Introduction

The Central Water Authority (CWA) is the sole supplier of water in Mauritius. The CWA provides customers with meters and arranges for contractors to undertake infrastructure works for customers wishing a water supply. The meters cost CWA 400 rupees and CWA charges its customers an initial connection fee, a “symbolic” rent for meters of 10 rupees a month, no specific sum for subsequent maintenance and statutorily fixed charges for the water supplied.

The legislature introduced an amendment stating that the renting out of meters and the carrying out of infrastructure works were to be exempt (input taxed) goods for VAT. Following this amendment the Revenue contended that CWA was not entitled to credits for the cost of the meters or the cost of the infrastructure works. CWA contended that it makes only one relevant supply to its customers – being water, and that the maters provided and the infrastructure works undertaken were either submerged in that water supply or, if still capable of being identified at all, entirely incidental to it.

CWA succeeded in the Courts below and the Revenue appealed to the Privy Council.

The arguments below – Card Protection Plan and single/multiple supply

Before the Courts below, CWA successfully relied on the principles in Card Protection Plan Ltd v Commissioners of Customs and Excise [1999] 2 AC 601, where the Court was asked to identify “the appropriate criteria…for deciding, for VAT purposes, whether a transaction which comprises several elements is to be regarded as a single supply or as two or more distinct supplies to be assessed separately”. The relevant paragraphs from that judgment are as follows:

29. In this respect, taking into account, first, that it follows from article 2(1) of the Sixth Directive that every supply of a single service must normally be regarded as distinct and independent and, secondly, that a supply which comprises a single service from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system, the essential features of the transaction must be ascertained in order to determine whether the taxable person is supplying the customer, being a typical customer, with several distinct principal services or with a single service.

30. There is a single supply in particular in cases where one or more elements are to be regarded as constituting the principal service, whilst one or more elements are to be regarded, by contrast, as ancillary services which share the tax treatment of the principal service. A service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied…

 The basis for CWA succeeding below appears to be because the supply of the meters and the infrastructure works were preparatory to the supply of water, being a component of the overall supply of water by CWA to its customers.  If the Revenue had not adopted a different contention, it appears likely that the Privy Council would have come to the same view, as can be seen by the following observations of the Council (at [29]):

In a case such as the present, customers need to be supplied with a meter and a connection if they are to be connected to the mains and to receive water. That the supplying of a meter and connection are necessary pre-requisites to any supply of water to a customer is highly relevant to the CPP question whether either is an independent, as opposed to ancillary or incidental supply…

Such a view is consistent with that taken last year by Canada’s highest Court in City of Calgary (City) v Canada [2012] SCR 689. The issue in that case was whether the City of Calgary could claim credits for the cost of constructing transit facilities on the basis that the provision those transit facilities was a separate supply to the exempt supply of a “municipal transit service” (my post discussing that case can be accessed here). The  Court observed as follows:

[42] …the question in this appeal is whether, in substance and reality, the alleged separate “transit facilities service” supply is an integral part, integrant or component of the overall supply of “public transit services”. According to the jurisprudence, if one supply is work of a preparatory nature to another supply (an “input” to that supply), then the input is a part or component of the single overall supply.

[43] In my opinion, the true nature of the City’s “transit facilities services”, a determination to be made with common sense, was work of a preparatory nature to the supply of a municipal transit service to the public. Transit facilities were constructed, acquired, and made available in order to supply a municipal transit service to the Calgary public. This would point to the allegedly separate “transit facilities services” being in fact a component of the overall supply of “public transit services” to the Calgary public.

In Australia, the principles in Card Protection Plan were adopted by the Federal Court in cases such as Saga Holidays Limited v Commissioner of Taxation [2005] FCA 1892 at [109] (appeal dismissed by Full Federal Court), Travelex Limited v Commissioner of Taxation [2009] FCAFC 133 at [60] (appeal allowed by High Court), Reliance Carpet Co Pty Ltd v Commissioner of Taxation [2007] FCAFC 99 at [13] (referring to submissions of the appellant) (appeal allowed by High Court) and by the Tribunal in AGR Joint Venture and Commissioner of Taxation [2007] AATA 1870 at [33] (per Downes J sitting as the President). In each of the three GST cases heard by the High Court, these principles have not been referred to (notwithstanding the references in the Federal Courts below) and one may now question whether these principles have any operation in Australia.

The new argument of the Revenue

During the appeal, the primary argument of the Revenue (which was accepted) was that the single/multiple analysis was irrelevant because  it was open to the legislator to identify “a concrete and specific aspect” of an overall supply such as that of water made by CWA, and to give that aspect a different VAT status, whether by making it exempt, by making it zero rated or by attaching to it a different rate of VAT.

CWA contended that this argument could not succeed in this appeal because the provision of a meter and the infrastructure for a customer was not a supply. The Council rejected this contention and observed as follows (at [26]):

In so far as this submission suggests that the only relevant or recognisable supply was or should be treated for all purposes as having been of water, because that was the aim of all the CWA’s activities, the Board cannot accept it. In speaking of a “single service”, the CPP principle does not mean that ancillary services or supplies entirely disappear. Rather, it treats them as ancillary services or supplies which share the tax treatment of the principal service….The power to exempt or attach a lower VAT rate to what would otherwise fall to be treated as a single service can thus attach to a “concrete and specific aspect” of such a service.

Accordingly, where supplies are ancillary or incidental to a principal supply, those supplies do not disappear but simply share the tax treatment of the principal supply. Further, it is open to the legislature to effectively dissect a transaction or arrangement and treat its constituent parts differently for VAT purposes.