It may also involve failure to adhere and observe procedural rules expressly laid down in a statute or legislative instrument by which such authority exercises jurisdiction to make a decision.” The Tribunal has to ask itself, whether the Commissioner’s disregard of the ‘last in first out’ method, and his use of the ‘first in first out’ method was illegal, or was it so irrational, or tainted with procedural illegality.   When one peruses Sections 91(1)(a) and 91(2) of the ITA one cannot avoid feeling that the framers of the Income Tax Act wanted to empower the Commissioner to shift goal posts when a tax payer is about to score. In other words, where a taxpayer uses mechanisms which may reduce its tax liability, the Commissioner is empowered to disregard them as long as it is plainly clear the taxpayer wanted to reduce its liability.

It tilts the ground in determining tax liability in favour of the Commissioner. The Tribunal feels that where the law is clear it has to apply it as it is.   S. 91(1) (a) of the ITA allows the Commissioner to re-characterise a transaction where there is a tax avoidance scheme. It is not in dispute that the effect of the SPAs selling the purportedly Heritage interests first would be to restructure the payments and expenditures in such way that the gain for taxation purpose is minimal hence the tax liability would reduce. This would be as opposed as to when the payments and expenditures incurred in all the three blocks is evenly distributed or the ‘first in first out’ method is considered. One cannot deny that the applicants’ purported sale of Heritage’s interest first in Blocks 1 and 3A is an ingenious way of reducing tax liability. This is because when Heritage sold its interests in Blocks 1 and 3A to Tullow on the 26^th January 2010 they ceased being Heritage’s interests. They become Tullow’s interests. In Clause 6.1(a) of the SPAs, Tullow warrants to the Purchaser that it is the legal and beneficial owner of the interest with the right to sell and transfer them to the purchaser.

We have to call a spade a spade and not a big spoon. At the time, two years later, when Tullow sold its interests it was not holding powers of attorney for Heritage. The law deals with actualities and not suppositions. At what point of time do the interests cease being Heritage interests and become Tullow interests, is it 2 years, 10 years or never? It should be at the time the sale is done and the transaction is completed.Between 2010 and 2012 when the interests of Heritage were acquired and when Tullow sold its interest a lot of water had flowed under the bridge. One cannot say that at time of sale the level of oil exploration, development, and the market forces in respect of oil in 2012 were the same as in 2010. Oil exploration is not static but dynamic.

All these factors go to determine the nature of interests that were sold.   Under the SPAs, the applicants sold interest data, interest property and interest documents. The applicants sold indivisible interests. What the applicants sold were intangible assets. Intangible is defined by Black’s Law Dictionary 8^th Edition p. 823 as: “adj. Not capable of being touched; impalpable; INCORPOREAL. … n. Something that lacks a physical form; an abstraction, such as responsibility; esp., an asset that is not corporeal, such as intellectual property” An intangible asset will always remain intangible. Labeling it does not make it tangible. In cross-examination when Mr. Inch was asked: “when you acquired 100% is there any way you could split and say this is for Tullow, this if for Heritage?” He answered, “No”. The story would have been different if the applicants had sold a Block. For instance if the applicants had sold Block 1 to CNOOC and Block 3 to Total it would be clear what the applicants sold. However the applicants sold interests.

An interest is not something that is tangible. For one to contend that with specificity what interests were sold would be tantamount to splitting atoms to determine which protons were sold. An example of how difficult it is to specify what intangible interests were sold is where one purchases one litre of unleaded petroleum and two litres of leaded petroleum mixes them and then sell one and half litres of petroleum. The said person cannot say that he sold one litre unleaded petroleum and a half a litre of leaded petroleum. To make such an allegation would be to descend in the realm of conjectures and abstracts. The law does not deal with illusions and fallacies. Therefore for the applicants to argue that they sold Heritage’s interest first and then their pre-existing interests later is untenable. For contractual purposes parties may make the terms of the contracts as they wish, freedom of contract. However for tax purposes, the Uganda Revenue Authority has the powers to re-characterise a transaction to reflect the reality of the transaction. In Weiss v Stearn, Supreme Court (United States), 265 U.S. 242, Judgment dated 26^th May 1924 the court noted that: “Questions of taxation must be determined by viewing what was actually done, rather than the declared purpose of the participants, and when applying the provisions of … income laws… we must regard matters of substance and not mere forms.”

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