THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT

Case No: 395/15
Reportable/Not reportable

In the matter between:

XO AFRICA SAFARIS CC
APPELLANT

and

THE COMMISSIONER FOR THE SOUTH AFRICAN
REVENUE SERVICE
RESPONDENT

Neutral Citation:
XO Africa Safaris v CSARS (395/15) [2016] ZASCA 160
(3 October 2016)
Coram:
Navsa, Wallis, Saldulker and Mathopo JJA and Dlodlo
AJA
Heard:
5 September 2016
Delivered:
3 October 2016
Summary:
Value Added Tax (VAT) – local company assembling
package tours for foreign tour operators and individuals – whether supply of
services attracting VAT at standard rate or whether zero rated in terms of
s 11(2)(l) of Value Added Tax Act 89 of 1991 – services supplied to person
not a resident of the Republic but supplied directly to other persons who were
in the Republic at the time the services were rendered – VAT payable at
standard rate.

______________________________________________________________

ORDER
______________________________________________________________

On appeal from the Tax Court, Johannesburg (Le Grange J) sitting as court of
first instance):
The appeal is dismissed with costs including the costs of two counsel.
______________________________________________________________

JUDGMENT
______________________________________________________________

Mathopo JA (Navsa, Wallis and Saldulker JJA and Dlodlo AJA concurring):

[1] The appellant, XO Africa Safaris CC (XO), assembled tour packages
for foreign tour operators (FTO‘s) arranging for group and individual foreign
tours to this country. These packages included accommodation, travel,
restaurant bookings and recreational activities, such as golf, safaris, whale
watching and the like (local services). Some of the tour groups were in South
Africa partly for business and partly for social purposes, in which event the
packages included arranging meeting facilities and the like. XO accepted that
this involved a supply of services to the FTO, but claimed that it was a supply
that was zero rated in terms of s 11(2)(l) of the Value Added Tax Act 89 of
1991 (the Act). The Commissioner: South African Revenue Services (SARS)
contended that these services did not fall within s 11(2)(l), but were subject to
the standard rate of VAT of 14% in terms of s 7(1) of the Act.

[2] On 22 November 2010, after an audit, SARS gave a letter of audit
findings to XO, indicating its intention to raise VAT at the standard rate on the
supply of ‗tour packages and services‘ to FTO‘s during the tax periods to
February 2008 and 2009 and April 2010. XO‘s attorneys responded indicating
that XO would object to any assessment raised on that basis. A letter of
assessment to VAT, together with penalties and interest, was issued on 4
March 2011 and the promised letter of objection came on 25 March 2011. The

objection was upheld in regard to penalties and, interest, but disallowed in
relation to the assessment to VAT. Aggrieved by this decision, XO took the
decision of SARS on appeal to the Western Cape Tax Court (Le Grange J),
which dismissed XO‘s case and held that XO directly supplied the local
services to the FTO‘s and/or their customers on their behalves and
accordingly VAT was payable at the standard rate. This appeal is with the
leave of that court.

[3] At this stage it is necessary to set out in brief, in the paragraphs that
follow, the relevant factual background. In doing so I borrow largely from the
court a quo‘s judgment.

Background facts
[4] XO is a registered VAT vendor in terms of the Act. It operates a
business involving the supply of services to FTO‘s which are non-resident in
the Republic of South Africa. The accommodation would be used, the meals
eaten and the other activities enjoyed, by the members of the tour groups
assembled by the FTO‘s. They or, in some cases involving commercial
groups, their employers would pay the FTO for the right to enjoy these
services and activities. These individuals had no direct contractual connection
with XO, which contracted with the FTO.

[5] According to SARS, XO contracted local suppliers to provide local
services to itself and thereafter XO supplied the local services to the FTO or
the FTO‘s customers when they were in the Republic. It did this, according to
SARS, by concluding contracts for the supply of the local services with the
hotels, restaurants and other providers of such services and contracting
separately with the FTO‘s to provide those services to the members of the
tour parties when they were in South Africa. When the agreements were
concluded with the FTO‘s, neither the FTO‘s nor their customers were in the
Republic. Once an agreement between XO and an FTO was concluded, XO
arranged the local services with the local supplier if, it had not already done
so, as was often the case. If prior arrangements had been made these would
be confirmed. XO then invoiced the FTO for a lump sum which included the

local service provider‘s costs and its own mark-up. The FTO‘s were not
advised and had no knowledge of the prices charged by the local suppliers.

[6] It is apparent that the mark-up set by XO was not fixed nor disclosed to
the FTO‘s. The FTO‘s and their customers could not demand that the local
supplier disclose the price it had charged. XO did not account to the FTO for
the amounts which it received from them. The amounts charged by XO to the
FTO were determined by reference to what the FTO was willing to pay for the
local services. In its books of account, XO included the amounts invoiced to
the FTO as sales and treated the costs invoiced to it by the local suppliers as
expenses. In its annual financial statements the value of the services supplied
by it to the FTO‘s was reflected in its gross revenue. XO‘s position in its books
of account was therefore that it was acquiring services from the local service
providers, which constituted its cost of sales, and included in its income
amounts which it charged to the FTO‘s.

[7] In terms of the agreements with the FTO‘s it was the responsibility of
XO to ensure that the local services were properly provided during the tours.
XO employed consultants to make sure that the hotels and conference
facilities were properly booked and set up. In the event of a problem with the
local supplier it was incumbent upon XO to rectify the problem. The FTO and
its customers played no role in this regard. This was because XO had a
contract with the local supplier and FTO and its customers had no contract
with them.

The evidence
[8] XO called three witnesses, Mr Charrieras, Ms Kimmich and Ms Mignot.
Their evidence related to five group and individual leisure tours selected as
typical.

[9] The documents in relation to these tours indicated that XO contracted
with local suppliers to provide local services to XO. XO arranged for the local
services to be made available to the FTO‘s customers. It is common cause
that not all agreements between XO and the FTO‘s were reduced to writing.

The case was dealt with on the basis of these five inbound tours because they
were accepted to be representative of XO‘s business operations and could be
applied to all its dealings with FTO‘s.

[10] Mr Charrieras testified that although written contracts were not always
concluded with an FTO, the contractual relationship between XO and an FTO
was that XO would provide the local services listed in the itinerary, budget or
programme provided to it, and that the FTO would purchase such services. It
was his evidence that the local services were provided in the Republic. He
further testified that XO‘s consultants were normally posted at the hotels to
deal with any problems raised by the FTO‘s or their customers. In cross-
examination he conceded that the consultants were necessary because ‗that‘s
what [XO] are paid for‘, to ensure that the local services were provided during
the tours. It was his evidence that amongst the duties of the consultants would
be to make sure that the conference facilities were correctly set up. At no
stage were the complaints of the customers attended to by the hotel
personnel. In relation to corporate tours the staff of XO were, on occasion,
involved in checking that local suppliers were properly prepared to provide
certain of the services. He said that XO had purchased the local services from
the local supplier. Based on that he stated that XO was entitled to deduct
input VAT charged by the local suppliers. Furthermore, his evidence
continued, that in addition to the profit comprising its mark-up, XO made a
further profit equivalent to 14% of the charges, because XO would claim an
input VAT deduction in circumstances where XO did not pay output VAT.
This, in other words, meant that if XO was not liable for output VAT charged at
14%, it was making profit at the expense of the fiscus.

[11] In cross-examination he conceded that the services were provided to
the customers of the FTO when they were in the Republic, but denied that
they were provided by XO.

[12] Ms Kimmich gave evidence about how XO entered into agreements
with local suppliers for the services to be supplied to XO. According to her no
other entity or party was involved in the agreement. The unchallenged

evidence of Ms Mignot centred mainly around her role with regard to the
preparation of the documents and emails in respect of the tours arranged for
an FTO called Preference Events.

[13] The emails reveal that XO was approached by Preference Events, and
FTO‘s, to formulate a tour programme for a commercial entity, Total
Lubrifiants. The programme included both business meetings and social
events. It appears that Preference Events had to tender for the project
because an email dated 11 November 2009 addressed to Ms Mingot by the
FTO said that ‗we have been selected for the Total tour‘ and she replied: ‗I am
delighted that we have won this great project together.‘ There was a good
deal of correspondence thereafter concerning the different elements of the
tour. Ms Mingot, on behalf of XO, contacted various local suppliers to arrange
accommodation, restaurants and entertainment for the tour. As one might
expect the programme was adjusted from time to time as the date of the tour
drew near and more details emerged of the people in the tour party.

[14] On 11 November 2009 XO sent to Preference Events a detailed
proposed itinerary for the tour, which was to take place from 28 March 2010 to
1 April 2010. It specified in great detail the entire programme for each day and
the cost of each element of the package. On arrival in Cape Town XO would
assist at the airport and greet the tour party. The first item for which a charge
would be levied was porterage at the airport. Provision was then made for a
French speaking guide and transport in a coach to the hotel. The extent of the
detail is apparent from the inclusion of an optional item of a bottle of water for
each passenger on the bus to the hotel. The itinerary went on to detail gifts on
arrival at the hotel, porterage, and transport in the coach to the Waterfront in
Cape Town. This was to be followed by a Sundowner Cruise and dinner at a
restaurant in the Waterfront complex. Various options were offered under that
head. Each item was separately charged for, some, such as the dinner, at a
per person rate and some, such as the cruise, on a group basis. Finally, for
that day, provision was made for the accommodation of the members of the
touring party on a sharing basis (with the possibility of paying a single room
supplement) in a hotel.

[15] The itinerary continued on that basis for each day of the proposed
tour. Its closing entries are relevant. After dealing with the return of the party
to Europe and what are described as ‗Global services throughout the
program‘, the notation ‗End of our services‘ appears. The final portion deals
with the cost and records that the ‗Total for services quoted in ZAR‘ is R792
669. If the reader wanted more information about XO‘s general terms and
conditions they were referred to XO‘s website.

[16] The itinerary was updated from time to time during the preparation of
the tour with the final version being dated 5 May 2010, after the tour was over.
It was always in the same form. Also forming part of the trial bundle before the
Tax Court were the supporting invoices from the local suppliers, that is, the
hotel, the restaurants and the providers of entertainment. They were all
addressed to XO and were payable by XO, not the FTO. An examination of
the invoices shows no consistent relationship between the prices set out in
the itinerary, that is, the prices XO was charging Preference Events and the
prices charged to XO by the local suppliers.

[17] In the case of the Total Lubrifiants tour a written contract was
concluded on XO‘s standard general terms and conditions. It was accepted in
argument that all the contracts giving rise to the appeal were on the same
terms. They are revealing. The Letter of Agreement commences by saying
that and Preference Events:
‗Have agreed that XO Africa will provide and PREFERENCE EVENTS will purchase
materials and services for the Programme or referred to therein …‘
The group‘s name is given as Total Lubrifiants and the Programme is
identified as being annexed to the letter of agreement as ‗annex 1 – Budget B‘
That is the document already described. Under the heading ‗Budget‘ it was
said that:
‗The fully itemised Budget specifying all fares, prices and fees for all materials and
services purchased in relation with the Programme has been attached to the present
Letter of Agreement. See annex 1 – Budget B.‘

Lastly, in the letter of agreement, a payment schedule was set out under
which 30 percent of the initial budget was payable upon signature of the letter
of agreement; a second deposit of 40 percent was payable three months before the
group‘s departure; a deposit of 95 percent of the estimated land arrangements and
air travel and charter arrangements would be paid at the latest thirty days before
departure, and the final billing would be eight days after completion of the
programme, that is, by 9 April 2010.

[18] Under the heading, ‗General Terms and Conditions‘ the following
appears:
‗XO Africa and PREFERENCE EVENTS have agreed that for the consideration
described herein, XO Africa will provide and PREFERENCE EVENTS will purchase
materials and services described in the attachments for the Programme described or
referred to therein (the ―Programme‖) on the following conditions:
1.
Services: XO Africa shall perform services listed. Services will be limited to
those outlined, unless otherwise agreed to in writing.
. . .
3.
Prices: Payment and consideration to XO Africa for services described herein
shall be in accordance with prices listed herein, subject to terms and conditions
hereof:
a.
Prices stated herein have been quoted by XO Africa with respect to the
Programme described herein and shall not bind XO Africa with respect to any other
Programme.
b.
Prices are subject to compliance with timelines outlined.
c.
Prices have been based on the specified number of people and travel dates
shown on this letter of agreement, and will be adjusted accordingly if the number of
participants and/or dates change.
d.
The quoted land prices for this Programme is based on negotiated tariffs and
applicable taxes. In the event that these rates are revised by XO Africa‘s suppliers
(transportation, carriers, hotels, guides, sightseeing contractors, etc.) or destination
government prior to the operation of this Programme, XO Arica will notify
PREFERENCE EVENTS of any necessary price deviations.
e.
XO Africa‘s services are labelled in specific currencies being the South
African Rand (ZAR), the Euro (€) or the US Dollar ($) applicable to the destination of
travel or the type of services to be provided. The different parts of the budgets will be
invoiced in their respective applicable currencies and payment should be received as

such. [On Programmes to foreign destinations, the pricing has been calculated on a
specific currency exchange rate (listed on the attached budget spread sheet), which
may change prior to travel dates. As a result, XO Africa will notify PREFERENCE
EVENTS of any necessary price revisions. Note that only average exchange rates
will be applied. XO Africa can also offer PREFERENCE EVENTS the benefit of
advance purchase options on currencies. It will however be PREFERENCE
EVENTS‘s full responsibility to make use or not of this service.]
. . .
XO Africa: acts as agent or intermediary to arrange the means of
transportation, lodging and other services as described . . .‘

[19] All XO‘s dealing with FTO‘s followed the pattern set out above. That
was all undisputed. It is in the light of those facts that I turn to consider the
applicable law and the contentions of XO and SARS.

The law
[20] The issue in this case is primarily concerned with the application of
s 11(2)(l) to XO‘s activities. The cardinal consideration in determining the
intention of the legislature is to interpret the provision in the context of the Act
as a whole, and its history and the explanatory memoranda in the event of
any uncertainty. See for example Natal Joint Municipal Pension Fund v
Endumeni Municipality [2012] ZASCA 13 593 (SCA) para 18, where this court
set out the relevant principles to be used in interpreting statutes. Those
principles are equally applicable to taxing statutes. Commissioner, South
African Revenue Service v Bosch and Another 2015 (2) SA 174 (SCA) para 9.

[21] Section 7(1)(a) of the Act imposes value added tax and applies to the
whole of the Republic. It provides as follows:
'(1) Subject to the exemptions, exceptions, deductions and adjustments provided for
in this Act, there shall be levied and paid for the benefit of the National Revenue
Fund a tax, to be known as the value-added tax —
(a)   on the supply by any vendor of goods or services supplied by him on or after the
commencement date in the course or furtherance of any enterprise carried on by
him;

(b)   on the importation of any goods into the Republic by any person on or after the
commencement date; and
(c)   on the supply of any imported services by any person on or after the
commencement date,
calculated at the rate of 14 per cent on the value of the supply concerned or the
importation, as the case may be.'

[22] It was submitted on behalf of XO that the services rendered by XO
were not subject to VAT at the standard rate in terms of s 7(1)(a), of the Act,
but that such services should have been zero rated in terms of s 11(2)(l) of
the Act. Section 11(2)(l) provides as follows:
‗(2) Where, but for this section, a supply of services . . . would be charged with tax at
the rate referred to in section 7(1), such supply of services shall, subject to
compliance with subsection (3) of this section, be charged with tax at the rate of zero
per cent where —
. . .
(l) the services are supplied to a person who is not a resident of the
Republic, not being services which are supplied directly —
(i) in connection with land or any improvement thereto situated inside the
Republic; or
(ii) in connection with movable property (excluding debt securities, equity
securities or participatory securities) situated inside the Republic at the
time the services are rendered, except movable property which —
(aa)
is exported to the said person subsequent to the supply of such
services; or
(bb)
forms part of a supply by the said person to a registered vendor
and such services are supplied to the said person for purposes
of such supply to the registered vendor; or
(iii) to the said person or any other person, other than in circumstances
contemplated in subparagraph (ii)(bb), if the said person or such other
person is in the Republic at the time the services are rendered.‘ (My
emphasis).

[23] Before us, XO contended that its services should be zero rated
because it did not supply or render the local services directly to the FTO or its
customers. XO submitted that it entered into a back-to-back agreement with

the FTO in terms whereof the local supplier would give XO an undertaking
that it would render the local services to the customers identified to it by XO.
According to XO the local supplier would then supply the customer with local
supplies when the customer arrived in the Republic, thereby discharging its
obligations to XO by performance in favour of the adjectus solutionis gratia
nominated by it. On this basis it was contended that the local suppliers
rendered services to XO by performing their contracts in favour of the tourists;
that XO rendered the service of organising the package to the FTO and the
FTO had a contract with the foreign tourists to ensure that they would receive
services while in South Africa from the local suppliers

[24] The argument was that there needed to be, a direct connection
between the party that supplied the services i.e. XO and the recipient thereof,
and since there was no direct relationship or connection between XO and the
FTO or its customers in relation to the local services, these services were not
directly supplied by XO. The nub of XO‘s case was that the local services
were rendered by the local supplier directly to the FTO or its customers
because XO had no direct relationship with the customers. It was XO‘s case
that the service which it provided to the FTOs in terms of the back-to-back
agreement was not a local service and attracted VAT at zero per cent,
because it was a service supplied to a person who was neither resident nor
present in South Africa.

Discussion
[25] It is clear that the resolution of this dispute requires consideration of the
following: (a) what services did XO supply? (b) to whom did XO supply such
services? (c) were the parties to whom such services were supplied, residents
of, or present in the Republic when such services were supplied? To resolve
this regard should be had to the applicable statutory provisions as well.

[26] A subsidiary issue which can be disposed of summarily relates to the
argument raised by XO in its heads of argument that SARS sought to widen
its grounds of assessment in para 16.4 of its statement of assessment. XO‘s
objection was that SARS was bound by its amended grounds of assessment

when it stated that the local services were rendered by the hotel to the
customers, and could not widen its grounds by stating that XO directly
supplied the local services to the customers. SARS contended that XO
misconstrued the context in which the averment was made and denied that
the paragraph introduced a new ground. Paragraph 16.4 read as follows
‗[XO] arranged the tours, including inter alia the Local Services. [XO] did so by
entering into agreements with the local service suppliers (the ―Local Service
Suppliers‖) in terms of which the Local Service Suppliers agreed to supply the Local
Services to the Customers when they undertook the tours in the Republic.‘

[27] In my view para 16.4 was clearly foreshadowed in the notice of findings
and the notice of assessment, as well as the responses to these in the letter
of objection by XO‘s attorneys and described the manner in which XO
performed its contractual obligations vis-à-vis the local service suppliers.
There was no merit in this point. At all stages the issue was whether XO
admitted the supply of services to the FTO‘s fell within s 11(2)(l) of the Act.

[28] Turning to the factual issues referred to in para 26 above, the difficulty
confronting XO‘s argument was that it was wholly inconsistent with the facts
as they emerged from the evidence and the documents. It was correct insofar
as it said that XO contracted with local suppliers to provide local services to
foreign tourists, whom XO would identify. It was wholly incorrect when it said
that the only services XO supplied to the FTO‘s were the organisational
services involved in assembling the tour package and nothing else.

[29] The letter of agreement, standard terms and conditions of contract and
the itinerary attached to the letter of agreement proclaimed unequivocally that
XO was providing materials and services consisting of accommodation,
meals, entertainment, gifts, transport and the like as specified in the itinerary.
That is what XO undertook to provide to the FTO‘s; that is what it was paid to
provide and that is what it provided. The fact that in order to perform its
obligations towards the FTO‘s it in turn had to acquire those goods and
services from local suppliers was neither here nor there. Its contract was to
provide those goods and services. How it did so was no concern of the FTO.

And it provided those goods and services, not directly to the FTO, but to other
persons who were in the Republic at the time that the goods and services
were provided. That served to exclude these services from the class of
services that enjoy zero rating under s 11(2)(l). SARS was accordingly correct
in saying that the supply of the services attracted VAT at the standard rate.

[30] We were taken to the various amendments of this section which led to
the current version of the section around which the dispute between the
parties revolves. That history showed that the statutory purpose underlying
s 11(2)(l) was to ensure that where services were rendered to a foreigner by a
person liable to pay VAT, but the services themselves were rendered in South
Africa and the benefit of them was enjoyed in the Republic, they would not
enjoy the benefit of zero rating. VAT would be payable at the standard rate.

[31] The argument of XO is unsustainable because, if is followed, it would
mean that notwithstanding the fact that the services were consumed in the
Republic and XO would have a claim for input VAT in relation thereto, the
fiscus would forego the 14% output tax levied on the supply of local services
by XO. This court has already held that the purpose of this provision is to
ensure that when services are consumed in South Africa VAT is payable at
the standard rate (see Master Currency v CSARS 2014 (6) SA 66 (SCA)).

[32] In the result the appeal is dismissed with costs including the costs of
two counsel.

________________________
R S MATHOPO
JUDGE OF APPEAL

APPEARANCES:

For appellant:
S A Cilliers SC (and T S Emslie SC and M W Janisch SC)

Instructed by:

Webber Wentzel, Cape Town

Honey Attorneys, Bloemfontein

For respondent:
P A Solomon SC (and J Boltar)

Instructed by:

Mothle Jooma Sabdia, Pretoria

Symington & De Kok, Bloemfontein

THE SUPREME COURT OF APPEAL OF SOUTH AFRICA

MEDIA SUMMARY OF JUDGMENT DELIVERED IN THE SUPREME COURT OF APPEAL

FROM

The Registrar, Supreme Court of Appeal

DATE

3 October 2016

STATUS

Immediate

Please note that the media summary is for the benefit of the media and does not form part of
the judgment.

XO Africa Safaris v CSARS (395/15) [2016] ZASCA 160 (3 October 2016)

MEDIA STATEMENT

Today, the Supreme Court of Appeal (SCA) dismissed an appeal by XO Africa Safaris CC (XO)
against an order of the Tax Court, Johannesburg, and affirmed the interpretation of the Value Added
Tax Act 89 of 1991 contended for by the Commissioner of the South African Revenue Service
(SARS).

The issue before the SCA was whether the rate of value added tax (VAT) applicable to the operations
of XO, a tour operator, was the standard rate of 14% or the zero rate applicable in terms of s 11(2)(l).

XO was a South African company which arranged tour packages in South Africa for foreign tour
operators, which would then on-sell those packages to their own customers. Neither the foreign tour
operators nor their customers were South African residents.

XO argued that the payments it received from the foreign tour operators should be zero-rated in terms
of s 11(2)(l) on the basis that they were payments for booking services supplied to foreign tour
operators, and therefore for services supplied to persons who were not resident in South Africa and
not present at the time that the services were rendered.

The SCA rejected this argument. It held that XO had not only provided a booking service to foreign
tour operators. In the various contracts XO had entered into with the foreign tour operators, it had
undertaken to provide the local services themselves. It had ensured that the services were properly
rendered by the local service providers. And, it treated the payments it had made to the local service
providers as expenses and deducted input vat from those payments, while treating the total invoiced

amounts to the foreign tour operators as sales. This was not consistent with its version that it had only
provided a booking service to the foreign tour operators. In addition, while the foreign tour operator
may have been the party contracting with XO, the services were ultimately for the benefit of the
foreign tour operator’s customers, and the services were rendered to those customers while they
were present in South Africa.

Accordingly, the SCA held that s 11(2)(l) did not apply to XO’s operations, and dismissed the appeal.

--- ends ---