INNODIS LTD v THE DIRECTOR GENERAL, THE MAURITIUS REVENUE

AUTHORITY (CUSTOMS DEPARTMENT)

2023 SCJ 73

Record No. 113391 (5C/28/16)

THE SUPREME COURT OF MAURITIUS

In the matter of:-

Innodis Ltd

Appellant

The Director General, the Mauritius Revenue Authority (Customs Department)

Respondent

JUDGMENT

This is an appeal by way of case stated against the Finding of the Assessment Review
Committee (ARC) made under section 21 of the Mauritius Revenue Authority Act 2004. The
factual background of the appeal is as follows.

The respondent had carried out an assessment of the appellant’s tax liability in respect
of the assessment years 2002-2003 and 2003-2004. In the course of the exercice, a number of
items were added to the chargeable income including interest free loans to subsidiary
companies and overseas passage allowances to eligible employees earmarked but which had
not been paid.

The appellant appealed to the ARC against the decision of the respondent. All the issues
raised in the appeal before the ARC were resolved by agreement of the parties except those
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relating to the items interest free loans to subsidiary companies and overseas passage
allowances to employees.

So, the questions which the ARC had to determine were the following:

i. whether the respondent was right in considering that the overseas passage
allowances due to employees by virtue of their contract of employment
earmarked for the financial years in question but which were not actually
paid to the beneficiaries were not deductible under section 26 of the
Income Tax Act; and

ii. whether the respondent was right, in application of section 75 of the

Income Tax Act, to add the interest free loans granted to its wholly owned
subsidiaries to the chargeable income in respect of the assessment years
in question on the ground that the loans were not made at arm’s length.

The ARC determined the two questions in favour of the respondent. In the present
appeal by way of case stated, the appellant is challenging the findings of the ARC on the ground
that they are erroneous in law for reasons listed under the three grounds of appeal invoked.

Before looking into the grounds of appeal, it is appropriate to point out that in resisting
the present appeal, the respondent raised in its skeleton arguments a procedural point. It is to
the effect that the office of “Director General, Mauritius Revenue Authority (Customs
Department)” is a non-existing entity under the Mauritius Revenue Authority Act, and on this
score alone, the appeal should be set aside. We propose to deal with this issue first.

In her arguments on the procedural point taken, learned counsel for the respondent
invoked the case of Leelodharry D v The Mauritius Revenue Authority [2016 SCJ 341]. She
contended that although the latter case was an application for judicial review, the principle
adumbrated in it finds application in the present appeal. In that respect, she highlighted the fact
that in Leelodharry (supra), the action was directed against the “Mauritius Revenue Authority”
whereas under the Excise Act it ought to have been entered against the “Director General, The
Mauritius Revenue Authority.” The Court upheld the objection of the MRA to this procedural flaw
and set aside the application for judicial review and in doing so observed:

“It is equally clear from the analysis above that the party against the action
of the applicant should be directed is not a mere matter of semantics, nor is it a
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minor procedural defect. Rather, it goes to the validity of the application for leave
to apply for Judicial Review based on the reasoning that such an application has to
be directed against the decision maker.”

In the same judgment, the Court went on to buttress the above reasoning by referring to
observations made along the same lines in the cases of V. Ramsahaye v The Mauritius
Revenue Authority [SCR No. 112182-unreported] and Caunhye M. S. Y. v Mauritius
Revenue Authority [2015 SCJ 222].

In reply to his learned friend for the respondent, learned Senior Counsel for the appellant
contended that the point cannot be accepted. In his submissions, he pointed out that all the
documentation submitted by the ARC in stating the case indicate that the respondent against
whom the appellant’s action was directed was styled “Director-General, Mauritius Revenue
Authority.” This being so, the respondent was not under the least misapprehension as to the
true identity under which it is being sued all along and in this appeal. Thus, there is absolutely
no prejudice caused to the respondent by the party undertaking the present appeal. In support
of his argument, learned Senior Counsel cited the case of Development Bank of Mauritius v
Union Enterprises Ltd [2014 SCJ 302] in which the Court observed that there has never been
any doubt in the mind of any party as to their respective identity.

We note that in the present appeal, the name of the party joined as respondent is
inexplicably styled “Director-General, The Mauritius Revenue Authority (Customs Department).”
As rightly pointed out by respondent’s counsel, the “Director-General, The Mauritius Revenue
Authority (Customs Department)” is non-existent under any revenue law, the enforcement of
which is entrusted to the Mauritius Revenue Authority by virtue of section 3 of the Mauritius
Revenue Authority Act.

Therefore, it cannot be disputed that there is indeed a mistake with regard to the name
of the respondent against whom the present appeal is directed. However, it is to be noted from
the statement of case of the ARC that the respondent is styled as “Director General, Mauritius
Revenue Authority” which is the correct name of the party whose assessment was being
challenged before the ARC. In the circumstances, it cannot be said in the particular
circumstances of the present case that the mistake as to the designation of the respondent
stems from an error on the identity of the party against whom the appeal is directed. As a matter
of fact, it is clear from the record of proceedings before the ARC that the applicant exercised its
right of recourse against the relevant authority, which is the MRA.
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Now, in the case of Jhundoo v Jhuree [1981 MR 111], the Court laid down the
following principle:

“If, then, when an action is brought against a dead man, it is a complete

nullity, it follows by analogy that when an action is brought against a non-existent
body, it is equally null and void, and the defect cannot be cured by substituting a
real person for the imaginary defendant.”

In the case of Development Bank of Mauritius v Union Enterprises Ltd [2014 SCJ
302] cited by learned Senior Counsel for the appellant, the issue was whether the action
entered before the Intermediate Court by the plaintiff styled “Development Bank of Mauritius”
(BDM) could be proceeded with being given the fact that the BDM had ceased to exist as a
legal entity by operation of the law. The Court examined the ratio decidendi in Jhundoo (supra)
in the light of the law in England on the point. Thus, the Court first made the following
observations:

“The principles upon which the English Courts would now act in such a
situation in order to allow an amendment for the substitution of a plaintiff, or to
have a plaintiff’s name amended have been closely examined in the case of
Sardinia Sulcis [1991] 1 Lloyd’s Rep. 201. The crucial test is whether there is a
mistake as to the name of the party or as to the identity of the party. The Court
went on to explain that such a mistake in name may exist where the statements of
case have provided an ample description of the party, but gave the party the
wrong name. A key question to ask is whether it is possible to identify the
intending plaintiff by reference to a description more or less specific to the
particular case.”

After a review of other English cases on the matter, the Court in Development Bank of
Mauritius (supra) summed up the principles to be followed as under:

“The Court of Appeal in Adelson v Associated Newspapers Ltd [2007]

EWCA civ 701, following an extensive review of the leading authorities, went on to
broaden the criteria laid down in the Sardinia Sulcis case. It was held that the
Court must be satisfied that (1) the mistake is as to the name of the party in
question and not as to the identity of that party; (2) Had the mistake not been
made, the new party bearing the correct name would have been named in the
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pleadings; (3) the true identity of the person intending to sue must be apparent to
the defendant although the wrong name has been used; (4) the mistake was made
by the person responsible directly or through an agent for issuing the process
which bears the wrong name. In other words, the person intending to sue is the
person who, or whose agent, has authorised the person issuing the process to
start proceedings on his behalf. The Court in Adelson (supra) concluded that
“The mistake must be as to the name of the party rather than as to the identity of
the party, applying the generous test for this type of mistake laid down in Sardinia
Sulcis.”

In application of the principles adumbrated in the authorities cited above, the mistake in
the name of the respondent cannot be fatal to the present appeal. As a matter of fact, as
explained earlier, it cannot be said that the appellant is mistaken about the identity of the party
to put into cause as respondent or that the appellant blatantly directed its case against a non-
existent party.

Therefore, we overrule the preliminary objection taken by the respondent and we

proceed to consider the merits of the grounds of appeal invoked.

The first ground of appeal challenges the conclusion of the ARC that the overseas
passage allowances to employees by virtue of their contract of employment falling due during
the assessment years in question but which were not paid were not deductible under section
26 of the Income Tax Act. The complaints of the appellant under this ground of appeal are to
the effect that the finding of the ARC that the ‘… MRA is right to have treated the item of
passage benefit as provision and not as having accrued …’ was wrong in law as it
discarded and/or failed to address its mind to, inter alia,

(a) the legal purport of a ‘benefit’ within the realm of contracts of employment;
(b) the peculiar nature of the said passage benefits which, in view of the
undisputed fact that it is a ‘fixité’ and not a ‘libéralité’, is deemed to be, by
law, a ‘complément de salaire’; and
(c) settled jurisprudence on the legal principles which govern conditions of
employment; and, particularly the fact that the obligations of the appellant to
honour its employer’s commitments which for so long as the contracts of
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employment subsist, are continuous by nature and, therefore, accrue over

time and not at a specific point in time.

In relation to the subject matter of this ground of appeal, we note that the ARC reached
the following conclusion:

“The Committee, therefore, finds that the MRA is right to have treated the
item of passage benefit as provision and not as accrued. The applicant can
claim amounts paid as passage benefit when they are actually disbursed
and paid whilst observing all conditions set out in Section 18(1) for such
deduction.”

We have gone through the whole reasoning of the ARC to come up with the above
conclusion, which in effect boils down to holding that the passage benefits earmarked and which
were not actually paid cannot amount to deductible expenditure under section 18 of the
Income Tax Act.

We note in the reasoning of the ARC that it took into account the following undisputed
facts:

i. the fact that the commitment of the appellant for the payment of passage
benefits to certain categories of employees reckoning a certain number of
years of service was indeed a contractual obligation under the contracts of
employment of the employees concerned;

ii. there is no certainty as to the actual time of disbursement or payment of

the passage benefits accumulated and accruing to employees entitled to
such benefits being given that the disbursement will depend on the
employees concerned exercising their right to claim payment of such
benefits as and when they become due and demandable; and

iii. in view of the above the passage benefits cannot be considered as a

deductible expenditure in any income year on an accrual basis under
section 18(1) of the Income Tax Act until and unless they are actually
paid in the assessment year.
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We see no flaw in the reasoning of the ARC. As a matter of fact, the respondent neither
misinterpreted the contractual obligations of the appellant under the contracts of employment of
the employees entitled to passage benefits nor failed to give due consideration to the very
nature of such obligations.

Furthermore, it makes sense that the passage benefits in question cannot but be
considered as a provision for a commitment resulting from the terms of the contracts of
employment until they were actually disbursed. Indeed, as observed by the ARC in its Findings,
despite it being regular binding contractual obligations on a yearly basis, there was no certainty
as to their payment being given that it is subject to the will of the employees entitled to these
benefits. In the circumstances, it stands to reason that although there could be no doubt that
passage benefits amounted to an expenditure incurred to generate income, they would only be
deductible under section 18 of the Income Tax Act as and when they are actually disbursed
upon the employees concerned opting to use them. At any rate, it would be preposterous to
consider a commitment in respect of which the disbursement is uncertain or which may never
happen as a deductible expenditure for the determination of the chargeable income for the
purpose of income tax.

Therefore, we come to the conclusion that the respondent rightly considered that the
passage benefits not yet paid were in the nature of a provision which cannot be considered as a
deductible expenditure under section 18 of the Income Tax Act.

We accordingly hold that there is no merit in ground of appeal 1.

Grounds of appeal 2, 3, 4 and 5 all challenge the conclusion of the ARC to the effect that
the MRA was right to add to the chargeable income the interest free loans made by the
appellant to its subsidiaries for the reason that the loans were not made at arm’s length.

The complaints and arguments put forward under these grounds of appeal and the
submissions of learned Senior Counsel to substantiate them basically question the application
of section 75(1)(a)(b)(c) of the Income Tax Act 1995 and the arm’s length principle to the facts
of the case. In that respect, we note that the salient aspects of the case of the appellant are that
the ARC:

(a) erred both in law and on the facts or misdirected itself as regards the real
purport of the loan transactions which, to all intents and purposes, involved
only domestic companies and entailed no international aspects of taxation;
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(b) wrongly confined its reading/analysis of the applicability of S 75 of the

Income Tax Act 1995 to only S 75(1)(a)(i)&(ii) and S 75(1)(b) and to have,
incidentally, taken the view that S 75(1)(a), S 75(1)(b) and S 75(1)(c) were
provisions which ought to be read and construed disjunctively rather than
conjunctively;
(c) discarded and/or failed to properly address its mind to the other provisions
which fall within Part V of the Income Tax Act 1995 and, consequently,
assess their incidence in relation to the provisions which fall within Part VII
of the Income Tax Act 1995 (including S 90);
(d) failed to assess the incidence of the raison d’être of S 90 Income Tax Act
1995 and the arm’s length principle in relation to the provisions which fall
within Part V of the Income Tax Act 1995; and
(e) came up with an assessment of interest income which has no legal basis
and which is not catered/sanctioned by any known tax law in Mauritius,
including the Income Tax Act 1995.

Now, the whole reasoning of the ARC to conclude that the MRA was right to add to the
chargeable income the interest free loans made by the appellant to its subsidiaries as such
loans were not made at arm’s length is fully set out at pages 37 onwards of the case stated
filed. We note that the MRA duly addressed all the issues raised in the above grounds of
appeal.

Thus, with regard to the applicability of S 75(1)(a)(b)(c) to the case at hand, the ARC
proceeded to an analysis and interpretation of the provisions of that section. It found that
although the section falls under Part V of the Income Tax Act 1995 entitled International
Aspects of Income Tax, it is clear in its wording that it applies to both a non-resident and a
resident controlling a business or an income earning activity in Mauritius. In that respect, the
ARC observed that whilst sub-section (1)(a) of section 75 concerns non-residents, sub-
section(1)(b), as couched, is more of general application in the sense that it is not restricted to
cases involving a non-resident only, but targets indiscriminately any person controlling an
income earning business in Mauritius.

We have carefully read the reasoning of the ARC and the provisions of section 75. In
our view, there can be no flaw in the reasoning of the ARC and its interpretation of the
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provisions of section 75 to come to the conclusion it reached. As a matter of fact, it is to be

noted that by virtue of its title, section 75 is meant to incorporate in our main tax legislation the
application of the arm’s length principle to business transactions for the purpose of assessment
of liability to income tax. Furthermore, the arm’s length principle is one which is widely accepted
and applied to both domestic and international business transactions. It implies that the parties
in a particular transaction act independently in their own self-interest to achieve the most
beneficial deal in the sense of a deal which closely matches a fair market value.

Therefore, it would be absurd to think that the legislator’s intention was to apply the
arm’s length principle only to non-residents doing business in Mauritius or cross-border
transactions.

On the contention of the appellant that the ARC ought to have taken into account the
relationship between the appellant and its subsidiaries who have been favoured with the
interest-free loans and the purpose for which they were made, we observe that the ARC was
fully alive to the circumstances in which the appellant alleged it made the loans and the
consequences thereof for the subsidiary companies if the loans had not been made. It
concluded after recalling the provisions of section 75 that the real purport or the commercial
motivation of the appellant in granting the interest-free loans to its wholly owned subsidiaries
was irrelevant for the purpose of section 75 of the Income Tax Act.

Indeed, as found by the ARC, by virtue of section 75, the Director-General is

empowered to determine the amount a business would have generated had all its commercial
and financial transactions and relations been wholly at arm’s length. Such power is to be
exercised in case the Director General is of opinion that by reason of relationship or otherwise
any person controlling a business in Mauritius is not at arm’s length with any other person and
that the business is producing less net income as could be expected. These provisions seek to
frontally address cases of non-arm’s length transactions aiming at avoiding income tax. The
word “shall”, used in the provision with regard to the use of the power afforded to the Director
General, means what it means, that is, makes it binding on the latter to determine the amount
the business would have generated if the parties had been acting at arm’s length. This
obligation should prevail irrespective of the economical or otherwise good reason behind the
business transaction undertaken.
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In the light of the observations made above, we set aside the contention of the appellant
that the ARC failed to take into account the relationship between the appellant and its
subsidiaries who have been favoured with the interest-free loans and the purpose for which they
were made and the commercial motivation behind the interest-free loans.

With regard to the complaint of the appellant that the ARC wrongly accepted the
application of “deemed interest” to assess the liability to tax as such notion has no legal basis,
we note that the ARC clearly explained the expression “deemed interest” and its application. In
that respect, the ARC observed that “deemed interest” is an expression commonly used in
practice by the tax authorities and accountants to denote interest which a party should have
claimed from another party if there had been no relationship between them. It also explained
that the use of the expression of “deemed interest” was relevant since in the present case, in
effect, the Appellant has been assessed on interest income, which it should have derived if it
had been at arm’s length with its subsidiaries regarding the loans. It further observed that it is
not correct to say that the assessment has no legal basis because it has always been the case
for the MRA that this assessment is based on section 75 Income Tax Act 1995 and the term
“deemed interest” was used in the heading to designate the nature of the amount assessed
under section 75.

We find no fault in the above reasoning of the ARC. As a matter of fact, we agree that,
as found by the ARC, the assessment itself had a legal basis by virtue section 75, which
empowers the Director General to do so if he is of the opinion that the transaction in question
was not at “arm’s length.” Once this is done, it was necessary for the Director General to
designate by an appropriate term the income that would have been derived if the transactions
had been at “arm’s length.” Since the transactions targeted were loans, which in practice
generate interests as income, there can be no wrong in designating the income that the
applicant ought to have derived from them as “deemed interest”. Furthermore, as observed by
the ARC, the concept of “deemed interest” is neither one invented by it or the respondent nor
blatantly inappropriate since it is an expression used by the tax authorities and accountants to
denote interest which a party should have claimed from another party if there had been no
relationship between them.

With regard to the application of the provisions under Part VII of the Income Tax Act,
particularly those under section 90, we note that in brushing aside the contentions of the
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appellant in that respect, the ARC made the following observations, with which we agree. Part
VII concerns anti-avoidance provisions and section 90 relates to transactions designed to avoid
liability to Income Tax. The MRA had decided to base its case on section 75 of the Income Tax
Act as it was entitled to and to the extent that section 75 imposes on domestic companies an
obligation to deal with subsidiaries at arm’s length, it is irrelevant whether section 90 could also
have been applicable. It is therefore correct to say, as the ARC observed, that even if section
90 would have been applicable, it does not mean that the Director General was bound to apply
section 90 or that section 75 was wrongly relied upon.

Therefore, there is no substance in the appellant’s contention that the ARC was wrong to
have discarded and failed to properly address its mind to the application of section 90 of the
Income Tax Act 1995 and the arm’s length principle which is enunciated therein.

For all the above reasons, the present appeal cannot succeed. We accordingly dismiss it
with costs.

J. Benjamin. G. Marie Joseph

Judge

N. F. Oh San-Bellepeau
Judge

21 February 2023

_____

Judgment delivered by Hon. J. Benjamin G. Marie Joseph, Judge

For Appellant: Mr G. Ng Wong Hing, Attorney-at-Law

Mr M. King Fat, of Counsel

For Respondent: Senior State Attorney

Principal State Counsel