Shell Petroleum Development Company Of Nig. Ltd Vs Federal Board Of Inland Revenue (1996)
LAWGLOBAL HUB Lead Judgment Report
This case arose from the decision of the Board of Inland Revenue, the respondent herein, not to allow deductions from the Petroleum Profits Tax for 1973 payable by the appellant in respect of exchange losses, Central Bank of Nigeria commissions and scholarships expenses incurred by the appellant.
The facts of the case are not in dispute. They are as follows. The appellant was registered in Nigeria as a company. Its main object was to engage in petroleum operations. Its yearly profits, therefore, became taxable by virtue of the provisions of the Petroleum Profits Tax Act. 1959 (now Cap. 354 of the laws of the Federation of Nigeria, 1990). Section 8 of the Act provides:-
‘8. There shall be levied upon the profits of each accounting period of any company engaged in petroleum operations during that period a tax to be charged, assessed and payable in accordance with the provisions of this Act.’
Pursuant to these provisions and those of Section 28 of the Act which provides in subsection (1) thereof as follows:-
‘(1) Every company which is or has been engaged in petroleum operations shall for each accounting period of the company, make up accounts of its profits or losses, arising from those operations, of that period
The appellant submitted its Petroleum Profits Tax returns for the accounting period of 1st January, 1973 to 31st December, 1973 to the respondent (Exhibit 39). The returns contained the revised tax assessment which in the view of the appellant was payable by it. The respondent disallowed the following 4 items from the returns, which were incurred by the appellant, on the ground that such expenses were not deductible for the purpose of computing chargeable tax under the provisions of the Petroleum Profits Tax Act, 1959:-
- Exchange losses on payment of Petroleum Profits Tax N3, 355,091.00
- Central Bank Commission for payment of Petroleum Profits Tax 2,915,429.00
- Scholarships expenses 257,550.00
- Gifts and donations 61,222.00
The appellant objected to the exclusion of these items in the computation made by the respondent for the tax payable on the adjusted profits for the period in question. They, therefore, appealed to the Federal Body of Appeal Commissioners.
At the hearing, the appeal in respect of the 4th item on ‘Gifts and Donations’ was abandoned by the appellant. In its ruling the Federal Body of Appeal Commissioners dismissed the appellants appeal and confirmed the revised assessment made by the respondent.
The appellant appealed further to the Federal High Court (Ayinde, J.) against the ruling of the Federal Body of Appeal Commissioners. The Federal High Court allowed the appeal in respect of exchange losses and Central Bank of Nigeria Charges, but dismissed the appeal against scholarships expenses as follows:-
‘In accordance with Section 35(8) of the Petroleum Profits Act (sic) 1959. I hereby annul the tax assessments on exchange losses of N3, 355.091 (Sic) and Central Bank charges of N2, 915, 429 (sic). I confirm the tax assessment on N257, 550 (Sic) scholarship expenses’
Both the appellant and the respondent were dissatisfied with the decision of the Federal High Court. They appealed to the Court of Appeal. The appellant, against the confirmation of the assessment on scholarship expenses and the respondent, against the annulment of the assessments on exchange losses and Central Bank of Nigeria charges.
In its judgment, the Court of Appeal (Akpata, Babalakin, JJ.C.A. as they were then, and Awogu, J.C.A.) dismissed the appeal by the appellant and allowed the appeal by the respondent and thus in effect setting aside the decision of Ayinde, J. in respect of Exchange Losses and Central Bank of Nigeria charges.
The appellant appeals to this court. As the 3 items of assessment were treated separately by the lower court and in the parties briefs of argument, I too propose to deal with them accordingly. But before doing so I would like to make some observations on the briefs of argument filed by the parties. It is well settled, as a rule of practice, that a well written brief of argument should be brief and concise, containing concise statement of the facts of the case which are material to the consideration of the questions presented for determination by the court. It should also contain direct, concise and succinct statement of the argument in the appeal. But what are we confronted with in this appeal? The appellants brief consists of 70 pages while the respondents brief is made up of 435 pages (including the preliminaries). Surely these are, with respect, far from the ideal. Rather than assist the Court to easily follow the argument in support of the questions for determination, they helped in making the arguments complex. Had it been the circumstances herein were ordinary, we would have no difficulty in striking out the briefs for offending the rules. Be that as it may, I consider the questions raised by the appeal as important and will, therefore, endeavour to consider the argument contained in the briefs as best as I can, but not without trepidation. The worse culprit in this respect is without doubt learned counsel for the respondent
- Exchange Losses
The issues for determination formulated by the appellant in this regard are as follows:
“(i) What is the effect of the agreement between Shell and the Federal Government on the liability of Shell to pay instalments of petroleum profits tax.
(ii) Whether the exchange losses incurred by Shell were ‘outgoings and expenses wholly, exclusively and necessarily’ incurred for the purpose of its petroleum operations (as found by the Federal High Court) or whether they are expenses incurred in respect of tax on its profits (as found by the Court of Appeal).
While those formulated on behalf of the respondent are 15 in number even though the appellant filed only 6 grounds of appeal. Clearly this defeats the purpose of formulating questions for determination, which is to enable parties to an appeal to narrow the issues contained by the grounds of appeal in the interest of accuracy, clarity and brevity. A proliferation of questions for determination ought to be discouraged – See Ogbuanyinya v. Okudo (No.2) (1990) 4 NWLR (Pt. 146) 551 and Carlen (Nig.) Ltd v. Unijos (1994) 1 NWLR (Pt.323) 631 at p. 664 A-D per Onu, JSC. Therefore, in determining the questions here I will ignore the issues formulated by the respondent and rely on those by the appellant.
It is common ground between the parties to this appeal that the tax payable by the appellant is assessable in Naira and that by the provisions of the Petroleum Profits Tax Act such tax if not paid constitutes a debt owed by the appellant, which is payable to the respondent Section 36 subsection (1) of the Petroleum Profits Tax Act provides:
‘(1) The Board shall cause to be served personally on or sent by registered post to each person whose name appears on an assessment in the Assessment List a notice of assessment stating its accounting period and the amount of its chargeable profits, assessable tax and chargeable tax charged and assessed upon the company, the place at which payment of the tax should be made, and informing such company of its rights under subsection (2).’
In compliance with these provisions the Board of Inland Revenue sent to the appellant a notice of assessment of tax in respect of the accounting period for the year 1973. The notice reads thus:
‘Federal Inland Revenue Department,
Private Mail Bag 12672,
Reference No. PC.1Nol.4/2/1973/163
18th December, 1978.
The Finance Manager,
Shell-BP Petroleum Development Company of Nigeria Limited,
2122 Marina, P. M. B. 2418,
Petroleum Pmts Tax 1973
I have carefully considered your grounds of objection to the above notice of assessment and have revised my computation of the profits you objected against by allowing the following items of expenses:
Education Assistance 14311,664
Ex – gratis, Payment 17,148
The revised tax computation is as follows:
Chargeable Profits as per my letter dated 26/7/78 N841, 783,332
Less Expenses now allowed as above 328,812
Chargeable Profits (revised) 841,454,520
Assessable Tax at 55% N462, 799,986
Less Section 17 deductions 8,644,200
Chargeable Tax N454, 155,786
Less Tax already paid 450,531,675
Balance Payable or Due N3,624,111
The relevant notice of revised assessment and of refusal to amend the revised assessment are attached herewith to enable you settle the tax due without delay.
(J. O. Akinmola)
Chief Inspector of Taxes &
Although by the provisions of section 36 subsection (1) of the Petroleum Profits Tax Act the Board of Inland Revenue is obliged to state the place where the payment of tax should be made, there are a number of formal agreements entered into by the Federal Government and the appellant, which alter the manner and indeed the place where the tax assessed was to be paid. The first of such agreements is Exhibit 1, dated the 25th day of April, 1967. The second is Exhibit 2, dated the 10th day of May, 1971 and the third is Exhibit 3 dated the 5th of June, 1972. There is also Exhibit 4 which is a letter addressed to companies engaged in petroleum operations. The letter was dated 15th March, 1968. It reads as follows:-
‘Ref. No. F. 122151255
Federal Ministry of Finance,
M. B. 12195,
Lagos. 15th March, 1968.
The General Manager,
The Shell-BP Petroleum Development
Company of Nigeria Limited,
Philips Petroleum Company,
Third Floor Block ‘A,”
8/10, Broad Street,
Tenacco Oil Company of Nigeria,
O. Box 2119
8/10, Broad Street,
Nigerian Gulf Oil Company,
19, Tinubu Square,
The General Manager,
Mobil Exploration Nigeria Incorporation,
O. Box 31, Industry Road,
The Resident Manager,
SAFRAP (Nigeria) Limited,
Western Nigeria Development Corporation Building,
21 Wharf Road,
NEW PROCEDURE FOR PAYMENTS OF ROYALTIES, PETROLEUM PROFITS TAX AND RENTS TO THE FEDERAL GOVERNMENT
I am directed to inform you that with effect from the 1st of January, 1968 and until further notice all payments due to the Federal Government of Nigeria from your company in respect of the three items mentioned above should be made to the account of the Central Bank of Nigeria with the Bank of England. As the amounts due are normally expressed in Nigerian Pound, the payer/company must ensure that enough Sterling is made available to make Nigerian Pound equivalent of the amount due from the company.
This letter supersedes all previous correspondence which your company has received from any Federal Government Department regarding the method and procedure for these payments.
Exchange Control Officer’
By reason of the agreements between the appellant and the Federal Government (Exhibits 1, 2 and 3) and the above letter (Exhibits 4) payments of petroleum profits tax made by the appellant, at all the times material to this case, were made in Pound Sterling into the account of the Central Bank of Nigeria with the Bank of England at London. This resulted in the appellant converting United States dollars into Naira and then converting Naira into Pound Sterling in order to be able to meet its obligation to the Federal Government. The conversion from United States dollars to Naira became necessary because the former was and still is the currency in which sale of petroleum is made. It is because of the conversions which the appellant had to undertake that it claimed that it incurred losses. Hence its demand that the losses should be deductible for tax purposes.
Section 10 subsection (1) of the Petroleum Profits Tax Act 1959 provides:
“(1) In computing the adjusted profit of any accounting period from its petroleum operations there shall be deducted all outgoings and expenses wholly, exclusively, and necessarily incurred, whether within or without Nigeria, during that period by such company for the purpose of those operations, including but without otherwise expanding or limiting the generality of the foregoing-
Furthermore clause 4 of Exhibit 3 reads thus:
“4(a) For purposes of the arrangements under which the company carries on its operations in Nigeria, posted prices stated in U.S. Dollars with respect to any complete or partial month of petroleum operations subsequent to the Effective Date shall be converted into Nigerian Currency at a rate of exchange equal to the arithmetic average as certified by the Central Bank of Nigeria of the mean of the buying and selling rates in respect of telegraphic transfers for U.S. Dollars to Nigerian Currency quoted by the Central Bank of Nigeria at 10:30 a.m. G.M.T. on each day when such Bank is open during such complete or partial month.
(b) The Nigerian Currency amounts determined under paragraph 4(a) above shall be the basis for determining the companys tax and royalty obligations.
(c) For purposes of satisfying obligations due to Government as stated in Nigerian currency and amount of U.S. Dollars or Pounds Sterling, as determined below shall be deposited with the Federal Reserve Bank of New York or the Bank of England respectively for the account of the Central Bank of Nigeria When such currency of deposit is U. S. Dollars there shall be deposited to the account of the Central Bank of Nigeria an amount of U.S. Dollars determined by converting such Nigerian Currency obligation into U.S. Dollars by using a rate of exchange equal to the arithmetic average as certified by the Central Bank of Nigeria of the mean of the buying and selling rates in respect of telegraphic transfers for U.S. Dollars to Nigerian currency quoted by the Central Bank of Nigeria at 10.30 a m. G.M.T. on each day when such Bank is open during the thirty day period ending on the 20th day of the month of the date of payment.
(d) When such currency of deposit of paragraph 4(c) above is Pounds Sterling, Nigerian currency obligations shall be converted firstly, into U.S. Dollars in accordance with the second sentence of Paragraph 4(c) above and such U.S. Dollar amount determined hereunder will be converted, secondly, into Pounds Sterling by using a rate of exchange equal to the arithmetic average as certified by the National Westminster Bank, London of the mean of the buying and selling rates in respect of telegraphic transfers for U.S. Dollars to Pounds Sterling quoted by the National Westminster Bank, London at 10:30 a m. G.M.T. each day when the London foreign exchange market is open during the third day period ending on 20th day of the month of the date of payment’
The question which arises is: should the determination of the deductions due to the appellant be limited to the interpretation of these provisions of the Act or should it be extended to the formal agreements (that is Exhibits 1, 2 and in particular 3 and also the letter Exhibit 4) as well? The Federal Body of Appeal Commissioners held in its ruling that the issue dealt exclusively with the interpretation of sections 2, 8, 9, 10 and 11 of the Petroleum Profits Tax Act, 1959 and that Exhibit 3 could not apply to vary the provisions of the Act nor apply to the respondent which was not a party to it. The Body reasoned as follows:
‘Counsel for the appellant strongly contended before us that the charge losses incurred by the company were caused by the separate obligation of Shell B. P. vis-à-vis the Federal Government in compliance with the specific requirements of Clauses 4(c) and 4(d) of the 1972 Agreement, these losses were wholly, exclusively and necessarily incurred by the company for the purposes of its petroleum operations and consequently qualify as allowable deduction under the provisions of section 10(1) of the P.P.T.A. 1959. The losses were incurred because of the Compliance with the 1972 Agreement, which was not part of the P.P.T.A. nor can any agreement not properly enacted into the legal…………………. (blurred) the respondent was not a party to the Agreement. In which case it cannot be bound by it. Also the Agreement cannot override the law. Any of its provisions which is in conflict with the law will be ultra vires the law.’
On appeal to the Federal High Court from this ruling, Ayinde, J. set aside the ruling and held thus:
“……… it is obvious that the combined effect of the letter Exhibit 4 and the Agreements Exhibits 2, and 3 is to abrogate the previous arrangement whereby Petroleum Profit Tax was to be paid to the respondent in Naira in Nigeria and to substitute, by way of accord and satisfaction, an agreement whereby the appellants were obliged to pay their profit tax obligation in Sterling into the account of the Central Bank of Nigeria with the Bank of England. In other words, the obligation of the appellants to pay their petroleum profit tax in Naira in Nigeria was dissolved and discharged. In view of the foregoing, I agree with the learned counsel for the appellants that various sums paid in Sterling by the appellants into the account of the Central Bank of Nigeria as detailed in Exhibit 11 were not actually payment of the tax assessment of the appellants for the accounting period ending 31st December, 1973 but were accord and satisfaction of their tax indebtedness for the accounting period.
As stated in the pleadings of the appellants, I agree that the parties to the accord and satisfaction were the Federal Government to whom the tax debt was owed and the appellants who owed the debt. I also agree that the fact that the respondent, Federal Beard of Inland Revenue (which is only an agency of the Federal Government for the assessment and collection of tax) was not a party to the agreement which constituted the accord and satisfaction is irrelevant.
Having found that what the appellants paid in Sterling in London was accord and satisfaction of their tax indebtedness in Nigeria, I will now consider whether the amounts paid were expenses wholly, exclusively and necessarily incurred for the petroleum operations of the appellants which according to the Section 10(1) of the PPTA should be deducted from the adjusted profit of the appellants for 1973 accounting period.
At the risk of being considered to be unduly repetitive, I will recite here again the definition of Petroleum Operations. Petroleum operations according to Section 2 of the PPTA, 1959 means
‘The winning and transportation of petroleum or chargeable oil in Nigeria by or on behalf of a company for its own account by any drilling, mining, extracting or otherlike operations or process not including refining at a refinery, in the course of a business carried on by the company engaged in such operations and all operations incidental thereto and any sale of or any disposal of chargeable oil by or on behalf of the company.’
I agree with the submission of the learned counsel for the appellant that, if the appellants as an oil company (and like other oil companies) had not been required by the Agreement evidenced by Exhibits 2, 3 and 4 to pay their tax indebtedness in Sterling they would have incurred no losses. Apart from confirming the arrangement in Exhibit 4 whereby the appellants were directed to pay their tax liability in Sterling in London, the Agreements Exhibits 2 and 3 also regulated the petroleum operations of the appellants.
In view of the foregoing, I am of the view that the expenses incurred by the appellants in complying with the directive in Exhibit 4 that they should pay their tax liability in Sterling into the account of the Central Bank of Nigeria with the Bank of England which directive was confirmed by the Agreements, Exhibits 2 and 3, were expenses incurred wholly exclusively, and necessarily for the purpose of petroleum operations of the appellants.’
The respondent, being dissatisfied with this decision, appealed against it to the Court of Appeal. In allowing the appeal, the court below reversed the decision of the Federal High Court and held as follows, as per Awogu, J.C.A. who wrote the lead judgment:-
‘Petroleum operations are defined in Section 2 of the P.P.T. Act to mean:
The winning or obtaining and transportation of petroleum or chargeable oil in Nigeria by or on behalf of a company for its own account by any drilling, mining, extracting or other like operations or process, not including refining at a refinery, in the course of a business carried on by the company engaged in such operations and all operations incidental thereto, and any sale of or any disposal of chargeable oil by or on behalf of the company.’
By this definition, the two items in issue can only properly come under ‘all operations incidental thereto.’ It is difficult however to conceive of exchange losses and Central Bank charges as ‘operations incidental to petroleum operations.’ Profits come under Section 9, but under Section 11(1)(f), no deductions shall be allowed in respect of ‘any amounts incurred in respect of any income tax, profits tax or other similar tax, whether charged within Nigeria or elsewhere.’ Finally, any deductible expenses must pass the W.E.N. Test. Thus, by no stretch of the imagination can the two items in issue be said to pass the W.E.N. Test when they were not in operations incidental thereto, under Section 2 of the Act. Perhaps only in the context of Exhibits 1, 2, 3, 4, can such an inference be drawn.’
After examining Exhibits 1, 2, 3 and 4 in the judgment, the learned Justice of the Court of Appeal concluded as follows:-
‘In other words, before Exhibit 3 of 5/6/72, Shell and the other five companies in Exhibit 4 had been paying their due tax abroad and in dollar or in sterling. Each company made the choice of whether to pay in dollar or in sterling. …………………………………………………… Indeed, Exhibit 3, in Clause 4(c), made it clear that for the purposes of ‘satisfying obligations due to the Government as stated in Nigerian currency, an amount of U.S. Dollars or Pound Sterling, as determined below, shall be deposited.’ It is therefore clear to me that the choice of payment in sterling was voluntarily made by Shell. If any doubt remains on the issue, Exhibit 6 clears it. It was written by Shell on 5/6/72 (in response to Exhibit 3) and states that the company elects pounds sterling as the currency of deposit.’ ………………………………….
Clearly, if Shell paid their tax in sterling abroad, as agreed, and the Board issued the necessary receipts in acknowledgement of the payments, how can it be argued that the payments did not discharge the tax obligations of the company? It was no longer open to the Board to approbate and reprobate. Ayinde, J. appears to have been right in so holding; but, was the issue really a matter of accord and satisfaction? ……………………………..
As I understand it, the position might have been different if Shell were compelled by the Federal Government to pay in sterling. In other words had Exhibit 4 been the only directive on the issue, common sense would have dictated that any expenses incurred as a result should be deductible. But Exhibit 4 led later to Exhibits 2 and 3, which then became the basis of this accord and satisfaction. Thus, if Exhibits 2 and 3 do not provide for deduction of expenses incurred, how can one of the parties unilaterally do so. The true purport of the accord and satisfaction is exemplified by Exhibit 11, where Shell as a result, made an excess payment of N3,671,274.84K (sic). Had this been a deficit as a result of the varying exchange rates, the Federal Government would have similarly absurbed (sic) the loss and, having regard to accord and satisfaction, cannot call upon Shell to make up the deficit……………………………………………….
Accordingly the appeal on Exchange Losses is allowed and the decision of Ayinde, J. on the deduction is hereby set aside.
”The appellant was aggrieved by this decision. It appealed before us and argued thus: The definition in section 2 of the Petroleum Profits Tax Act, 1959 of the expression ‘petroleum operations’ includes all operations that are incidental to petroleum operations. Therefore all activities of the appellant which are not strictly petroleum operations but which are activities occurring or liable to occur in connection with those operations are deemed to be ‘petroleum operations.” The section provides: ‘Petroleum operations’ means the winning or obtaining and transportation of petroleum or chargeable oil in Nigeria by or on behalf of a company for its own account by any drilling, mining, extracting or other like operations or process, not including refining at a refinery, in the course of a business carried on by the company engaged in such operations, and all operations incidental thereto and any sale of or any disposal of chargeable oil by or on behalf of the company.’
The appellant argued further that the agreement between it and the Federal Government, which it claimed to constitute an accord and satisfaction, is an agreement entered into by it in connection with its petroleum operations. Accordingly, the agreement, including the execution or performance of its terms, was incidental to the appellants petroleum operations and, therefore, by the definition of the expression ‘petroleum operations’ it should be deemed to be part of the appellants petroleum operations. It is contended that losses and charges incurred by the appellant in the discharge of its contractual obligations under the agreement in question are incurred for the purpose of petroleum operations. The appellant referred to the provisions of section 11 subsection (1) (f) of the Petroleum Profits Tax Act, 1959 which read:
’11.(1) Subject to the express provisions of this Act, for the purpose of ascertaining the adjusted profit of any company of any accounting period from its petroleum operations, no deduction shall be allowed in respect of –
(f) any amounts incurred in respect of any income tax, profits tax or other similar tax whether charged within Nigeria or elsewhere”; and contended that the payments made by the appellant in pound sterling were based upon the amount of debt payable in Naira owed to the Federal Government. It was then submitted that it was misconception in both law and fact for the Court of Appeal to regard such payments as tax, as envisaged under section 11(1) (t) of the Petroleum Profits Tax Act, 1959. It was contended further that section 11 (1) (f) clearly intended to disallow deduction of amounts paid in respect of income tax, profits tax and other similar taxes. We were, therefore, urged to hold that section 11(i) (f) does not prevent the deduction of exchange losses.
The respondent, in reply, submitted that the payment of tax is a mandatory statutory and constitutional obligation of all companies. To illustrate this, reference was made to sections 8, 15(1),16(1) and (2),17(1), 29(1) and 31(1) of the Petroleum Profits Tax Act, 1959 and sections 69,31(3)(a) and 76(I) and (6) of the 1979 Constitution (Cap. 62 of the Laws of the Federation of Nigeria, 1990). With regard to the provisions of section 10 subsection (1) of the Petroleum Profits Tax Act, 1959, it was argued that the phrase ‘outgoings and expenses wholly, exclusive and necessarily incurred, whether within or without Nigeria, for the purpose of petroleum operation of an Oil Company,” which the lower court tagged the ‘W.E.N. Test’ was not applicable to both Exchange Losses and Central Bank Charges as found by the Court of Appeal. This was so, because they were expenses incurred after profits had been earned and after the completion of the petroleum operations of the appellant. Nor were they incurred in the course or as a result of or within or during the business activities of the appellant. Again they were not expenses incurred on operations that were incidental to petroleum operations of the appellant. An English authority which was said to be the locus classicus on the applicability of the ‘W.E.N. Test’ was cited in support of the above contention of the respondent. It was Strong & Company of Romsey Limited v. Woodifield (Surveyor of Taxes) (1906) A.C. 448; 5 T.C. 215, per Lord Daveys at pp. 453 and 220 respectively.
Referring to the agreements between the appellant and the Federal Government and the latter s letters (i.e. Exhibits 1, 2, 3,4 and 6), the respondent argued that the principle of accord and satisfaction being relied upon by the appellant had no bearing on its statutory and primary obligation to pay petroleum profits tax. It was argued further that the effect of Exhibits 2, 3, 4 and 6 was merely to modify the procedure for making the payment of the petroleum profits tax. Respondent contended that this modification came about by mutual agreement and did not in any way alter the ch
Other Citation: (1996) LCN/2660(SC)