|
2004-3704(GST)I |
|
|
|
BETWEEN: |
|
DSL LTD., |
|
Appellant, |
|
and |
|
|
|
HER MAJESTY THE QUEEN, |
|
Respondent. |
____________________________________________________________________
Appeal heard on common evidence with the appeal of Summ It Corporation (2004-3705(GST)I), on April 7, 2005, at Edmonton, Alberta,
|
By: The Honourable Justice E.A. Bowie |
|
|
|
|
|
Appearances:
|
|
|
Counsel for the Appellant: |
Gordon Beck |
|
Counsel for the Respondent: |
Mark Heseltine |
____________________________________________________________________
JUDGMENT
The appeal from the reassessment made under the Excise Tax Act, notice of which is dated September 12, 2003, and bears number 10BT0105102, for the period July 1, 2000 to December 31, 2000, is dismissed.
Signed at Ottawa, Canada, this 24th of June, 2005.
|
"E.A. Bowie" |
Bowie J.
|
2004-3705(GST)I |
|
|
|
BETWEEN: |
|
SUMM IT CORPORATION, |
|
Appellant, |
|
and |
|
|
|
HER MAJESTY THE QUEEN, |
|
Respondent. |
____________________________________________________________________
Appeal heard on common evidence with the appeal of DSL Ltd. (2004-3704(GST)I), on April 7, 2005, at Edmonton, Alberta,
|
By: The Honourable Justice E.A. Bowie |
|
|
|
|
|
Appearances:
|
|
|
Counsel for the Appellant: |
Gordon Beck |
|
Counsel for the Respondent: |
Mark Heseltine |
____________________________________________________________________
JUDGMENT
The appeal from the reassessment made under the Excise Tax Act, notice of which is dated September 12, 2003, and bears number 10BT0105101, for the period January 1, 1998 to December 31, 2000, is dismissed.
Signed at Ottawa, Canada, this 24th of June, 2005.
|
"E.A. Bowie" |
Bowie J.
|
Citation: 2005TCC411 |
|
Date: 20050624 |
|
Docket: 2004-3104(GST)I |
|
2004-3105(GST)I |
|
BETWEEN: |
|
DSL LTD. and SUMM IT CORPORATION, |
|
Appellants, |
|
and |
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent. |
REASONS FOR JUDGMENT
BowieJ.
[1] The appeals of these two companies were heard together on common evidence. Their businesses have now been amalgamated under the name Summ It Corporation, but during 1999 and 2000, they operated separately. On September 12, 2003, they were separately assessed for goods and services tax, together with associated penalties and interest. Together, the taxes amount to some $39,357. When penalty and interest are added the amount in dispute was slightly more than $52,500 at the date of the assessments. As the Appellants are now amalgamated, I shall refer simply to Summ It in these Reasons to denote both the former companies.
[2] Summ It's business is supplying, installing and servicing commercial freezers and similar equipment used in the distribution of food products. Most of the equipment that it sells is manufactured by Taylor Company of Rockton, Illinois, USA. A much smaller amount comes from another U.S.company called Henny Penny. I was told that the relevant facts in respect of the Henny Penny equipment are no different from the facts relating to the Taylorequipment. The hearing certainly proceeded on that basis, and I shall deal with the case as though the evidence I heard as to the Taylorequipment applies to all the transactions giving rise to the assessments. The tax in question has been levied under Part IX of the Excise Tax Act[1] (the Act).
[3] The Taylor equipment is distributed through three dealers in Canada, the Appellant in the four western provinces and the territories, a dealer in Toronto for Ontarioand the Atlantic region, and a dealer in Montreal for the provinceof Québec. These territories are almost, but not entirely, exclusive. This is clear from the Appellant's contract with Taylor(Exhibit A-1), in particular the following paragraph:
Taylor will use every reasonable effort to direct all sales and service customers within your area to your company. However, you and we recognize that Taylor has certain National Account sales policies that allow distributors to sell into other distributor's areas (as established by Taylorfrom time to time and communicated to you), and Taylormay be unable to limit other sales by distributors in your area. You will receive compensation in accordance with established policies for services rendered on freezers sold into your area by other distributors. You agree to an unconditional responsibility to provide service for all new and used Taylor freezers, consistent with Taylor's Service Policies, which are installed in your area, regardless of whether sold by you.
[4] As that paragraph contemplates, Taylorequipment was sold from time to time by another dealer for installation in premises in the Appellant's territory. Often, but not always it seems, these sales were for installation in branches of national fast food or convenience store chains whose head offices were in the east. When such sales took place, the equipment was shipped to the destination at which it was to be installed, and it became the responsibility of the Appellant to attend to its installation and setup, as well as after-sale service. The assessments that are under appeal treat the installation and setup as a taxable supply. The Appellant's position is that it is wrong to do so, and that the assessments should be vacated. Mr. Beck advanced four separate arguments in support of that position. Before I turn to those, I shall amplify the relevant facts. There is little or no serious disagreement about the facts, although counsel for the parties certainly place very different interpretations on some of the documents.
[5] The equipment in question is by its nature somewhat complex. It must be installed, set up, inspected and adjusted by qualified technicians. The purchaser's employees must be shown how to operate and maintain the equipment. When the Appellant provided these post-sale services in respect of equipment sold by other dealers, or by Taylordirectly, it was compensated as the excerpt from the contract that I have quoted above contemplates. That compensation took the form of credit memos, two examples of which are found in Exhibit A-7. These list a number of locations at which the Appellant had provided post-sale installation and setup services, with a credit for each. In one case the credits total $12,976 for ten installations. Mr. Ryder, President of the Appellant, testified that these credit notes were later applied against amounts due by the Appellant to Taylorin respect of its purchases from Taylor of either equipment or parts. In its general ledger the Appellant, at least for part if not all of the period covered by these assessments, credited these amounts to an account titled "territory infringements". I also understood Mr. Ryder to say that the Appellant accounted for these amounts, at least in part of the period, as adjustments to the cost of goods sold. Equipment sold by the Appellant, and presumably by other Taylor distributors, is shipped from Taylor's facility in Illinois, and by the terms of the agreement between the Appellant and Taylor title to the equipment passes from Taylorto the Appellant upon shipment taking place. It is against these shipments, and shipments of repair and replacement parts to the Appellant, that the credit notes in question were applied.
[6] The issue in these appeals is whether the amounts represented by these credit notes are consideration for services that constitute taxable supplies upon which GST is exigible at the rate of 7%. Mr. Beck characterizes these amounts as territory infringement compensation, but he also advances three separate arguments in the alternative to exclude them from taxation on the basis that they are consideration for zero-rated supplies. He says that if they are supplies at all then they are zero-rated because they fall within section 5, section 7, or section 13 of Part V of Schedule VI of the Act. If they are within any part of Schedule VI then they are zero-rated,[2] and that means that the rate of tax on them is 0%.[3] The principal argument, however, is that the amounts in question are not consideration for a supply at all - they are simply an abatement of the price of equipment purchased by the Appellant from Taylor, a non-resident of Canada that is not a registrant under the Act, and from whom the Appellant makes purchases at its premises in the United States.
[7] Mr. Heseltine's position is simply that the credit notes are the consideration for the supply of a service, in the course of commercial activity, in Canada, to a recipient, and that the supply therefore comes within the charging provision of the Act, subsection 165(1), to be taxed at 7% on the value of the consideration, which is the aggregate of the credit memos. Nothing exempts them from tax, and nothing causes them to be zero-rated.
[8] I do not find any merit in the Appellant's arguments. From the evidence of Mr. Ryder, and the documentary evidence entered by the Appellant, certain conclusions are inescapable. First, the Appellant does not have any exclusive right to sell Taylor's products in its territory. The paragraph that I have reproduced above from Exhibit A-1, the Sales and Service Agreement between the Appellant and Taylor, makes it quite clear that there will be sales made into the Appellant's territory from time to time by other distributors of Taylor's products. Indeed, the contract not only contemplates that, but it also provides that when it happens the Appellant is obliged under the agreement to provide the installation and setup service, for which it is paid. Second, the payments received by the Appellant that are the subject matter of these appeals are "compensation for services rendered", as the agreement provides. The fact that they take the form of a credit to the Appellant in its running account with Taylor, and are therefore set off against future purchases from Taylor, cannot alter the reality that the Appellant is being paid for the work of installing equipment and training the users of it. There was evidence to the effect that the Appellant's accounting treatment of the credit notes issued to it was to record them as an abatement of the price of goods purchased from Taylor, but the Appellant's bookkeeping entries do not determine the true character of the payments - the nature of the transactions does. The Appellant's argument that these credit notes are not payments for services but simply price abatements therefore must fail.
[9] What is perhaps less clear is to whom the Appellant renders the services for which it is paid. The immediate beneficiary of the service is the customer who has purchased the equipment from another distributor. That other distributor would normally be obliged to render the service, as the service is normally included in the purchase price, according to Mr. Ryder's evidence. The evidence does not reveal whether that dealer reimburses Taylor for the payment that Taylor makes to the Appellant; however the only privity of contract of which there is evidence before me is between the Appellant and Taylor. As will appear, it is not material to the issue before me whether the Appellant is rendering the service to the customer, to the other distributor, or to Taylor.
[10] The Appellant's alternative submission is that if the amounts in question are consideration for services, then they nevertheless do not attract tax under the Act because they are services that fall within section 5, section 7 or section 13 of Part V of Schedule VI of the Act, and as such are zero-rated supplies by reason of the definition of that expression in section 123. Section 5 reads:
5. A supply made to a non-resident person of a service of acting as an agent of the person or of arranging for, procuring or soliciting orders for supplies by or to the person, where the service is in respect of
(a) a supply to the person that is included in any other section of this Part; or
(b) a supply made outside Canada by or to the person.
[11] The only non-resident person to whom the Appellant could conceivably be found to have made the supply of installation and setup services is Taylor. The purchasers and the selling dealers carry on their businesses in Canada, and nothing in the evidence suggests that any of them are non-resident persons. Nor is the supply in question one of the kind described in this section. While the word "agent" may on occasion have been used in the colloquial sense to describe the Appellant, it is not an agent of Taylor. When it sells Taylor's products it does so in its own name and on its own account. It purchases the product from Taylor and title passes to the Appellant at Taylor's factory door. It sells to customers in Canada, and title passes from the Appellant to those customers. Nothing in the evidence suggests that the Appellant is Taylor's agent, even using that word in its least technical sense. Section 5 simply cannot have any application.
[12] Section 7 reads:
7. A supply of a service made to a non-resident person, but not including a supply of
(a) a service made to an individual who is in Canada at any time when the individual has contact with the supplier in relation to the supply;
(a.1) a service that is rendered to an individual while that individual is in Canada;
(b) an advisory, consulting or professional service;
(c) a postal service;
(d) a service in respect of real property situated in Canada;
(e) a service in respect of tangible personal property that is situated in Canada at the time the service is performed;
(f) a service of acting as an agent of the non-resident person or of arranging for, procuring or soliciting orders for supplies by or to the person;
(g) a transportation service; or
(h) a telecommunication service.
Even if it is assumed that the supplies in question here are made to Taylor - a non-resident - they cannot possibly come within this section, because they are excluded by paragraph (e). The services supplied are clearly in respect of the equipment that is located at the customers' premises in Canada, and that fact alone is sufficient to exclude the application of section 7.
[13] Section 13 reads:
13. A supply made to a non-resident person who is not registered under Subdivision d of Division V of Part IX of the Act of
(a) tangible personal property, or a service performed in respect of tangible personal or real property, if the property or service is acquired by the person for the purpose of fulfilling an obligation of the person under a warranty; or
(b) tangible personal property, where the supply is deemed under section 179 of the Act to have been made as a consequence of a transfer of possession of the property in the performance of an obligation of the person under a warranty.
The work that comprises the supplies in this case is installation and setup work, and training work. It is not warranty work. Mr. Beck sought to take some comfort from the fact that Taylor's equipment is covered by a warranty, and that warranty is dependent on the installation and setup being carried out by a technician employed by an authorized Taylor distributor. The technician must complete a checklist on the warranty registration document, and that document must be completed by the customer and returned to Taylor before the warranty can become effective. That, however, does not make the installation and setup a "service performed ... for the purpose of fulfilling an obligation of the person [Taylor] under a warranty". To be warranty work, it would have to be the correction of a defect in material or workmanship, which the service in issue here is not. Section 13 also cannot apply.
[14] The appeals are dismissed. This is not a case in which I can award costs.
Signed at Ottawa, Canada, this 24th day of June, 2005.
|
"E.A. Bowie" |
Bowie J.
|
CITATION: |
2005TCC411 |
|
COURT FILE NO.: |
2004-3704(GST)I and 2004-3705(GST)I |
|
STYLE OF CAUSE: |
DSL Ltd. and Summ It Corporation and Her Majesty the Queen |
|
PLACE OF HEARING: |
Edmonton, Alberta |
|
DATE OF HEARING: |
April 7, 2005 |
|
REASONS FOR JUDGMENT BY: |
The Honourable Justice E.A. Bowie |
|
DATE OF JUDGMENT: |
June 24, 2005 |
|
APPEARANCES: |
|
Counsel for the Appellants: |
Gordon Beck |
|
Counsel for the Respondent: |
Mark Heseltine |
|
COUNSEL OF RECORD: |
|
For the Appellants: |
|
Name: |
Gordon Beck |
|
Firm: |
Field LLP |
|
For the Respondent: |
John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada |