Aluminium Industries Aktien Gesellschaft V. Federal Board Of Inland Revenue (1971)
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Aluminium Industries Aktien Geselschaft (hereinafter referred to as “Appellant Company”) was assessed by the Federal Board of Inland Revenue for tax in the 1962-1963 year of assessment in the sum of 1,900 pounds, in the 1963 – 1964 year of assessment in the sum of 3,000 pounds and in the 1964 – 1965 year of assessment in the sum of 6,428 pounds, and appealed against that assessment to the Appeal Commissioners who by a majority on December 20th, 1968 allowed the appeal and discharged the assessment, though a minority of two of the appeal commissioners dissented from the decision of the majority. The Federal Board of Inland Revenue then appealed to the High Court, Lagos by virtue of the provisions of section 59 of the Companies Income Tax Act, 1961 (No. 22 of 1961). As no rules had been made under section 59(10) of that Act by the Chief Justice of the Lagos High Court, by virtue of that sub-section the Income Tax Appeals (Lagos) Rules (Cap. 85) applied. Rule 5(2) of those rules provides for the form and contents of the grounds of appeal and reads:
“(2) The grounds of appeal shall set out concisely in separate paragraphs the relevant facts (but not the evidence by which they are to be proved) or any point of law, or both, upon which the appellant intends to rely in support of his appeal and the concluding paragraph shall, where the appeal is against an assessment, set out-
(a) the amount of the income shown on such assessment and upon which tax has been assessed, and also the amount of the tax as assessed and the identification number of the assessment, and
(b) the amount of the income upon which the appellant considers the tax should have been assessed, and the amount of the tax thereon payable, which the Court is asked to find and adjudge as being the proper amounts:
Provided that this paragraph shall be read where necessary, subject to the modifications set out in rule 20.”
Rule 8 requires a respondent to file an answer, and rule 15(1) reads:
“15(1) Subject to the express provisions of section 61 of the Act and of these Rules, the practice and procedure of the Court in relation to an appeal under the provisions of these Rules shall be assimilated as nearly as may be to the practice and procedure of the Court in the exercise of its civil jurisdiction as if the appellant and the respondent were respectively the plaintiff and the defendant in an action, and the civil procedure rules of the Court for the time being in force shall apply with such modifications as may be necessary.”
The Federal Board of Inland Revenue accordingly filed amended grounds of appeal and in paras. 1 to 11 thereof set out the following particulars:
“1. The respondent company, Aluminium Industries A.G. (hereinafter referred to as ‘the company’) is a limited liability company registered and resident in Switzerland. 35;
- The principal activities of the company are the production of aluminium and manufacture of aluminium products.
- The company is not registered in Nigeria under the Companies Decree, 1968 and has no place of business in Nigeria but it is the beneficial owner of all the issued share capital of the Aluminium Manufacturing Company of 40 Nigeria Limited (‘Alumaco’), a company incorporated in Nigeria and enjoying pioneer status, whose principal activities are the manufacture and sale of various aluminium products.
- The respondent company’s investment in Alumaco from the time of its incorporation in January, 1960 to December 31st, 1963 amounted to 100,000 pounds in share capital, subscribed mainly in cash by bank transfers from Switzerland, and approximately 421,330 pounds on current account, comprising expenditure incurred outside Nigeria on behalf of Alumaco. Of this 421,330 pounds, amounts totalling 330,000 pounds were transferred from current account to loan account during the three years to December 31st, 1963.
- The decision to transfer part of the current account to a loan account was originally reached at a meeting held in Zurich on December 21st, 1961 at which it was also decided that the loan account would carry interest at 5% per annum.
- The decisions reached at this meeting were confirmed in writing by the company to Alumaco on December 26th, 1961. No formal agreement was entered into between the parties.
- It was agreed between the parties that the loan granted is a loan in Swiss francs to be repaid in that currency.
- Interest was charged by the appellant company to Alumaco in the following amounts: for the year to December 31st, 1961, SF57,475 interest equals 4,750 pounds; for the year to December 31st, 1962, SF90,570 interest equals 7,500 pounds; for the year to December 31st, 1963, SF121,000 interest equals 10,000 pounds.
- The Federal Board of Inland Revenue, the body established by law under the Companies Income Tax Act, 1961 as the lawful authority charged with the due administration, assessment and collection of tax under the income tax acts, assessed the company to tax on the interest payable by Alumaco to the company under the deeming provisions to the charging section of the Companies Income Tax Act, 1961, and appointed Alumaco as the agent for the purpose of collection of the tax due from the company.
10.The assessments by the appellant were made as follows:-
Assessment Year of Tax Profit Date of refusal
Number Assessment Assessed Assessed to amend
LCBA 142 1962/1963 1,900 4,700 7th Nov. 1965.
LCBA 143 1963/64 3,000 7,500 7th Nov. 1965.
LCBA 90 1964/65 6,428 16,070 7th Nov. 1965.
11.The Company having objected to the assessments and notices of refusal to amend the said assessment having been issued by the appellant, the respondent company appealed against the said assessment to the body of Appeal Commissioners on the ground that the interest payable to it by Alumaco were not derived and cannot be deemed to be derived from Nigeria because it carried on no trade or business in Nigeria.”
These were admitted in the answer of the appellant company, which was at that stage the respondent.
The effect therefore of the rules to which we have referred was to treat the amended grounds of appeal and answer as pleadings, and the Federal Board of Inland Revenue is, of course, bound by them, and as can be seen from para. 9 of the amended grounds of appeal which we have quoted, the Federal Board of Inland Revenue rested its case on the “deeming provisions to the charging section of the Companies Income Tax Act, 1961,” which section is not disputed on either side is section 17 of that Act, which at the material time read:
“17. The tax shall, subject to the provisions of this Act, be payable at the rate hereinafter specified for each year of assessment upon the profits of any 45 company accruing in, derived from, brought into; or received in, Nigeria in respect of –
(a) any trade or business for whatever period of time such trade or business may have been carried on;
(b) rent or any premium arising from a right granted to any other person for the use or occupation of any property;
(c) dividends, interest, discounts, charges or annuities;
(d) any source of annual profits or gains not falling within the preceding categories;
(e) any amount deemed to be income or profits under a provision of this Act or, with respect to any benefit arising from a pension or provident fund, of the Income Tax Management Act, 1961:
For the purposes of this section, interest shall be deemed to be derived from Nigeria if –
i. there is a right to payment of the interest in Nigeria; or
ii. the interest is by deed, will or otherwise charged upon or reserved out of real or personal estate situate in Nigeria the property of the person paying the same, or as a personal debt or obligation by virtue of any contract which is entered into in Nigeria; or
iii. in the case of money lent to a Nigerian company, the loan is evidenced by mortgage, debenture, loan or other stock, whether secured or unsecured, issued by the company in recognition of its debt.”
A further deeming provision: “(iv) interest is payable on money lodged at interest in Nigeria” was inserted by the Income Tax (Amendment) Decree, 1966, but whether or not that provision would have affected the result here does not arise as it was not in force at the time in question for these assessments.
The case accordingly as pleaded fell within a narrow compass and what the court had to determine was whether by virtue of the deeming provisions the appellant company was liable to tax. As the Federal Board of Inland Revenue in fact, as was conceded by Mr. Ojosipe who represented the Board before us, relied only on deeming provision (i), the issue before the court was confined to determining whether the appellant company had “a right to payment of the interest in Nigeria”, because if so the interest was deemed to be derived from Nigeria and consequently taxable under section 17. Again it was not disputed, because the paragraph of the amended grounds of appeal which we have already quoted was admitted by the appellant company, that the interest arose from a liability incurred by the Nigeria Company, Alumaco, with the appellant company in Switzerland and which resulted in it being agreed between the two companies that a sum of 300,000 pounds should be transferred to a loan account in Zurich, Switzerland which was to bear interest at the rate of 5% per annum, and that the loan was in Swiss francs and was to be repaid in that currency. It was also not disputed that the appellant company was a Swiss company, and was non-resident in Nigeria, as the fact that it was the beneficial owner of the share capital in Alumaco did not make the Swiss company carry on business here as the Aluminium Manufacturing Company of Nigeria Limited was a separate company to the appellant company. In the Lagos High Court Sowemimo, J. gave judgment for the Federal Board of Inland Revenue and allowed the appeal, holding that the interest in question was subject to tax, and in his judgment he said:
”There is no doubt that Alumaco had paid the 5% interest agreed upon to the respondents. What has to be decided is whether Alumaco as the agent of the respondent is liable to the payment of tax on the interest paid to the respondent. The interest is derived from the profits made by Alumaco in Nigeria. Such profits are taxable. Alumaco is a subsidiary of the respondent company, the only difference being that Alumaco is a company registered in Nigeria, whereas the respondent is a foreign company. Since this foreign company had decided to invest money in a subsidiary company in Nigeria it cannot escape payment of tax on the interest derived from profits made on the investment in the subsidiary company merely because the ‘deeming’ provision of section 17 speaks of a right to a payment of interest in Nigeria. I am in complete agreement with the judgment of the minority that the Swiss company could sue Alumaco in Nigeria if they should default in paying the agreed interest. It is immaterial whether the agreed interest should be paid in Swiss fancs or not, the interest to be paid is out of the profits made in Nigeria. The money was invested in Nigeria therefore whatever profits are derived from such investment by way of interest must be subject to tax in Nigeria”.
Chief Williams for the appellant company argued before us that the contract here was to pay Swiss francs in Switzerland and the only place where the appellant company had the right to payment of such interest was in Switzerland. It was only in the Swiss courts that the appellant company could sue Alumaco and obtain judgment in Swiss currency. If the appellant company tried to sue Alumaco in Nigeria it could only do so for damages for failure to pay its debts or fulfil its obligations, and a Nigerian court could only award damages in Nigerian currency. He relied on New York Life Ins. Co. v. Public Trustee (1924) 2 Ch. 101 at p.120 where Atkin, L.J. (as he then was) said:
‘The ordinary rule in respect of a debtor is that the debt is situate where the debtor resides, because there the debt can be enforced against him by process of law”.
Further Chief Williams submitted that the general rule did not apply if there is a contract, as was the case here, to pay in a specific currency as Eve, J. indicated in In re Russian Bank of Foreign Trade (1934) Ch. 720 where at 738 he said:
“And although as a general rule the location of simple contract debts is the place in which the debtor is to be found, that rule, in my opinion, does not apply here, where the obligation is in terms to pay in sterling in London. I think the law to be applied is the English and not the Russian Law”.
Chief Williams also referred us to In re Claim by Helbert Wagg & Co. Ltd. (1959) Ch. 323, and in particular to the judgment of Upjohn, J. as he then was at page 342; but on examining that decision it is clear that Upjohn, J. was not following the statement of law by Eve, J. in In re Russian Bank for Foreign Trade, and he indicated that the judgment of Eve, J. proceeded on the basis that in that case the debtor resided both in Russia and in England so that the statement of Eve, J. fitted the facts of the case. Upjohn, J. in fact followed in that case the principle that the debtor must be sued where he resides, so it did not assist Chief Williams. It is further to be noted that the statement of law: “If the place of payment of a debt be stipulated it will be there situate, the general rule notwithstanding,” in Dicey’s Conflict of Laws, 6th ed., at 304 (1949) referred to by Upjohn, J. at page 342 (supra) no longer appears in the more recent Eighth Edition, 1967, at the page dealing with the situs of debts.
We have not been told what the law of Switzerland is and no argument was at any stage in the proceedings adduced in regard to it, so we are not in a position to know whether or not under Swiss law the appellant company could sue in Switzerland the Aluminium Manufacturing Company Nigeria Limited. What however is certainly clear to us is that the only place where the appellant company could recover in Swiss currency, assuming it would be able to sue, would be in Switzerland. The only place under the terms of the loan where the appellant company had the right to payment of interest was in Switzerland in Swiss francs and it had no right to payment of interest in Swiss francs in Nigeria and could not so sue in Nigeria. If an action was brought in Nigeria by the appellant company it would have had to be for breach of contract and the damages awarded could only be in Nigerian currency as Swiss currency could not be awarded in a Nigerian court: see In re United Rys. of Havana and Regia Warehouses Ltd. (1961) A.C. 1007 where at page 1059 Lord Radcliffe said:
“I take it myself that any contract to settle a debt in the currency of the country in which the settlement is to be made is a contract for the payment of money in the eyes of our law, and this notwithstanding the fact that, if action is taken in England for breach of the contract, the remedy sought must be damages, not debt, and those damages expressed in sterling for the purposes of judgment.”
and Lord Denning said on page 1067).
“So approaching the problem, it seems to me clear that the lease here was part and parcel of a composite transaction of which the primary aim was the raising of money in the United States on the security of railway equipment in Cuba. The contract was made in the United States, the money was raised there and was paid out there; and it was to be repaid there both as to principal and interest. The security alone was in Cuba. On these facts, as in the case of a mortgage, it can fairly be said that the debt ‘is considered to be the principal, and the securities are considered as adjuncts, depending, for their existence, on the existence of the debt.’ … So considered, it seems to me that, in the absence of any express clause determining the proper law, the transaction should be governed by the law of the country of the lender. A borrower who comes from a foreign country seeking a loan must expect to conform to the laws of the country to which he comes: for otherwise he is unlikely to get the loan. The fact that the security is situate abroad is only material as necessitating the observance of the foreign law in the pledging and enforcement of the security …
This being so, it is plain that the legislation in Cuba could not take away the right of the trust company to receive payment in the United States of rentals due under the lease; and the railway company was at all material times under an obligation to pay the rentals to the trust company in full in dollars in the United States of America, together with interest at 6 per cent from the time they became due.
Now the trust company comes to the courts in England to recover the sums in arrears and unpaid. And if there is one thing clear in our law, it is that the claim must be made in sterling and judgment given in sterling. We do not give judgments in dollars any more than the United States Courts give judgment in sterling.”
Indeed, Mr. Ojosipe for the Federal Board of Inland Revenue conceded that a Nigerian court could only give an award of damages in Nigerian currency, but he submitted that the appellant company as the creditor would be entitled to bring an action in Nigeria against Aluminium Manufacturing Compnay of Nigeria Limited (though he did not define what sort of action) if the latter company failed to pay the agreed interest, and that therefore there was a right to payment of interest in Nigeria under the first deeming provision of section 17 of the Companies Income Tax Act, 1961.
Our problem here is not to determine whether the appellant company could recover if it chose to sue the Aluminium Company of Nigeria Limited but to decide solely whether it had a right to payment of the interest in Nigeria, and in our view it had not. Its sole right under the contract was for payment in Switzerland in Swiss francs and it certainly could not sue in Nigeria for payment of interest in Swiss currency. The source of the obligation was the agreement made in Zurich between the appellant company and Aluminium Company of Nigeria Limited, and the obligation itself under that agreement was for Aluminium Company of Nigeria Limited to repay the principal and interest on the loan to the appellant company in Zurich in Swiss currency. Hence neither the source of the obligation nor the obligation itself arose in Nigeria, but in Swizterland: see National Bank of Greece S.A. v. Westminster Bank Executor & Trustee Co. (Channel Island) Ltd. in the Times Law Report, House of Lords, of 11th November, 1970. That being so, on that ground we must decide that the claim for tax could not be brought within the first deeming provision of section 17 of the Companies Income Tax Act, 1961 which only deems interest to be derived from Nigeria and so liable to tax if there is a right to payment of that interest in Nigeria.
As the case presented by the Federal Board of Inland Revenue rested solely on that deeming provision it should in our view have been rejected and we must accordingly allow this appeal and set aside the judgment of Sowemimo, J. of November 21st, 1969 in Lagos Suit No. LD/7A/69, together with his order of 30 guineas costs to the Federal Board of Inland Revenue, and we do order that the decision of the majority of the Appeal Commissioners be restored discharging the assessments for 1962-1963, 1963-1964 and 1964-1965 as shown in Assessment Notices LCBA 142, LCBA 143 and LCBA 90 in the sums chargeable income 4,750 pounds (tax payable 1,900 pounds), chargeable income 7,500 pounds (tax payable 3,000 pounds) and chargeable income 16,070 pounds (tax payable 6,428 pounds) respectively. The appellant company is entitled to costs in the High Court which we assess at 20 guineas and to costs of the appeal in this court.
Other Citation: (1971) LCN/1235(SC)