Mauritius Revenue Authority (The Director General) v Central Water Authority

2011 SCJ 253

Record No. 98100

IN THE SUPREME COURT OF MAURITIUS

In the matter of:

The Director General, Mauritius Revenue Authority

Appellant

V/s

Central Water Authority

Respondent

JUDGMENT

The respondent is solely responsible for the supply of water to domestic, industrial and
commercial consumers throughout Mauritius.

In order to supply water to its customers, the respondent purchases meters, meter
chambers and carries out infrastructural works. In so doing, it suffers input tax. Customers are
charged a nominal sum of Rs.10 as rental fee for the meters. They do not pay value added tax
on the consumption of the first 15 cubic metres of water. New customers have to pay a fee for
the installation and connection of water meters to their premises. They are not charged for the
infrastructural works done from the distribution main to their meters.
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On 4 August 1998, respondent, in a letter addressed to the appellant asked for

confirmation and clarification of whether or not value added tax (VAT) was applicable to meter
rent, Morcellement infrastructural works and on installation fees.

In a letter dated 28 August 1998, the appellant replied that meter rent and infrastructural
works were not subject to VAT.

On 25 January 2001, appellant issued a claim to respondent in the sum of Rs.7,796,994

representing tax due and payable in respect of taxable periods September 1998 to May 2000.
By 3 April 2001, the said sum was not yet paid, a notice of assessment was sent to the
respondent in the sum of Rs. 8,144,870, inclusive of penalty.

Representation was made by the respondent contesting that assessment but it was

maintained by the appellant.

On 12 June 2001, the respondent appealed against the determination of the then
Commissioner for VAT before the then Tax Appeal Tribunal. The case was eventually heard
and determined by the Assessment Review Committee (ARC). The ARC had to decide whether
the input tax incurred by the respondent for the renting out of meters to the consumers and the
infrastructural works from the distribution main to the meters were considered as being
incidental to the supply of water and as such entitled the respondent to obtain tax credit.

The ARC, after having considered the representation made by all the parties concerned,
ruled in favour of the respondent by concluding that the respondent was entitled to credit for
input tax on a proportional basis with regard to the purchase of meters and infrastructural works
costs incurred from the domestic main to the consumers’ meters.

Feeling aggrieved by and dissatisfied with the determination of the ARC, the appellant
has by way of case stated appealed against such determination on the following grounds:
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1. The Committee erred in applying section 4 (5) (c) of the Value Added
Tax Act in order to hold that the renting of meters and the costs incurred
in infrastructure works are necessarily incidental to the supply of water
and hence credit for input tax suffered in respect thereof should be
allowed in proportion.

2. The Committee erred in allowing credit for the input tax on a proportional
basis in respect of tax suffered on the purchase of meters and costs
incurred in the infrastructure works from point C to the meter.

3. The Committee erred in failing to give due consideration to item 29 of the

First Schedule (Exempt supplies) of the Value Added Tax which
identifies the specific supplies which are exempt from Value Added Tax,
namely:

(i) renting out of a meter

(ii) carrying out of infrastructure works by the Central Water Authority

As a consequence thereof, the Committee ought to have reached the

conclusion that the input tax suffered on the specific taxable inputs used
to make the specific exempt supplies is not allowable as credit by virtue
of section 21(2)(a) of the Act.

4. On evidence that was on record before the Committee, the latter

ought to have reached the conclusion that the input tax suffered on taxable
inputs used to make exempt supplies is not allowed as credit.

All the above grounds of appeal were argued together by learned counsel appearing on
both sides. In her submission to us, learned counsel for the appellant referred us to item 29 of
the First Schedule to the Value Added Tax of 1998 (VAT Act) which provides that the first 15
cubic meters of water per month supplied by the respondent for domestic purposes was an
exempt goods. She also pointed out that by virtue of Government Notice No.160 of 1998, which
amended item 29 of the First Schedule to the VAT Act, both the renting of a meter and the
carrying out of infrastructure works by the respondent were also exempted from value added
tax.

GN 160 of 1998 came into operation on 7 September 1998 and it is not in dispute that
for the assessment period which is in issue, the latest amendment to item 29 of the VAT Act
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should be applied and considered. The ARC has itself ruled that by virtue of section 72 of the
VAT Act, the Minister was entitled to make such amendment to the First Schedule to the VAT
Act.

Accordingly, it is the submission of learned counsel for the appellant that since the
renting of a meter and the carrying out of infrastructure works were exempt commodities, the
respondent was not entitled to benefit from tax credit in virtue of section 21 (2) (a) of the VAT
Act which provides that no input tax shall be allowed as a credit in respect of goods or services
consumed to produce an exempt supply.

All along, it has been the contention of learned counsel for the appellant that since on
the water bills which are sent to the domestic consumers, they are charged separately for meter
rent and for the supply of water, that is enough proof that there are two distinct supplies and
accordingly by virtue of section 21 (2) (a) of the VAT Act and GN 160 of 1998, the respondent
was not entitled to benefit from tax credit in respect of goods or services used or consumed to
produce an exempt supply.

In a sober reply, learned counsel for the respondent has submitted that his case rests
essentially on the fact that a supply of services incidental to the supply of goods should be
considered as forming an integral part to the supply of goods. If, the Appellate Court were to
come to the finding that for the purpose of supplying water to domestic consumers, the
respondent, has made two distinct types of supply then, he has no case.

Section 4 (5) (a) (b) and (c) of the VAT Act gives an elaborate meaning of the word
‘supply’ for the purpose of this case. It provides that:

(a) A supply of goods incidental to the supply of services is part of the supply
of the services.

(b) A supply of services incidental to the importation of goods is part of

the importation of the goods.
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(c) A supply of services incidental to the supply of goods is part of the

supply of the goods.

We consider that by virtue of section 4 (5) (c) of the VAT Act, the supply of services in
respect of infrastructure works should be considered as being ancillary or incidental to the
supply of water to the consumers. We find support from the case of British Airways Plc v.
Commissioners of Customs and Excise [1990 WL 753488], where the Appellate Court of the
Queens Bench Division had to decide the issue of whether there was only one supply of air
transport or two supplies since air passengers are provided with in-flight catering and
transportation. The test that was adopted in this case was whether the in-flight catering was an
integral part of the transport. It was held that “British Airways do not just supply transportation,
they supply transportation to a certain degree of comfort. That involves different standards of
seats, space, hostess service and toilet services depending on the class of travel. It may not be
necessary for passengers to wash their hands on a short haul flight; yet it would be astonishing
if the supply of soap was to be regarded as a separate supply of goods. Catering facilities are
part of and integral to the transportation in that degree of comfort which British Airways have
decided is commercially appropriate and indeed necessary to attract passengers”.

As opposed to the decision reached in the above-mentioned case, there are three
appeals from the decisions of the London Value Added Tax Tribunal which were delivered in
favour of the taxpayers. These concerned the cases of British United Provident Association
Limited v. Commissioners of Customs & Excise, Commissioners of Customs & Excise v.
British United Provident Association Limited and Commissioners of Customs & Excise v.
St. Martins Hospital [1997 WL 1105711]. The question the Appellate Court had to decide was
whether: (1) the provision of pharmaceutical supplies to in-patients in private hospitals and (2)
the supply of surgical fitting of prostheses, such as artificial hip joints or pacemakers, to such
patients are zero-rated for Value Added Tax. Again the same test as in the case of British
Airways cited above was applied. The Court stated that “in determining whether what would be
two supplies should be regarded as a single supply it has to ask itself whether one element is
an integral part of the other, or is ancillary or incidental to the other or whether the two elements
are physically and economically dissociable”. The Court ruled that “only if one begins by
assuming that hospital treatment is a single supply that it is possible to conclude that the supply
of drugs or prostheses is an integral part of that supply. But the reality is that care and treatment
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in hospital involves multiple supplies by different suppliers; and that it is difficult to see why the
supply by the hospital of medication prescribed by a consultant should be regarded as ancillary
to the accommodation or nursing services supplied by the hospital rather than to the services
supplied by the consultant in which it cannot be subsumed”.

Applying the same test to the case in hand, we consider that the supply of water via
meters and the associated infrastructure works should be regarded as a single supply. The
provision of meter and associated work form an element integral to the supply of water, or is
ancillary or incidental thereto. The ARC was, according to us, correct in concluding that the
“renting of meters and carrying out of infrastructure works from point C to the consumer meter
have no other purpose than to enable it to supply water to consumers and that the renting of
meters and the costs incurred for infrastructure works from point C to the CWA consumer meter
are necessarily incidental to the supply of water.....”.

We hold, therefore, that pursuant to section 21(1) of the VAT Act which provides that
“Subject to the other provisions of this section, any person may, if he is a taxable person, take,
either in his return referred to in section 22 or in his statement referred to in section 23, as a
credit against his output tax in any taxable period, the amount of input tax allowable to him
during that period” and to section 21 (3) which specifies that “Where goods are used partly for
taxable supplies and partly for exempt supplies, the credit shall be allowed in such proportion as
specified in the seventh Schedule”, the respondent was entitled to benefit from tax credit on the
renting of meters and infrastructure works needed for the supply of water. The ARC rightly
pointed out that the appellant has in any event allowed tax credit for works carried out from point
A which is the service reservoir to point C, the distribution main. We, accordingly, agree with the
ARC that there is no reason why it should be different from C to the consumer meter.

In the light of our findings, we find no reason to disturb the determination of the ARC. All
grounds of appeal, therefore, fail and the appeal is dismissed with costs.

G. Angoh
Judge
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N. Devat
Judge

19 July 2011

Judgment delivered by Hon. G. Angoh

For Appelant: Mrs. Green-Jokhoo, Principal State Counsel

Mr. A. Moolna, Principal State Attorney

For Respondent: Mr. A. Robert, Attorney at Law

Mr. R. Pursem, Senior Counsel