Suzuki New Zealand Ltd v Commissioner of Inland Revenue
[2001] NZCA 144
•7 May 2001
| IN THE COURT OF APPEAL OF NEW ZEALAND | CA160/00 |
| BETWEEN | SUZUKI NEW ZEALAND LIMITED |
| Appellant |
| AND | THE COMMISSIONER OF INLAND REVENUE |
| Respondent |
| Hearing: | 30 April 2001 |
| Coram: | Richardson P Gault J Keith J Blanchard J McGrath J |
| Appearances: | D E McLay and P L Harper for Appellant J H Coleman and G R Withers for Respondent |
| Judgment: | 7 May 2001 |
| JUDGMENT OF THE COURT DELIVERED BY BLANCHARD J |
Introduction
The issue on this appeal by Suzuki New Zealand Ltd (SNZ) is whether GST is payable in relation to certain payments made to it by its parent company in Japan, Suzuki Motor Company Ltd (SMC), pursuant to warranties on new motor vehicles sold by SMC to SNZ and exported from Japan by SNZ to New Zealand where SNZ acts as SMC’s distributor. The Commissioner says that the payments were made in consideration of the supply of repair services. SNZ in turn argues that GST is not due in respect of the payments because they were for financial compensation, not consideration for the supply of any service; or, SNZ says, they were payments for the setting up of a repair system. SNZ also argues that, even if the payments were for repair services, they would have been zero rated under s11(2)(e) of the Goods and Services Tax Act 1985 because they were supplies to a person outside New Zealand at the time the services were performed and were not supplied directly in connection with moveable property situated in New Zealand.
In a cross-appeal the Commissioner put his case upon an alternative basis, namely that the payments from SMC were made in consideration of SNZ’s supply of repair services, through car dealers, to purchasers of Suzuki vehicles. Counsel for the Commissioner advised the Court that it was accepted that, if SNZ’s appeal were to fail, then the Commissioner’s cross-appeal should be dismissed.
Facts
Although a request had been made for a court of five, Mr McLay, appearing for SNZ, did not advance any argument of general principle in support of his client’s appeal, instead concentrating his argument on the construction of the particular contractual arrangements between his client and SMC.
The period during which affected payments were made by SMC to SNZ was 1 February 1988 to 30 September 1991. During that time SMC, as vendor, sold vehicles to SNZ, as purchaser, FOB Japan on general terms and conditions which included a warranty by SMC (“SUZUKI”):
5. WARRANTY: a) SUZUKI warrants that the products sold under this contract are free from defects, suitable for purpose intended, and produced in good workmanlike manner. b) SUZUKI’S obligation under said warranty shall be limited to repairing or replacing at SUZUKI’s option, any product or parts thereof, which under normal and proper use and maintenance, proves defective in material or workmanship: provided that notice of any such defect and satisfactory proof thereof is promptly given by Buyer [SNZ] to SUZUKI. No other warranty, whether expressed, statutory or implied shall apply to said products, and, in no event whatsoever, shall SUZUKI be liable for consequential indirect or special damages. c) This warranty is not intended to and shall not include defects resulting from ordinary wear and tear, or improper or negligent handling by Buyer, his customers or others.
The contract documents also included a Warranty Policy Guide. That produced to the Court related to motorcycles only but we understand there were similar guides for other SMC goods. The purposes of the guide were stated in its Preface to establish the basis of the warranty policy between SMC and “the Suzuki motor cycle distributor” and to set forth minimum standards with respect to distributor parts and service operations. The Preface stipulated that the distributor, when establishing a warranty system for its customers on behalf of SMC, should establish its own warranty policy for customers, which should be in accordance with the SMC warranty policy and should include “terms appropriate for the respective market”. The Suzuki factory warranty policy was set out. It stated, among other things, that:
The repair or replacement of defective parts under warranty must be made by the Suzuki distributor or its authorised Suzuki motorcycle dealer.
It was also stated, in a note to the warranty policy, that SMC would reimburse the distributor for warranty claims “by payment of money only, and only after the repairs have been completed.”
A further document was entitled “Warranty Policy Interpretation”. It was a manual “intended to provide the interpretation of SUZUKI warranty policy and guidelines of operation to be practised by the SUZUKI distributor”. It included the following statement under the heading “Warranty activities”:
The distributor is responsible for the after-sales-service activities with respect to the product he has sold in his market throughout its lifetime so that the product can be serviced and maintained to the customer’s satisfaction. This service activities [sic] include the warranty related activities to be performed as an important role of the distributor.
In yet another document, called Warranty Conditions, there was confirmation to SNZ of “current Suzuki warranty conditions applicable to your distributorship”. This provided for the distributor to follow the policies in the Warranty Policy Guide, the Warranty Policy Interpretation and a document issued by SNZ itself to its dealers entitled “Warranty Procedure”. The Warranty Conditions document provided for reimbursement to SNZ of labour costs incurred in relation to the SMC warranty in US dollars at specific rates for motorcycles, automobiles and marine and general products and for reimbursement of parts costs according to a formula based upon the FOB price. The document also stipulated a warranty period for each product.
Finally, there was a Warranty Payment Memorandum in which SMC and SNZ agreed to the offsetting of warranty claim charges against all or part of the spare parts to be ordered between the parties in accordance with a parts agreement.
It is necessary to say something about the downstream arrangements. SNZ sold Suzuki vehicles to local retailers pursuant to dealer agreements. Those agreements provided that SNZ would give what was described as a standard Factory Warranty for the products. Dealers were authorised to issue purchasers of Suzuki vehicles with a document which included a warranty that SNZ would “ at its option and without charge replace or repair any defective parts, materials or workmanship that arise in respect of your Suzuki” during a stipulated period. That period was more extensive than the period of the warranty given by SMC to SNZ under the Warranty Conditions document (para [7] above).
The practice adopted where vehicles developed faults covered by SNZ’s warranty, which necessarily included faults also covered by SMC’s warranty to SNZ, was that, subject to obtaining authority from SNZ, a dealer would arrange for the appropriate repairs. In some instances, depending on the geographical location of the vehicle at the time, this might not be the same dealer which had originally sold the vehicle to the purchaser. The repairing dealer would invoice SNZ and would be reimbursed in accordance with SNZ’s warranty policy. The dealer’s invoice to SNZ included GST. No question is raised about this.
Where the matter also fell within the terms of the SMC warranty, SNZ, having paid the dealer, would make a claim against its parent, but limited to the amounts or rates stipulated in the SMC warranty conditions. In cases which fell entirely outside the SMC warranty but within the SNZ warranty, SNZ was unable to claim reimbursement. In other cases it might not, in terms of the SMC warranty conditions, be able to recover the entire expense of reimbursing its dealer.
Statutory provisions
The following provisions of the GST Act are relevant:
s2Consideration, in relation to the supply of goods and services to any person, includes any payment made or any act or forbearance, whether or not voluntary, in respect of, in response to, or for the inducement of, the supply of any goods and services, whether by that person or by any other person
s11(2)(e)Where, but for this section, a supply of goods would be charged with tax under section 8 of this Act, any such supply shall be charged at the rate of zero percent where…
(e)The services are supplied for and to a person who is not resident in New Zealand and who is outside New Zealand at the time the services are performed, not being services which are supplied directly in connection with…
(ii)moveable personal property (other than choses in action, and other than goods to which paragraph (c)(ii) of this subsection applies) situated inside New Zealand at the time the services are performed…
s60(1)Subject to this section, for the purposes of this Act, where an agent makes a supply of goods and services for and on behalf of any other person who is the principal of that agent, that supply shall be deemed to be made by that principal and not by that agent.
The High Court judgment
The matter came to the High Court on an appeal by way of Case Stated by the Taxation Review Authority, Judge Barber. The High Court upheld the Authority in all respects and it is convenient to go direct to the reasoning of the High Court. In a reserved decision on 18 July 2000, McGechan J said it was not necessarily the case that payments made by SMC to SNZ were entirely payments under the warranty or entirely payments for repair services. SMC owed warranty repairs to SNZ, but the Judge accepted that “the SMC obligation is wider than clause 5, and indeed extends to an obligation to make financial compensation (subject to rate and cost limits) to SNZ”. [The Judge’s emphasis] But that was not the end of the matter. SNZ, for its part, “does not look for simple financial compensation”. It had accepted an obligation to SMC to make (through dealer repair shops) the SMC warranty repairs. The Judge was of the view that the payment made was in discharge of the SMC warranty, in the sense that SMC would not be paying it but for that warranty, “but it also is made in respect of the SNZ repair services rendered”. The SNZ repair service was thus an integral component of the situation and activity which brought about the SMC payment. That brought the supply within the GST Acts definition of “consideration” for such a payment. “There is a clear nexus”. The payment, if not “in respect of” certainly was “in response to” those repair services. The Judge was unable to accept characterisation of the SMC payments as for the surrender of a chose in action, the chose being in the form of a claim for breach of warranty.
On the subject of whether the repairs service was zero rated, the Judge was in no doubt that it was carried out directly in connection with movable personal property situated in New Zealand at the time the services were performed. “The nexus could not be closer”. He accepted that the repairs were also carried out for retail customers. While there was one repair, it arose under and met two quite separate contracts with two different persons. “So far as SMC is concerned, the repair was a service to SMC, quite irrespective of the other contract with an SNZ customer likewise discharged”. There were concurrent but different supplies.
Responding to the Commissioner’s alternative argument, now the subject of the cross-appeal, the Judge repeated that SNZ did carry out repairs (via agents) for customers under the warranty which it gave to purchasers of vehicles. It also carried out repairs for SMC under warranty arrangements. He was unable to accept on the facts of the case that SMC payments to SNZ were made in consideration of SNZ repairs of cars for customers. He said that, as he had already found, SMC made payments to SNZ in consideration of SNZ effecting repairs required to meet SMC’s breaches of its own warranty to SNZ. In his view it was not paying SNZ to provide repairs for customers.
Argument for appellant
Mr McLay said that there was a single factual question: was the High Court right in saying that in whole or in part the payments made by SMC were for repair services? Although also arguing the zero rating point, he realistically accepted from the outset that if the SMC payments were for repairs, it was unlikely that the appellant could succeed on that argument.
Central to Mr McLay’s primary submission was the contention that nowhere in the contractual arrangements had SNZ specifically undertaken to carry out a repair service on behalf of SMC. He said that cl.5 of the SMC warranty had to be read in the light of the other parts of the documentation. Overall there was no repair obligation to SMC. Mr McLay characterised the payments as being financial compensation from SMC for its breaches of warranty. He said that a repair provided by SNZ to a customer (through a dealer) ought not to be construed as also being a supply to the overseas manufacturer. Counsel suggested that the High Court’s analysis meant that each of SMC and SNZ was to be taken as having agreed to provide repairs to the other, with SMC paying SNZ for repairs. This construction was said to create a circular or offsetting set of obligations. Instead, it was submitted, what was occurring was that SNZ was receiving payments from SMC to compensate it for defects in the products supplied by SMC, which counsel said was a view supported by the arrangement for the offsetting of the payments against debts payable by SNZ to SMC for parts. When referred by the Court to part (b) of cl.5, counsel argued that it was merely a limitation of SMC’s liability to pay compensation, and that it did not create an obligation for SMC to have the defective products repaired.
Alternatively, Mr McLay submitted, the obligation of SNZ ought to be construed as a duty to set up or arrange a warranty system, rather than an obligation actually to effect repairs for SMC. Pursuant to the warranty system the repairs were being effected for customers, not for SMC. SNZ was doing no more than arranging for the repairs to be carried out. There was no sufficient connection between the repairs for the customer and the payments made by SMC so as to justify treating the payments as consideration for the repairs.
It was also submitted that the Commissioner was, in effect, seeking to impose tax twice on amounts in relation to the same goods – once upon their sale and again upon the costs of repairing them.
Argument for the Commissioner
Mr Coleman submitted that the payments were not merely a refund of part of the price or an adjustment of the price because something had gone wrong with a vehicle, nor were they a bare payment of compensation. He answered the argument that the High Court’s construction of the documents was circular by observing that the appellant was confusing contractual obligations with supplies. The proper inquiry involved identifying the relevant supply. The relevant supply was said to be SNZ’s act of repairing the vehicles through its agent, the dealer. Mr Coleman pointed to evidence adduced by SNZ concerning the way in which a specific claim from a dealer provided the basis for a specific claim under the SMC warranty, although often for a lesser amount. The SMC warranty was never triggered in any case until a repair had been carried out on behalf of SNZ
In response to the “double taxation” argument, counsel for the Commissioner said that the sale and the repairs occurred pursuant to separate supplies for which separate payments were made.
Decision
We have no doubt that McGechan J and the Authority were right to conclude that SMC’s payments were in respect of taxable supplies of repair services by SNZ to SMC. Although the documents do not in a straightforward way place on SNZ the obligation, on SMC’s behalf, to carry out repairs through dealers acting as SNZ’s agents, it is quite clear when the documentation as a whole is examined, that this was the contractual intention. Contrary to Mr McLay’s argument, cl.5(b) of the standard Sales Note states an obligation on the part of SMC to repair or replace at its option defective products or parts. It is worded in the form of a limitation but it cannot sensibly be read otherwise than as an acceptance of a repair or replacement obligation. However, by the time the obligation came into play a vehicle would be in New Zealand where the subsidiary, SNZ, represented SMC as its distributor. There was no question of the vehicle being returned to Japan for repair. That obviously had to be done in New Zealand. The documentation therefore provided that the repair or replacement “must be made by the Suzuki distributor” and also that SNZ was responsible for after sales service including “warranty related activities to be performed as an important role of the distributor [SNZ]”. There was to be a warranty policy established in accordance with SMC’s warranty policy. The documents provided for SMC to reimburse SNZ for warranty claims by payment of money only, and only after repairs had been completed. Plainly, therefore, the repairs were, so far as SMC was concerned, to be done by SNZ. It was a not uncommon example of parties agreeing that an obligation falling primarily on one of them (SMC) would, as a practical matter, be performed for it by the other (SNZ), with that service being reimbursed by the former on an agreed and limited basis. SNZ was to undertake repair services which would otherwise fall upon SMC and would be paid, by an offsetting mechanism, for the repairs. This is a far more commercially sensible construction of the overall arrangements than characterising the payments as merely being financial compensation for the supply of defective vehicles; or as a series of payments for the setting up of a repair arrangement, notwithstanding that they are claimable only in relation to repairs actually carried out.
Through its agents, the dealers, SNZ was simultaneously, in cases falling within both warranties, discharging its obligations to purchasers of faulty vehicles. This is simply an instance of the common enough situation in which performance obligations under two separate contracts with different counter-parties overlap, so that performance of an obligation under one contract also happens to perform an obligation under another. In such case a supply can simultaneously occur for GST purposes under both contracts. There is a nexus in both cases between the performance and the consideration given by the other party. In the present case there is a more than sufficient financial and legal connection, as demonstrated by the evidence, between SMC’s payments and the carrying out of the repairs on behalf of SNZ by its dealers. The repairs may have been done for the customers, in practical terms, under SNZ’s standard warranty, but they were also done for SMC under its warranty.
We reject also the appellant’s double taxation argument. There were, as Mr Coleman observed, separate supplies of goods and repairs, just as there were between SNZ and the dealers. Each supply must be separately brought to account.
It follows from what we have said that we also reject the argument, made in relation to s11(2)(e), that the services were not supplied directly in connection with movable personal property situated in New Zealand. The repair services were obviously supplied in relation to goods, namely motor vehicles, which were situated in New Zealand. The supply of repairs could hardly be more directly connected with the motor vehicles. The fact that they may have no longer been owned by SMC or SNZ is irrelevant. Section 11(2)(e) therefore has no application.
Cross-appeal
In these circumstances the Commissioner is content to have the Court proceed on the basis that the cross-appeal does not need to be maintained. While disposing of the cross-appeal on that basis, we think it will be clear from what has already been said that, had it been necessary, we would have been sympathetic to the view that SMC’s payments could have been considered to be made in consideration of SNZ’s supply of repair services under SNZ’s warranty, notwithstanding the differences between the terms of that warranty and the SMC warranty to SNZ.
Result
Both the appeal and the cross-appeal are dismissed, with costs to the Commissioner of $5,000, together with his reasonable disbursements in connection with the appeal, which are to be fixed by the Registrar in the absence of agreement between the parties.
Solicitors
Paul Harper, Wellington for Appellant
Crown Law Office
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