Discretionary Powers of the Federal Inland Revenue Service under the Companies Income Act Cap C21, LFN 2004 in Issuing Additional Assessment of Taxes

CASE TITLE: NIRVANA OILFIELD SERVICES LTD v. FIRS (2022) LPELR-58812(CA)

JUDGMENT DATE: 31ST OCTOBER, 2022

PRACTICE AREA: TAXATION LAW

LEAD JUDGMENT: BIOBELE ABRAHAM GEORGEWILL, J.C.A.

SUMMARY OF JUDGMENT:

INTRODUCTION

This appeal borders on Tax Law.

FACTS

This is an appeal against the judgment of the Federal High Court, Abuja Division, Coram: A. Abdul – Kafarati J, in Suit No. FHC/ABJ/CS/142/2013 delivered on 26/1/2016.

The Appellant as Claimant commenced an action by means of a Writ of Summon before the trial Court claiming against the Respondent as Defendant the following reliefs, to wit:

1. A Declaration that the notices of additional assessment with reference numbers; IID/CT/BA/ADD/090, IID/CT/BA/ADD/091, IID/CT/BA/DD/092, IID/CT/BA/ADD/093, IID/CT/BA/ADD/094, IID/CT/BA/ADD/C95, IID/CT/BA/ADD/096, IID/CT/BA/ADD/097 and IID/CT/BA/ADD/098 issued by the Defendant against the Claimant are unlawful and invalid.

2. A Declaration that the Defendant notices of refusal to amend listed below as IID/CT/BA/ADD/090, IID/CT/BA/ADD/091, IID/CT/BA/ADD/092, IID/CT/BA/ADD/093, IID/CT/BA/ADD/094, IID/CT/BA/ADD/095, IID/CT/BA/ADD/096, IID/CT/BA/ADD/097 and IID/CT/BA/ADD/098 are unlawful and invalid.

3. A Declaration that the Claimant’s Tax liability for the 1996 – 2004 Tax year is as computed in the self – Assessment Forms submitted by the Claimant to the Defendant in respect of those years for the sums of $314,239, $225,153, $144,819, $212,695, $396,786, $717,276 and $673,336 respectively and that the said sums having been paid and acknowledge paid by the Respondent, the tax liability has been paid in full.

4. An Order setting aside both the notice of refusal to amend and notice of additional assessment, particulars of which are stated in 1 & 2 above.

5. Cost of this action on a full indemnity basis.

The case of the Appellant, the Claimant before the trial Court was that it is a non-resident company incorporated in the British Virgin Islands and is principally into the provision of services to Oil Companies for the rental of fishing boats, similar equipment, and fabrication services. However, being a foreign company and in compliance with Section 54 of the Companies and Allied Matters Act, Cap C20 Laws of the Federation of Nigeria 2004, it incorporated a local company called Africa Oilfield Services Limited for the purposes of providing local logistics support for its operations in Nigeria for which it paid for 100% of its total cost plus a 10% profit markup, in order to meet up with its tax obligations.

The Appellant submitted its corporate income tax returns for the 1996 – 2004 tax years using the deemed profit basis of assessment and the Respondent accepted the same, and the tax liability of the appellant was met for the said years of assessment. However, in the year 2005, following a desk audit, by the Respondent on the 1996 – 2004 tax returns of the Appellant, the Respondent raised additional assessment on the Appellant, which it objected to the notice of additional assessment and the Respondent further issued a notice of refusal to amend the said additional assessment, hence the Suit filed by the Appellant to set aside the wrongful additional assessment by the Respondent.

For the Respondent, the Defendant before the trial Court, its case against the Appellant inter alia was that the Appellant a foreign company engaged in some business in Nigeria is liable to pay income tax, and such tax is to be determined by assessment of its actual profit, where it subjects its income to financial auditing, and makes returns of its audited accounts to the Respondent. The tax can also be determined on the basis of its deemed profit, where it does not submit its income to financial auditing or submits the report of it to the Respondent.

Under Section 40(1) of the Companies Income Tax Act, Cap. C21 of the Laws of the Federation of Nigeria, 2004, the rate of profit in actual profit taxation is at a fixed rate of 30k on every naira, while by virtue of Section 30 of the Companies Income Tax Act, Cap. C21 of the Laws of the Federation of Nigeria, 2004, the rate is to be what in the opinion of the Respondent’s Board is a fair and reasonable rate on its deemed profit. Pursuant to its power under Section 30 of the Companies Income Tax Act, Cap. C21 of the Laws of the Federation of Nigeria, 2004, the Respondent’s Board emplaced a rule to the effect that 80% of the turnover of such a company shall be deemed as constituting its cost of doing the business, while the remaining 20% shall be deemed to be the profit of the business, and therefore, tax shall be assessed at the rate of 30% of the 20% deemed profit, which was the category voluntarily chosen by the Appellant but which obligation it failed to meet by purporting to deduct certain other costs it called recharges from its 20% deemed profit, and then assess itself to tax of 30% on what then remains of the said 20% and upon a desk tax audit of the Appellant’s Corporate tax returns for the years 1996 – 2004, the Respondent found out this anomaly of a clever tax-reduction and avoidance scheme and for which the Respondent then assessed the Appellant to tax on the portion of its 20% deemed profit that it had hidden and withheld from assessment to tax under the guise of its self-styled recharges.

The parties filed and exchanged pleadings and at the close of pleadings, the matter went to trial. The Federal High Court afforded the parties a plenary trial before it, and at the end delivered the judgment which dismissed the Appellant’s case against its assessment of the further tax by the Respondent.

It is against the said judgment of the Federal High Court that the Appellant has appealed to the Court of Appeal.

ISSUES FOR DETERMINATION

The Court determined the appeal based on the following issues for determination:

“1. Whether by the provision of Section 66 of the Companies Income Tax Act 2004, the Respondent could levy additional assessment beyond a 6 – year period?

2. Whether the treatment of 20% as deemed profit of the turnover of non-resident companies is a judicious exercise of discretion as provided by Section 30 of the Companies Income Tax Act 2004?

3. Whether Section 30 of the Companies Income Tax Act 2004, admits of any deduction to be made?

4. Whether recharges ought to be an allowable deduction in the hands of a non-resident company?”

DECISION/HELD

In the final analysis, the appeal was dismissed and the judgment of the trial High Court was upheld.

RATIOS:

• TAXATION – IMPOSITION OF TAX – Instance when the provisions of Section 66 of the Companies Income Tax Act 2004 will not avail a taxpayer
• INTERPRETATION OF STATUTE – RULES OF INTERPRETATION OF STATUTE – Guiding principle to the interpretation of taxation statutes
• TAXATION – ASSESSMENT OF TAX – Instance where the exercise of discretion by the Federal Inland Revenue Service under Section 30 of the Companies Income Act Cap C21, LFN 2004 in issuing additional assessment will be valid
• CONSTITUTIONAL LAW – BREACH OF RIGHT TO FAIR HEARING – Whether allegation of breach of the right to a fair hearing must be made responsibly
• COURT – DUTY OF COURT – Duty of Court to consider all issues raised before it; exceptions thereto and effect of failure