is to provide an incentive to exporters who in fact are providing foreign currency to the state”. However, the respondent disagreed with this contention, maintaining that the intention of the legislature was to encourage the development of new export markets in addition to those export markets which already exists, or to create or increase the demand for such exports, again in addition that which already exists. Accordingly, *Mr. Chinake*, for the respondent, posited that the costs incurred by the appellants in exporting the flowers to the foreign markets do not fall within the definition of “export market development expenditure”. The airfreight costs, port charges, commission and marketing charges incurred by the appellants are costs which are simply incurred for the purposes of trade and therefore allowable in terms of s 15(2)(a).

The contention by the respondent is unassailable. In the absence of proof to the satisfaction of the Commissioner that the costs incurred in the export of flowers by the appellants was increased above the usual expense for the purpose of seeking opportunities in an export market or for the purpose of increasing demand, the expenditure cannot qualify for the double deduction.

Section 15(2)(a) provides that the deductions allowed shall be “expenditure and losses to the extent to which they are incurred for the purposes of trade or in the production of income except to the extent to which they are expenditure or losses of a capital nature”.

In the light of the above definition, it is clear that not every expenditure incurred in the export of goods qualifies for the double deduction. The s.15(2)(gg) definition does not create or constitute an “export allowance” in the sense that any expense incurred for the purpose or connected with selling of goods in a foreign country qualifies for this allowance. This appears to be the reasoning in submissions made on behalf of the appellants, and in this regard they are made in erroneous appreciation of the clear provisions of the Income Tax Act.

In my view, the basic distinction, therefore, is of expenditure falling either under s.15(gg) and that which can be subsumed under s.15(2)(a). It is conceivable that a given expenditure might be partially for export development (s.15(2)(gg) and partly for the purposes of trade or the production of income (s.15(2)(a)). Such expenditure would not qualify for the export development double deduction as it would not have been incurred “wholly or exclusively” for the purpose of seeking opportunities for the export of goods from
 Zimbabwe, or of creating or increasing the demand for such exports. Herein lies the second error in appellants’ submissions. There is a failure to prove or try and show how much of the expenditure, if any, was incurred “wholly or exclusively” for export development.

The distinctions outlined above were clearly made in the case of ‘C’ v Commissioner of Taxes 1973 (4) SA 448 by GOLDIN J who restricted allowable expenditure as that which is “incurred for the purpose of seeking opportunities for the export of goods or of creating or increasing the demand for such exports”, and refused to accept as export development expenditure any direct or indirect costs incurred in satisfying the existing demand of foreign buyers for the purpose of fulfilling existing orders for exports, unless if it is shown that such expenditure expanded the market, concluding at p.451 as follows:

“Application of this approach is by no means free from difficulties and borderline cases will inevitably arise. But, generally speaking, expenses incurred for the purpose of obtaining an order or a contract in a foreign country would qualify for this allowance. Such expenses would usually be connected or concerned with opportunity or creating or increase in demand for export of goods. On the other hand, expenses incurred for the purpose of fulfilling an order or contract so obtained or entered into would not qualify for an allowance unless any item connected with the fulfilment of the contract can be proved to have been incurred for the purpose mentioned in the definition. For example, the expense of packing goods in fulfilling an export order would not qualify because it is an expense incurred for the purpose of fulfilling a contractual obligation and not for the purpose of obtaining the contract. But if the cost of packaging is increased above the usual expense involved because more expensive material is used or methods adopted for a purpose mentioned in para.(a) of the definition, then the additional costs could fall within it.”

Mr Biti submitted that CIR v Wanderag Asbestos (Pvt) Ltd 1992, 57 SATC 123 accepts implicitly the issue of commission as a legitimate export market development expenditure. In that case the taxpayer agreed to supply all asbestos it mined to a local competitor for export. The competitor then fizzled the asbestos and blended it with its own. The mixed asbestos was exported through the competitor’s marketing structure for which the taxpayer paid the competitor a selling commission based the asbestos delivered to it. The selling commission was allowed as a legitimate “expenditure incurred directly for the procurement of orders for goods exported”. The submission is highly persuasive that by parity of reasoning, the payment of commission to agents in casu is an expenditure incurred directly for the procurement of orders for goods exported.

CONCLUSION


It has not been shown that packaging and airfreight expenses were wholly and exclusively incurred for the purposes spelt out in section 15(2)(gg). It appears to me that they were incurred for the purpose of fulfilling already existing orders, and, thus, would not qualify for the double deduction. The agents’ commission and marketing charges, however, are, on the strength of authorities discussed above, expenditures incurred wholly for the procurement of orders for the goods exported, and, thus, qualify for the double deduction. As the appeal has succeeded only in part, it is proper that each party bears its own costs.

In the premises, the appeal succeeds in part. The disallowance of packaging, airfreight and port expenses is upheld. The agents’ commission and marketing charges, however, do qualify for the double deduction in terms of s 15(2)(gg). Each party shall bear its own costs.

Honey & Blanckenberg, Appellants’ legal practitioners
Kantor & Immerman, Respondent’s legal practitioners,
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