April 27, 2021
On 30th November, 2020, the Tax Appeal Tribunal (TAT or “the Tribunal”), sitting in Lagos, delivered a ruling in the case of Tetra Pak West Africa Limited (“Tetra Pak” or “the Appellant”) v. Federal Inland Revenue Service (FIRS) on the meaning of the phrase “sales in the ordinary course business”.
The Tribunal also held that a transaction is not subject to withholding tax (WHT) when a company buys or sells its usual stock in trade.
Tetra Pak by a letter dated 20th July 2016, sought clarification and confirmation from the FIRS on whether its business of the sale of packaging equipment, spare parts and material qualify as sale in the ordinary course of business and therefore exempt from WHT. The FIRS via a letter dated 18th December, 2018, ruled that the sales of packaging materials, spare parts, equipment and provision of installation, maintenance and repairs of equipment were not sales in the ordinary course of business of Tetra Park but contracts with rights and liabilities enforceable by law and therefore subject to WHT at the rate of 5%. Tetra Pak being dissatisfied with the ruling appealed to the Tribunal on the ground that the FIRS erred in law in its ruling.
The main issue before the Tribunal was whether the FIRS was wrong when it refused Tetra Pak’s request for ruling and decided that sales of packaging equipment, spare parts, equipment and providing installation, maintenance and repairs of equipment were not sales by Tetra Pak in the ordinary course of its business but contracts with rights and liabilities enforceable by law.
Tetra Pak sought a declaration that the sale of packaging equipment, spare parts and materials by Tetra Pak qualifies as sales in the ordinary course of business and is therefore exempt from WHT. At the Tribunal, Tetra Pak argued that although the Companies Income Tax (Rate of Tax deducted at Source (Withholding Tax) Regulation and the Companies Income Tax Act did not define “sales in the ordinary course of business”, “sales in the ordinary course of business” is a question of fact and could be determined by the taxpayer’s business or industry. Tetra Pak urged the Tribunal to adopt a literal interpretation to the construction of the phrase.
On the other hand, the FIRS contended that when parties enter into a contract or agency arrangement with rights and liabilities clearly defined, before proceeding to transact their business, such was liable to WHT deductions.
The Tribunal, however, ruled in favour of Tetra Pak, holding that the sale of packaging materials, spare parts and equipment by the Appellant is in its ordinary course of business and that the sales fall within the exemption envisaged under the WHT Regulations and therefore not subjected to WHT. In reaching its decision, the Tribunal made recourse to the Black’s Law Dictionary as well as some Indian cases because of the unavailability of any local law or judicial decision on the definition of the phrase. According to the Tribunal, there is a need to evaluate the following questions in determining whether a sale is in the ordinary course of business:
Based on the foregoing, the Tribunal held that when a company buys or sells its usual stock in trade, the transaction is not subject to WHT.
The TAT Ruling has introduced some clarity for taxpayers in determining what constitutes sales in the ordinary course of business. Based on this decision, the FIRS may no longer subject all transactions to WHT without specifically assessing whether such transactions are liable to or exempt from WHT.
Thus, for the purpose of WHT exemption, taxpayers may rely on this case and liaise with their consultants in determining the transactions that will qualify as sales in the ordinary course of business.