COMMISSIONER OF INLAND REVENUE V F B DUVALL LIMITED HC AK CIV 2007-404-2708

COMMISSIONER OF INLAND REVENUE V F B DUVALL LIMITED HC AK CIV 2007-404-2708 29 February 2008IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2007-404-2708BETWEEN COMMISSIONER OF INLAND REVENUE Applicant AND F B DUVALL LIMITED Respondent Hearing: 18 February 2008 Appearances: Mr C Wood for Applicant Mr S Judd for Respondent Judgment: 29 February 2008 at 2.30 p.m.JUDGMENT OF ASSOCIATE JUDGE DOOGUEThis judgment was delivered by me on29.02.08 at 2.30 pm, pursuant to Rule 540(4) of the High Court Rules. Registrar/Deputy Registrar DateSolicitors:Meredith Connell Solicitors, P O Box 2213, Auckland S Judd, P O Box 3320, AucklandIntroduction[1] On or about the 26 February 2007 the respondent (whom I shall refer to as 'the Commissioner') served a statutory demand under s 289 of the Companies Act 1993 on F B Duvall Limited ('the applicant'). The sum demanded was $29,295.07. The statutory demand had appended to it a statement of account to 26 February 2007 which showed the Commissioner's demand to be based on GST for two periods, those ending 31 March 2001 and 30 September 2000, together with additional penalties on the sums claimed and interest. [2] A statement of claim seeking an order placing the applicant into liquidation was filed in the High Court on 15 May 2007. It has yet to be dealt with. [3] The applicant filed and served an application under r 700K of the High Court Rules seeking orders restraining publication of any advertisement of the filing of the liquidation proceedings and staying further proceedings in relation to the liquidation. [4] The applicant has not taken any steps to set aside the statutory demand that was served on it. Its notice of application does not, in terms, dispute its indebtedness to the Commissioner. It accepts that it filed returns of GST on which it was assessed as owing GST to the Commissioner but it says that any debt owed should be cancelled out by setting-off credits due to the applicant by the Commissioner which arise from earlier returns. As I understand it, the applicant says that because the applicant has an unarguable right to such a set off, then issuing the statutory demand in the present circumstances can only be because the Commissioner has determined to use the statutory demand procedure for an improper purpose, namely to put the applicant into liquidation so that it cannot pursue future claims in litigation to be brought against the Commissioner. [5] There are two other grounds relied upon. The applicant says it is not insolvent and it says that the Commissioner is prevented from bringing these proceedings because to do so would conflict with an undertaking that theCommissioner gave not to take enforcement action with respect to the debt which is the subject of the statutory demand. [6] The service of the notice opened another front in a long war which has been waged between the applicant and the Commissioner and which has to do with a tax avoidance scheme which is the work of Mr J G Russell, a director of the applicant and its tax agent.Principles[7] In dealing with the application I intend to be guided by the statement of principle to be found in the judgment of Wallace J in Nemisis Holdings Ltd v North Harbour Industrial Holdings Ltd (1989) PRNZ 379, 385: I turn now to consider the application for a stay. That application is made in terms of r 700K, which does not appear to alter the substantive law. The relevant legal principles and practice concerning the Court's jurisdiction to stay winding-up proceedings (including advertisement) are discussed in the judgments of the Court of Appeal in Exchange Finance Co Ltd v Lemmington Holdings Ltd [1984] 2 NZLR 242, Anglian Sales Ltd v South Pacific Mfg Co Ltd [1984] 2 NZLR 249 and Fletcher Development & Construction Ltd v New Plymouth Hotels Holding Ltd CA63/86 24 July 1986. The Court has an inherent jurisdiction to stay winding-up proceedings where the debt upon which such proceedings are founded is the subject of genuine dispute. In those circumstances the plaintiff cannot show that it has the status of a creditor (required by s 219 Companies Act 1955) or (in the case of proceedings relying upon s 218(a) — not relevant in the present case) that there has been neglect by the company to pay. The decisions make it clear that the jurisdiction to stay is an inherent one to prevent abuse of process and that there is no inflexible rule. The governing consideration is whether the proceedings savour of unfairness or undue pressure. It is, however, a serious matter to stay winding-up proceedings so that the decision to do so is never made lightly. The onus is on the applicant and it is normally necessary to demonstrate "something more" than the balance of convenience considerations which it is usually appropriate to consider on an application for an interim injunction. [8] Of particular relevance to the present proceeding is Wallace J's statement inNemisis Holdings at 385: I also record that, if there is a dispute as to only part of the debt, that is not sufficient to justify a stay. The plaintiff is entitled to proceed solong as there is a debt due qualifying the plaintiff as a creditor and providing a basis for the ground of the proceedings: see Anglian Salesat p 255. Finally in relation to the law, I mention that Mr Knapp for the plaintiff did not dispute that, if the defendant has valid claims against the plaintiff, those claims are by way of equitable set-off. Claims for an equitable set-off, as distinct from a counterclaim, operate to eliminate the indebtedness claimed against the party seeking the set-off: see eg H M Fogarty Ltd v Commerce Et Finance Ltd HC AK M1784/88 14 February 1989,. If, therefore, the defendant in this instance can show a strong prima facie case on substantial grounds that it is entitled to a set-off, the Court has a discretion to stay the advertising of the petition.First Court of Appeal decision and events leading up to it[9] It is impossible to understand the merits or otherwise of the Commissioner's claim without reviewing some of the history of dealings between and earlier litigation involving the two parties. I have attempted to summarise this history in succeeding parts of the judgment as briefly as possible. [10] The applicant filed GST returns for periods ended 31 August 1987 to 31 August 1990. During that period the applicant received administration fees from various subsidiary companies and the Commissioner confirmed the returns filed by the applicant which showed that GST was payable arising from its receipt of administration fees. Because of a subsequent Taxation Review Authority decision, the applicant filed amended GST returns claiming that the administration charges should be classed as dividends received by it and therefore not attracting output tax. In its calculations for the amended return, the applicant claimed to recover the output tax it had earlier paid and as well to be entitled to get back input tax credits and interests, all of which resulted in the Commissioner owing it $164,152.65 plus interest. This return was disallowed and a case was stated to the TRA. [11] Mr Russell for the applicant gave evidence that there had never been any goods and services supplied to the subsidiaries by the applicant company and that if contrary to that view, goods and services had been provided, the payments received were exempt under s 14 of the Goods and Services Tax Act being in respect of financial services. The TRA confirmed the Commissioner's stance that thepayments received by the applicant attracted output tax. The TRA did not discuss the issue of supplies received by the applicant and its entitlement to any input tax credits. [12] The TRA stated a case on appeal to the High Court. At the hearing in the High Court the Commissioner apparently changed his stance and accepted that no output tax was payable. His ground for accepting that no output tax was payable was that, in his view, no services financial or otherwise had been supplied by the applicant and so no GST arose. The applicant before the High Court submitted that it was not open to the Commissioner to raise the 'no services' argument and if services had been supplied then they were financial services and therefore exempt from GST. [13] The Commissioner conceded that the appeal had to be allowed. The High Court accepted that the determination of the TRA should be set aside but the Judge also concluded that he had jurisdiction and authority to examine the reasons why it could be said that no output tax was payable. The Judge concluded that no services had been supplied by the applicant in return for the payments that were made to it. The Judge determined that the Commissioner was entitled to change his stance on appeal to one which was to the effect that the company had not supplied taxable services. At that point the Commissioner also argued that the applicant was not entitled to input tax credits. [14] The applicant appealed from the High Court decision and the judgment was given 17 May 2000; FB Duvall Limited v CIR (2000) 19 NZTC 15, 658(CA). The Court of Appeal concluded that the High Court had been in error and that the Commissioner was not entitled to change the stance he had taken in making the assessments and had pursued before the TRA, namely that the administration charges were in respect of taxable supplies assessable for output tax; and that the High Court lacked jurisdiction to hear and determine the Commissioner's new argument that Duvall had not supplied any services to subsidiaries, and then in subsequent judgments to determine that Duvall was not entitled to input tax credits: [22].[15] Amongst other grounds relied upon by the Court of Appeal was the consideration that it was not open for the Commissioner to assert the contrary of the basis upon which the original assessments had been made and objected to. All the notices of assessment asserted that Duvall had supplied services: [24]. Further, the High Court was not hearing and determining objections to assessments, rather it was hearing an appeal on questions of law or fact arising for its determination in terms of the case stated by the TRA. That being so the High Court was limited to determining whether the Commissioner was correct in ruling that the administration charges were taxable supplies and therefore subject to GST (that was the stance taken by the Commissioner in front of the TRA). Further the Court of Appeal said at paragraph [27] of its judgment that the legitimacy of input tax credits had not been an issue in the assessments and the High Court should not have gone into that area. It said that the whole focus was properly on output tax. [16] The High Court orders were quashed. The GST assessments referred to in the case stated by the Commissioner to the TRA were to be amended by deleting the amounts shown as payable by way of output tax in respect of administration fees for supplies made by the applicant to subsidiary companies. The question of whether the applicant should be able to claim input tax credits was expressly noted to be a matter that was still at large and that the Commissioner would need to consider whether he was able to make further assessments in respect of the input tax credits because of difficulties with a time bar. [17] The Court of Appeal judgment ended by fixing costs that were later quantified in the sum of $120,000 which the Commissioner was to pay to the applicant.Second Court of Appeal decision and events prior to it[18] The second round of appeals arose out of a further group of GST returns which the applicant made in the period 1990 to 1994. The background to the second Court of Appeal decision was as follows. Following the first round of appeals, the Commissioner issued assessments which gave effect to the Court of Appealjudgment in that his assessments did not make allowance for any output tax. However, the assessments rejected the claim by the applicant for input tax credits. The assessments related to different periods from those that were the subject of the litigation that found its way up to the Court of Appeal under the first round of appeals. The applicant appealed to the TRA. [19] The TRA gave an interim decision on 27 February 2002 (Case V18). In the decision it concluded that the charges that the applicant made to its subsidiary companies were part of a tax-avoidance scheme and did not create a genuine supply of services or alternatively any services provided were a financial service and exempt from GST. That being so the Commissioner could not assess the applicant with output tax and the taxpayer could not retain input tax credits in relation to the purported supply of such services. [20] Subsequently the TRA, in decision W25, issued its further and final determination. The TRA confirmed the first part of its decision that there were no taxable supplies that could result in the applicant being assessed with GST. However, the TRA accepted that it could not resolve the other issue which had been mentioned in the interim decision, namely whether the applicant had a right to claim input credits. The order that he made was that the output tax, which was assessed, was to be refunded to the objector. [21] At the request of the Commissioner, the TRA stated a case to the High Court. However Priestley J, for what may be described as procedural reasons, concluded that the TRA had not had jurisdiction to hear and determine the appeal. That was because the Commissioner had resolved to treat the amended returns as late objections but he had not decided whether or not to accept those objections. Priestley J therefore determined that without a determination having been made by the Commissioner, the TRA had no jurisdiction to decide the case. [22] Priestley J's decision was appealed to the Court of Appeal which gave a judgment 7 April 2006: F B Duvall Limited v CIR (2006) 22 NZTC 19,866 (CA). In its judgment, the Court of Appeal upheld Priestley J's determination and stated:28. The late objection not having been accepted, there can have been no allowance or disallowance of that objection. We accept the Commissioner's submission that, under s 33(2) and 34(2), a late objection must have been accepted and then that objection either allowed in part only or disallowed before the tax payer can require the Commissioner to state a case. In our view, this is the natural meaning of the statutory wording. [23] The long-running dispute between the applicant and the Commissioner over whether the applicant could claim input credits was therefore still unresolved.The background to the current proceedings[24] The current proceedings relate to two goods and services tax returns for the six month GST periods ended 30 September 2000 and 31 March 2001. Both of the returns were prepared by Mr G J Russell, a director of the applicant. In each case the returns were made on 22 April 2004. The returns which the applicant sent in were not accompanied by payment. They were both endorsed with the words 'please deduct this amount from refunds due in earlier periods'. [25] At some point the applicant received notices of assessment dated 19 May 2004 which confirmed the applicant's liability for GST as calculated in the 22 April returns. As calculated in those returns, the respective amounts of GST due were $222.22 and $12,941.67. [26] The assessments did not make allowance for any credits from earlier periods which the applicant had requested. [27] In June 2004 the applicant wrote to the Commissioner stating that there were credits which could be used to set off against the GST calculated. The letter stated: The net effect of that transfer will be to discharge the liability for the periods ended 30 September, 2000 and 31 March, 2001. [28] On 30 July 2004 the applicant wrote to the Commissioner making reference to a Goods and Services Tax Statement of Account dated 20 July 2004 which showed outstanding balances in respect of the GST periods. The applicant noted that it had not received a reply to its letter of 2 June 2004.[29] On 1 October 2004 the applicant again wrote to the Commissioner who, for some reason, had not replied to the earlier letters. The applicant's letter continued:We hereby give you notice that if we do not receive a reply within 14 days of the date of this letter we will take your non response to evidence that the Commissioner has made a determination to not respond to our correspondence and not deal with the Goods and Services Tax liability in those periods in the manner we have proposed. If the Commissioner makes such a determination we will file a Notice of Proposed adjustment which deals with the Goods and Services Tax liability in the manner set out in the correspondence.[30] Subsequently the applicant filed a notice of proposed adjustment ('NOPA") dated 18 October 2004 in respect of the two GST periods. The Commissioner asserts that that the NOPA is out of time, and this is a matter that I will return to subsequently. Essentially the NOPA sought the setoff of credit balances for earlier periods against the latest GST assessments to which I have been making reference. [31] On 28 October 2004 the Commissioner replied, apologising for the delay in responding to the applicant's letter of 1 October 2004. The letter is an important one. It stated: As you are aware the TRA decision, of 5 September 2003, is currently under appeal by the Commissioner. It would appear premature to finalise the assessments for your client until the completion of this process, therefore no adjustment has been made to your client's account. As no such credit is current available to action your requested transfers. (sic). Collection action will of course be suspended, for the GST periods ended 30 September 2000 and 31 March 2001. I trust you agree that this is the most efficient manner of dealing with the current situation. [32] Apparently the next communication that the Commissioner had with the applicant was a letter which the Commissioner wrote 5 May 2006. This was some two months after the Court of Appeal judgment dealing with case V18 and case W25 was given - see [19] and [20] above. The letter referred to the 'amended Goods and Services Tax returns' for the 1990/1991 GST returns. It went on to say that those amended returns had been treated as late objections as they were filed out of time. The letter then continued.I have determined that these late objections should not be allowed. The position shown in amended returns can not be correct. They show a claim for input tax credits for taxable supplies received during those periods without making any taxable supplies. On the face of it there is not taxable activity for Goods and Services Tax. In order to determine this matter properly it would be necessary to go back and investigate the entirety of the company's operations. The company has not provided a sufficient basis to justify the use of the Commissioner's resources on such an investigation. I apologise for the lengthy delay in making this decision. [33] Thereafter in May and September 2006 the applicant advised the Commissioner by letter that it wished to have the matter brought before the TRA by means of a case stated. [34] The next development was that on 8 January 2007 the Commissioner wrote advising that enforcement action would be taken to collect the sum of $28,617.48 which the Commissioner said was outstanding in the company's account and this was followed up by a statutory demand under s 289 of the Companies Act 1993 dated 26 February 2007. It is with respect to that statutory demand that the present application has been brought.Grounds for present application[35] The applicant relies on r 700K and the inherent jurisdiction of the Court to prevent the Commissioner from proceeding with the liquidation proceedings against it. Rule 700K states:700K Power to stay liquidation proceedings(1) Where an application for putting a company into liquidation is made by the filing of a statement of claim pursuant to Rule 700C(1), the defendant company, or, with the leave of the Court, any creditor or contributory or shareholder, as the case may be, of that company, or the Registrar of Companies, may, within 7 days after the date of the service of the statement of claim on the defendant company, apply to the Court for an order restraining publication of any advertisement required by Rule 700I or any other information relating to that statement of claim and staying any further proceedings in relation to the liquidation.(2) The Court shall deal with every application under subclause (1) as if it were an application for an interim injunction and, if it makes the order sought, may make it on such terms as the Court thinks fit. (3) Nothing in this rule limits the inherent jurisdiction of the Court. [36] The specific grounds upon which the applicant relies are: 1. The plaintiff is using the proceeding for the improper purpose of attempting to obtain payment of GST when the plaintiff owes the defendant a greater amount by way of GST refunds. 2. The defendant is not insolvent. 3. The plaintiff represented in a letter 28 October 2004 to the defendant that he would not seek to recover the claimed amount until the issues relating to other GST periods have been resolved and those matters have not yet been resolved. 4. It is in the interests of justice to grant the order sought.Abuse of proceedings groundApplicant's submissions[37] In the course of argument I asked Mr Judd to tell me what remedies he thought would be available to the applicant against the Commissioner. He told me that there may well be a contractual agreement that was entered into with the Commissioner which was set out in the letter the Commissioner wrote to the applicant on 28 October 2004 - refer to para [30] above. He said that alternatively, there might be some public-law type remedy available against the Commissioner for failing to act in accordance with his statutory obligations or for failing to observe a general duty to act fairly. Alternatively he said the letter of 28 October 2004 could give rise to an estoppel. All of these possibilities he said would justify the issue of an injunction to preserve the situation until the applicant could obtain such remedies.Submissions for Commissioner[38] Mr Wood's submission was to the following effect. He said that the Commissioner has an unimpeachable basis for claiming the amount set out in the statutory demand. No challenge had been made to the assessments of GST for therelevant periods. He said that the Commissioner had acted correctly in rejecting the NOPA because it was out of time and there were no exceptional circumstances which entitled the applicant to an extension. All that being so, the Crown, which the Commissioner represented, was entitled to rely on r 146 of the High Court Rules which provides:146 Restriction where Crown involved(1) In any proceeding by the Crown for the recovery of taxes, duties, or penalties, no defendant shall be entitled to avail himself of any set- off or counterclaim. (2) In any proceeding of any other nature by the Crown, no defendant shall be entitled to avail himself of any set-off or counterclaim arising out of a right or claim to payment in respect of any taxes, duties, or penalties. (3) In any proceeding by or against the Crown, being a proceeding to which neither subclause (1) nor subclause (2) applies, no defendant shall be entitled, without leave of the Court, to avail himself of any set-off or counterclaim – (a) If the Crown sues or is sued either – (i) In the name of the Attorney-General on behalf of a Government department or officer of the Crown; or (ii) In the name of a Government department or officer of the Crown; and (b) If the subject-matter of the set-off or counterclaim does not relate to that department or officer .(4) Where an application for leave under subclause (3) is made by a defendant other than the Crown, that application shall be served on the Crown not less than 7 days before the date therein specified for hearing the application.[39] Mr Wood also referred me to s 109 of the Tax Administration Act 1994 which provides:109 Disputable decisions deemed correct except in proceedings Except in objection proceedings under Part 8 or a challenge under Part 8A, - (a) No disputable decision may be disputed in a court or in any proceedings on any ground whatsoever; and(b) Every disputable decision and, where relevant, all of its particulars are deemed to be, and are to be taken as being, correct in all respects.[40] Before I determine the issue of abuse of process it is necessary to consider another aspect of the history of dealings between the Commissioner the applicant and that is the Notice of Proposed Adjustment which the applicant filed 18 October 2004.The NOPA of 18 October 2004Introduction[41] I referred in paragraph [30] above to the applicant filing a Notice of Proposed Adjustment dated 18 October 2004. As I noted in that paragraph, the intention of the NOPA was that there should be set off against the disputed GST liability which is the subject of these proceedings, credits which the applicant claimed from earlier periods. Specifically, the NOPA sought that part of the credit that the applicant considered it was entitled to for the period ended 31 December 1994 should be brought to account in the later periods during which the liability which is subject of these proceedings was incurred. Those later periods were 31 December 2000 and 31 March 2001 respectively. [42] The position that the applicant takes is that if the Commissioner accepted the adjustments proposed in the NOPA, the applicant would be able to offset input credits to which it says it is entitled from earlier GST periods, against its liability for the liability for GST claimed in the later period. [43] The Commissioner declined to accept the NOPA. The grounds for doing so are reiterated in the submissions for the Commissioner which I deal with next.Submissions for the Commissioner[44] Mr Wood for the Commissioner submitted:15. In certain circumstances a NOPA can be issued outside the four month period but only if "exceptional circumstances" exist. An exceptional circumstance is defined as an event or circumstance beyond the taxpayer's control that provides the taxpayer with a reasonable justification for not complying with the time limit. Anact or omission by the taxpayer's agent is not an exceptional circumstance unless it was caused by events beyond the agent's control that could not be anticipated and could not have been avoided if the accepted standards of business organisation and professional conduct were followed. 16. The NOPA of 18 October 2004 is more than four years out of time for the assessment made for the period ended 30 September 2000 and more than three and a half years out of time for the assessment for the period 31 March 2001. It is therefore invalid. 17. A NOPA cannot be used as a device to obtain disputed GST refunds for the earlier periods ended 31 May 1990, 31 December 1990, 30 June 1991, 31 December 1991, 30 June 1992, 31 December 1992, 30 June 1994 and 31 December 1994. The plaintiff's position is that he does not accept the late returns as being correct. There is no legal basis for the GST refund claims. 18. Amended returns were filed by Mr Russell on behalf of the defendant out of time for each of the periods referred to in paragraph 17 and have been treated by the plaintiff as late objections. The plaintiff considers that they cannot be correct as they show a claim for input tax credits for taxable supplies received during those periods but without making any taxable supplies and without accepting liability for output tax even if genuine taxable supplies have been made (see letter dated 5 May 2006, exhibit "F" to Mr Russell's affidavit sworn 5 July 2007).Discussion[45] I do not consider that the applicant's arguments concerning the NOPA take matters any further. The NOPA assumes that there is credit available to the applicant from an earlier period, namely those nominated in the NOPA which are the periods ending 31 December 1994 to 30 September 2000 and 31 March 2001. But on my understanding, there are no such credits. The applicant has battled resolutely with the Commissioner to obtain credits for input expenses but the Commissioner has adamantly declined to recognise any such entitlement. There matters rest unless and until the Commissioner's position is overturned by way of an appeal. The history that I have set out earlier in this judgment, though, reveals that the applicant's attempts to have matters corrected by way of appeal have not yet borne fruit. The NOPA therefore is premised on a false assumption. That being so, the fact that the NOPA was given out of time is neither here nor there. It would be ineffective to achieve the applicant's objective in any event.[46] I now go on to consider what the position would be if my conclusion set out above is incorrect. I remind myself that the applicant must demonstrate that there is a serious question to be tried concerning the NOPA. That is, the applicant has to demonstrate that there is some reasonable prospect of obtaining a determination (presumably by means of judicial review) that the Commissioner's refusal to accept the NOPA out of time, on the grounds of 'exceptional circumstances', was somehow flawed and should be set aside and the Commissioner directed to in fact accept the NOPA. [47] The foundation of the NOPA consists of two propositions: first that assessments from 2000 and 2001 can now be challenged and credits obtained for those periods; second that the credits so obtained can be applied to the 2004 period. [48] Mr Wood submitted:14) The defendant has issued a Notice of Proposed Adjustment ("NOPA"). The NOPA is dated 18 October 2004 and a copy is exhibit D to the affidavit of Mr Russell sworn 5 July 2007. The NOPA relates to the GST periods ended 30 September 2000 and 31 March 2001. A NOPA can be issued by a taxpayer but only in the circumstances permitted by sections 89D and 89DA of the Tax Administration Act 1994. The NOPA must be issued within four months of the relevant assessments: s 3(1) definition of "Response Period" of the Tax Administration Act 1994. 15) In certain circumstances a NOPA can be issued outside the four month period but only if "exceptional circumstances" exist. An exceptional circumstance is defined as an event or circumstance beyond the taxpayer's control that provides the taxpayer with a reasonable justification for not complying with the time limit. An act or omission by the taxpayer's agent is not an exceptional circumstance unless it was caused by events beyond the agent's control that could not be anticipated and could not have been avoided if the accepted standards of business organisation and professional conduct were followed. 16) The NOPA of 18 October 2004 is more than four years out of time for the assessment made for the period ended 30 September 2000 and more than three and a half years out of time for the assessment for the period 31 March 2001. It is therefore invalid.[49] I will accept for present purposes that the exceptional circumstances arise from the fact that the applicant was moved to issue its NOPA because it could not get a reply from the Commissioner to the letters it had been writing since 2 June2004. Those letters requested that a credit be carried forward which would effectively wipe out the GST which was assessed to be paid for the periods 30 September 2000 and 31 March 2001. The return though for those periods was not made until 22 April 2004 and the assessment came to hand in the following month. As I read the definition of "response period" in Section 3 of the TAA, the four- month period set out in 3(1)(c) runs from the date of the assessment. [50] Any explanation for why there are exceptional circumstances must account for the entire delay. The most the applicant can say is that in 2004 it could not get a reply from the Commissioner for several months. But there is no explanation as to why there had been a delay of three to four years in challenging the 2000-2001 returns. Those are serious delays. [51] The next step is to examine the other issue that would arise were the applicant to bring proceedings for relief against the Commissioner's refusal to accept the NOPA out of time. In my judgment, the applicant cannot reasonably submit that there would be a serious issue to be tried in such proceedings, given the length of the delay and the absence of any evidence establishing that there were exceptional circumstances. I can see no basis on which a Court hearing a judicial review would overturn the Commissioner's decision not to accept the NOPA.Determination of point concerning abuse of process[52] The substance of the applicant's case is that the Commissioner is using the Court's processes for a purpose that is not legitimate. The applicant does not assert that the abuse of process resides in some procedural irregularity which is the type of abuse involved, for example, where a litigant commences duplicated sets of proceedings which are concerned with the same subject matter. Instead, the applicant asserts that the Commissioner has issued the statutory demand to prepare the way for proceedings to liquidate the company. Once he has achieved that objective, the argument proceeds, he will have defeated the applicant's rights to challenge the way he has treated the applicant for tax purposes.[53] The applicant fails, in my view, to establish that the institution of liquidation proceedings is an abuse of process. In my view, the Commissioner is acting legitimately in enforcing the GST assessments that were the subject of the statutory demand. In particular, the applicant's argument that it has rights of set-off falls to the ground because there never has been a determination that the Commissioner is obliged to refund the input credits to which the applicant says it is entitled. Nor can the applicant contend that it has a 'counter-claim' for those amounts. The scheme of the Tax Administration Act is such that the only way in which the applicant can establish its statutory right to payment from the Commissioner is by going through the assessment procedures under the Act and if necessary to negotiate any appeals arising from those determinations. And as I have said that has not occurred. The proceeding is therefore caught by Rule 146 of the High Court Rules. [54] Further, because of the effect of s 109, the Commissioner's determination that input credits are not available to the applicant has to be taken as final for the purposes of the present proceedings. [55] All this leads to the final conclusion that the Commissioner is acting in accordance with his statutory duties. Any inference that the Commissioner is using the proceedings for an illegitimate object and that therefore his proceedings amount to an abuse of the Court's processes is simply not arguable.Solvency[56] The applicant states in the application that a ground for making the orders is that the defendant is not insolvent and is able to pay the amount claimed. [57] In his affidavit in support of the application to stay Mr Russell said:3. The Plaintiff has had copies of the accounts of the company filed with its yearly tax returns. Those accounts show that the Defendant is a solvent company. 4. The Plaintiff has been receiving copies of the accounts of the Defendant for some 35 years. The last set of accounts that were supplied to the Plaintiff shows total shareholder funds of $5,224,434.00 as at 31 March 2006.[58] I accept that there may be appropriate cases where on an application for stay the applicant is able to establish a strong case that the company is solvent and that in those circumstances it may be appropriate to grant a stay. However this case is not in that category. The evidence as to solvency essentially amounts to a statement of conclusion on Mr Russell's part. I accept that he also refers to one factual matter that might be arguably relevant to solvency, namely the shareholders' funds. But the importance to be attached to that item all depends upon what those funds are represented by and no detail is provided. [59] Because the accounts are not in evidence I have not been able to consider them to make my own assessment of the company's solvency. Given that the applicant is the subject of an expired statutory demand, it cannot be said with any degree of confidence that the ultimate decision that a Court would come to if this matter was to proceed to a defended hearing of the application for stay, is that the company is indeed solvent. If that is so, there can be no justification for intervening at this point to stop the plaintiff's proceedings.The letter of 28 October 2004 as a ground for stay[60] In its notices of application the applicant stated its fourth ground as follows: 4. The plaintiff has previously represented to the defendant that it would not seek to recover the claimed amount until the issues relating to other GST periods have been resolved and those matters have not yet been resolved. [61] I have already made reference to the fact that the applicant wrote a number of letters to the Commissioner asking for the Commissioner to reconsider the notices of assessment in respect of GST for the periods 30 September 2000 and 31 March 2001. I have also referred to the follow up letters that apparently received no reply. This series of correspondence was followed by the 'NOPA' which the applicant filed on or about 18 October 2004. [62] On 28 October 2004 the Commissioner wrote to the applicant referring to the last of the letters in the series that the applicant had written which culminated in the applicant issuing the NOPA. It is necessary to set this letter out in full:I am in receipt of your letter dated 1 October 2004 for which I apologise for the delay in replying. As you are aware the TRA decision, of 5 September 2003, is currently under appeal by the Commissioner. It would appear premature to finalise the assessments for [the applicant] until the completion of this process, therefore no adjustment has been made to your client's account. As such no credit is currently available to action your requested transfers. Collection action will of course be suspended, for the GST periods ended 30 September 2000 and 31 March 2001. I trust you will agree that this is the most efficient manner of dealing with the current situation.[63] The TRA decision that the letter referred to was W25. The appeal against that decision was decided by Priestley J on 8 March 2005. [64] On 5 May 2006 the Commissioner wrote disallowing the amended Goods and Services tax returns which the applicant filed for the periods ended 31 May 1990, 31 December 1990, 30 June 1991, 31 December 1991, 30 June 1992, 31 December 1992, 30 June 1994 and 31 December 1994. Those GST periods were relevant because, I understand, returns had been made on the basis that the applicant was able to claim input credits. If the claims for input credits were to be allowed, then the applicant's account with the Commissioner would be substantially in credit. It was that credit which the applicant wished to be applied to discharging the liability of $13,163.89 for the period 30 September 2000 to 31 March 2001. But the decision of the Commissioner contained in his letter to the applicant 5 May 2006 put an end to that possibility. By his determination he declined to accept that the GST should be assessed on the basis of the input credits which the applicant had claimed. On that basis, there was no credit which would 'take out' the GST liability for 30 September 2000 and 31 March 2001. [65] The liability arising out of the GST periods ending 30 September 2000 and 31 March 2001 is the core debt which is the basis for the statutory demand that has been issued, the amount being augmented by interest and penalties. [66] I will approach the issue raised by ground four of the Notice of Application by first enquiring whether there is a proper factual foundation for the applicant's contention.[67] The applicant bases the claim squarely on the letter from the Commissioner 28 October 2004 which I have set out in para [62] above. [68] I do not accept that the letter can bear the meaning that the applicant attributes to it. Mr Judd submitted that what the letter was saying was that no steps would be taken to enforce the GST liabilities until the issue of whether the applicant was able to claim input credits had been finally and authoritatively determined by the Courts. He said that Priestley J's appeal decision and the appeal from that decision to the Court of Appeal were confined to procedural matters and did not grapple with the substantive point that the applicant raises. The result is that apparently it has never been made clear if the applicant is able to claim input credits. The Commissioner's position remains that if the applicant is not making any taxable supplies there is no taxable activity and therefore input tax credits cannot be claimed. The latest iteration of that position by the Commissioner was, as I have said, in the letter which it wrote to the applicant on 5 May 2006. In that letter objections by the applicant based upon the non-allowance of input tax credits were again rejected by the Commissioner. I do not know whether any steps have been taken to challenge that view. [69] I consider that the letter of 28 October 2004, when reasonably construed, conveys that the Commissioner would not take any steps to enforce the amounts he said were owing in the GST periods 30 September 2000 and 31 March 2001 until the TRA decision W25 had come to hand. It is matter of record that Priestley J's judgment was given 8 March 2005. When the Commissioner said it was premature to finalise the assessments for the applicant until the completion 'of this process', he was clearly referring to the appeal by the Commissioner against the TRA decision W25. The explanation for the letter is that the Commissioner of Inland Revenue expected that on completion of 'the process', that is the appeal, there would be clarity in the matter of whether the applicant could claim input credits. The fact that that expectation was disappointed does not change what the letter proposed. It would be wrong to read the letter as though there was behind it an unspoken, but obvious, proviso that if the appeal did not resolve the issue then the Commissioner of Inland Revenue would suspend all action for an indefinite period until a determination solving the dispute was to hand – no matter how long that might take.[70] In my view, when the Commissioner issued the statutory demand 26 February 2007, any period during which he was required to freeze enforcement action because of the letter dated 28 October 2004 was long over. I cannot accept the contention that the letter has the open-ended meaning that Mr Judd submitted. That being so, I do not need to go on and consider the other difficulties that the applicant faces in raising this issue which has to do with the inability of the Commissioner to raise an estoppel against himself and which has been dealt with in cases such as: BNZ Finance Limited v Holland & Anor (1997) 18 NZTC 13, 156, at page 21.Is the costs award made by the Court of Appeal deemed to be an assessable supply of services?[71] In the supplementary submissions that each counsel filed a further issue emerged, namely, whether the GST which was the basis for the statutory demand was in fact owed. [72] It is common ground that the GST assessed against the applicant arises out of an award for costs that the Court of Appeal made in favour of the applicant following the hearing of the first appeal by the Court of Appeal. [73] The applicant now takes the view, apparently, that the costs award does not carry GST, which is rather surprising given that it had filed a self-assessment acknowledging a liability for GST for the relevant period. [74] The defendant apparently filed amended returns on 23 September 2007 seeking to "correct this mistake". [75] Mr Judd's submission was as follows:6. The costs award of $120,000 made by the Court of Appeal on 14 September 2000 was in respect of costs incurred in the High Court. The question is whether the legal services supplied to the defendant in the High Court meet the definition required by section 20A(2). The legal services would need to be in connection with-the preparation, institution, or presentation of an appeal against or in consequence of any determination or assessment made, in respect ofthe registered person, by the Commissioner under the provisions the Goods and Services Tax Act 1985:7. At paragraph 15 of the main judgment in CA 23/99 (dated 17 May 2000), the Court of Appeal recorded that in the High Court the Commissioner had conceded that Duvall's appeal from the TRA decision had to be allowed. Therefore, the appeal from the TRA was not in issue in the High Court. It was allowed by consent without argument. The issues that were the subject of argument in the High Court related to the Commissioner's desire to change his stance from that adopted previously. 8. The Court of Appeal concluded that the High Court had no jurisdiction to hear these new arguments raised by the Commissioner. The High Court should have formally allowed the appeal based on the Commissioner's consent and gone no further (see para 23 of Court of Appeal Judgment). If this had occurred then Duvall would not have required any legal services or incurred any costs. Duvall required services and incurred substantial costs in dealing with issues raised by the Commissioner that were not relevant to the appeal from the TRA. 9. As the legal services rendered to Duvall in the High Court did not relate to the appeal from the TRA they are not caught by section 20A(2). Therefore the costs award made in relation to those services is not caught by section 20A(4) and GST is not payable on the award.[76] Mr Wood for the Commissioner submitted:Under section 20A(4), whenever a registered person who is carrying on a taxable activity receives any payment for costs awarded by the court in a case to ascertain liability for GST the registered person must include in their GST return any costs received and show it as output tax.[77] He further submitted:The relevant parts of s 20A(2) are, "any goods and services acquired by the registered person in connection withthe calculation or determination of the goods and services tax payableor of an objection toor an appeal againstany assessment madeshall be deemed to be goods and services acquiredfor the principal purpose of making taxable supplies; and the Commissioner shall allow that person to make a deduction under section 20(3) of this Act of the tax charged thereon."[78] I accept that Mr Woods's submissions concerning the effect of section 20A are correct. The Court of Appeal awarded costs in respect of legal expenses incurred by the applicant in connection to its appeal to the High Court. It cannot be argued that such costs are any less attributable to the appeal because the Court of Appeal later ruled that the Judge enquired into matters that he did not need to and because he may have lacked jurisdiction to make some of the orders that he did.[79] Mr Judd did not suggest that there were policy considerations underlying s 20A, which required a distinction to be drawn for GST purposes between a costs award recognising expense incurred in arguing matters that the Judge was entitled to rule on, and those which he was not so entitled to rule on. [80] In my view it is unarguable that s 20A applies to the award for costs in this case. Quite apart from that, the assessment of GST cannot be challenged for reasons I have given elsewhere in this judgment and therefore submissions by the applicant that the GST was not owing are futile. [81] In any case, this argument is largely academic. An assessment has been made that GST was payable. That assessment stands to this day. That being so I cannot go behind it because of the provisions of s 109 of the Tax Administration Act 1994 which I have set out in para [36] of this judgment.Determination[82] Nemisis Holdings Limited, from which I excerpted the statement of principle at para [7] above, was a case where the issue was whether the defendant owed a debt to the plaintiff in circumstances where the defendant claimed to be able to set-off a sum which the plaintiff owed it against the amount which was the basis for the statutory demand. [83] In this case the issue of whether there is a debt and whether the applicant is able to set off a sum owed to it by the plaintiff is also an issue. For reasons which I have endeavoured to set out, I have concluded that there is a debt and that the proposed set off will not avail the applicant. The resolution of that issue also provides the key to the second issue, namely whether the Commissioner is using the liquidation proceedings in an improper way so that they constitute an abuse of the processes of the Court. The answer to that question essentially turns on the answer to the first issue. If the applicant is in fact indebted to the Commissioner then there was nothing exceptional about the service of the statutory demand and the proceedings subsequently filed in reliance on the applicant's non-response to thestatutory demand are prima facie legitimate. There is no evidence that establishes the contrary. [84] Finally, I have concluded that the claimed solvency of the applicant is not a ground for ordering a stay. [85] For these reasons the application for a stay and for an order restraining advertising is dismissed. The proceeding is to be listed for mention in my liquidation list on 18 April 2008 at 11.45 a.m._____________ J.P. Doogue Associate Judge