ANNON. NAV. LTD & OTHERS ν. REPUBLIC & AN. (1989) 3A CLR 402

Constitutional Law - Equality-Constitution Art. 28 - Taxation- Wide range and flexibility enjoyed by state - Taxation on foreign corporations may be more honerous than that on domestic corporations - State allowed to pick and choose districts, objects, persons, methods and even rates for taxation if it does so reasonably- Whether Part II of the Schedule to the Merchant Shipping (Taxing Provisions) Law, 1963 (Law 47/63), as amended by Law 16/82 offends against principle of equality - Question determined in the negative.

The sole issue in this case was the constitutionality of Part II of the aforesaid Law, whereby ships owned by Cypriots or by Cypriot companies (considered to be Cyprus ships under section 5(1)(a) and (b) respectively) are taxed with an annual tonnage tax reduced by 30%, whereas no such reduction was provided in respect of ships, which are considered to be Cyprus ships under section 5(1)(c) of the aforesaid Law, i.e. ships owned by corporations incorporated outside the Republic in which the controlling interest is vested in Cypriots.

Following an extensive reference to Cypriot, Greek and other authorities, concerning the principle of equality, the Court concluded, in dismissing the recourse, that in this case there exist factors which appear to justify a differentiation as regards the treatment for purposes ofreduction of payable tonnage tax in respect of the two categories of Cyprus ships on the one hand (subsections 5(1)(a) and (b)) on the one hand and the ships owned by the applicants (subsection 5(1)(c)) on the other hand.

Recourse dismissed. No order as to

costs.

Cases ref erred to:

Christodoulou v. Republic (Collector of Customs) (Nicosia 1 R.S.C. 1,

Spyrou and Others v. Republic (Licensing Authority) (No.2) (1973) 3 C.L.R. 627,

Papaxenophontos and Others v. Republic (1982) 3 C.L.R. 1037,

The Board for Registration of Architects & Civil Engineers v. Kyriakides (1966) 3 C.L.R. 640,

Madden v. Kentucky [1940] 309 U.S. 83,

Carmichael v. Southern Coal Co. [1937] 301 U.S. 495,

Mikrommatis v. Republic (Minister of Finance and Another) 2 R.S.C.C. 125,

Republic (Ministry of Finance) v. Arakian and Others (1972) 3 C.L.R. 294,

Antoniades and Others v. Republic (1979) 3 C.L.R. 641,

Republic and Another v Christoudhia and Another (1988) 3 C.L.R. 2622,

Johnston v. Chief Constable of the Royal Ulster Constabulary (Case 222/84) C.M.L.R., Volume 47(1986:3) p. 240,

State of Kerala v. Haji K. Haji Kutty Naha AIR 1969 SC 378,

City of Cleburne, Texas, et al., Petitioners v. Cleburne Living Center, Inc., et al. 473 US 432, 87L Ed2d 313,

Hanover Fire Ins. Co. v. Carr, (1926) 272 U.S. 494.

Recourse.

Recourse against the assessments raised on applicants whereby tonnage tax was levied on their ships in respect of the year 1986.

Ph. Clerides, for the Applicants.

Y. Zararou, Counsel of the Republic B, for the Respondents.

Cur.adv. vuIt.

STYLIANIDES, J. read the following judgment. The applicants by this recourse seek the annulment of the assessments raised on them, whereby tonnage tax was levied on their ships in respect of the year 1986, in accordance with the provisions of section 4 of the Merchant Shipping (Taxing Provisions) Law, 1963 (Law No. 47/1963) as amended.

The applicants were incorporated outside the Republic. The Controlling interest therein is vested in Cypriots. They are foreign corporations specially authorized by the Council of Ministers to register their ships as Cyprus ships under section 5(1)(c) of the Merchant Shipping (Registration of Ships, Sales and Mortgages) Law, 1963 (Law No. 45/1963) as amended. The aforesaid sub-section reads:

"5.-(1) A ship shall not be deemed to be a Cyprus ship, unless more than one half of the shares of the ship are owned-

(a) by a Cypriot;

(b) by a corporation established and operating under and in accordance with the laws of the Republic and having its Registered Office in the Republic; or

(c) if specially authorized by a decision of the Council of Ministers by a corporation incorporated outside the Republic in which the controlling interest is vested in Cypriots."

Cyprus ships are charged with annual tonnage taxes at the rates and in accordance with the provision set out in the Schedule to the Merchant Shipping (Taxing Provisions) Law, 1963 (Law No. 47/1963) as amended. The second part of the Schedule, as amended by Law 16/82, reads:

"PART II

Notwithstanding anything in this Schedule contained-

(a) In the case of a Cyprus ship as the same is prescribed in paragraph (a) of subsection (1) of section 5 of the Merchant Shipping (Registration of Ships, Sale and Mortgages) Laws of 1963-1982; and

(b) in the case of a Cyprus ship as the same is prescribed in paragraph (b) of the same aforesaid sub-section, if the controlling interest in the corporation owning the same is vested in Cypriots, the tonnage tax provided for in Part I of this Schedule shall be reduced by thirty per centum (30%);"

For the purposes of the Schedule "corporation controlled by Cypriots" in the case of a company means a company controlled by Cypriots Of which at least fifty-one per cent (51%) of the shares are owned by Cypriots.

In respect of the year 1986 assessments were raised on the applicants, whereby tonnage tax was levied on their ships at the rates prescribed in the Schedule, without any reduction, as Law 16/82 did not affect them.

They paid the tax levied with reservation of their rights to resort to the appropriate Court.

The applicants complain that the sub judice decisions are null and void, on the ground that the Law under which they were taken is unconstitutional as it violates the principle of equality enshrined in Article 28.1 of the Constitution.

A sub judice decision has to be annulled and be declared to be null and void and of no effect whatsoever if it was based on aninvalid enactment. (See Miltiades Christodoulou and the Republic Collector of Customs Nicosia), 1 R.S.C.C. 1; Savvas Chr. Spyrou and Others (No.2) v. Republic (Licensing Authority) (1973) 3 C.L.R. 627; Papaxenophontos and Others v. Republic (1982) 3 C.L.R. 1037.)

The applicants contend that the reduction of the tonnage tax payable by the other two categories of Cyprus ships is discriminatory against them who paid the full amount of the rate. The provision is unconstitutional as it discriminates between Cyprus ships owned by Cypriots and Cyprus companies on the one hand and foreign corporations in which the controlling interest is vested in Cypriots on the other.

The sole issue that falls for determination is the constitutionality of Part II of the Schedule to the Law.

A Law is presumed to be constitutional unless declared by this Court as repugnant or inconsistent with any of the provisions of the Constitution. It is upon a person challenging the constitutionality of a law to establish it beyond reasonable doubt. (The Board for Registration of Architects & Civil Engineers v. ChristodoulosKyriakides(1966) 3 C.L.R. 640.)

Where a tax is challenged as discriminatory, the burden is upon the person attacking the legislative arrangements to negative every conceivable basis which might support it - (Madden v, Kentucky [1940] 309 U.S. 83; Carmichael v. Southern Coal Co. [1937] 301 U.S. 495).

The principle of equality is well embedded in our system of law from the establishment of the Republic and it is safeguarded by Article 28 of the Constitution. This Court has dealt with the principle of equality in a number of cases including ArgirisMikrommatis and the Republic (Minister of Finance and Another) 2 R.S.C.C. 125, 131; Republic (Ministry of Finance) v. NishianArakian and Others(1972) 3 C.L.R. 294; Antohiades and Others v. Republic (1979) 3 C.L.R. 641; Papaxenophontos and Others v. Republic (supra).

In the recent decision of the Full Bench in The Republic of Cyprus, Through The Attorney-General of the Republicand Another v. Maria Christoudhia and Another (1988) 3 C.L.R. 2622) it was said:

"Article 28 of the Constitution safeguards the right of equality and embodies the principle of non-discrimination, which is a fundamental principle in democratic societies. It does not, however, forbid distinctions in treatment which are founded on an objective assessment of essentially different factual circumstances which, being based on the public interest, strike a fair balance between the protection of the interest of the community. Article 28 is violated only when the differentiation is not based on objective and reasonable justification. The existence of such justification must be assessed in. relation to the aim and effects of the measure under consideration, regard being had to the principles which normally prevail in democratic societies Article 28 is likewise violated when it is clearly established that there is no reasonable relationship of proportionality between the means employed and the aim sought to be realized. (See European Court of Human Rights Belgian Linguistic Case, Series A, Volume 6, p. 34, paragraph 10, with regard to Article 14 of the European Convention. See, also, Johnston v. Chief Constable of the Royal Ulster Constabulary (Case 222/84) C.M.L.R. Volume 47 (1986:3) p. 240, paragraphs (18) and (38).)

Article 28 of the Constitution was judicially considered in numerous cases, starting from. ArgirisMikrommatis and the Republic (Minister of Finance and Another) 2 R.S.C.C., 125, in which it was said at p. 131:-

'In the opinion of the Court the term 'equal before the law' in paragraph 1 of Article 28 does not convey the notion of exact arithmetical equality but it safeguards only against arbitrary differentiations and does not exclude reasonable distinctions which have to be made in view of the intrinsic nature of things. Likewise, the term 'discrimination' in paragraph 2 of Article 28 does not exclude reasonable distinctions as aforesaid.'

Bare equality of treatment regardless of the inequality of realities is neither justice nor homage to the constitutionalprinciple. Classification is for governmental or legislative judgment. It ordinarily becomes a judicial question only when it has been drawn and is then subjected to the relevant constitutional tests. Where objects, persons or transactions essentially dissimilar are treated uniformly, discrimination may result, for, in our view, refusal to make a rational classification may itself in some cases operate as denial of equality - (State of Kerala v. Haji K. Haji Kutty Naha AIR 1969 SC 378, as per Shah, J.).

The same principles are enunciated in a number of judgments of the European Court of Human Rights and by the Greek Council of State - (see, inter alia, Decision 3160/76, where it was said:-

'Ούχ ήττον δεν αποκλείει η αρχή αύτη την ευρείαν ευχέρειαν του νομοθέτου όπως, αναλόγως προς την φύσιν του υπό ρύθμισιν θέματος και εν όψει των εκάστοτε ειδικών συνθηκών, προβαίνει εις την θέσπισιν διακρίσεων δικαιολογουμένων εκ της συνδρομής ειδικών περιπτώσεων ή εκ λόγων εξυπηρετούντων το γενικόν συμφέρον.'

In Decision 1852/77 we read:-

'Επειδή εν τω πλαισίου της διά του άρθρου 4 παρ. 1 του Συντάγματος καθιερουμένης αρχής της ισότητας παρέχεται εις τον νομοθέτην ευρεία ευχέρεια όπως, συντρεχουσών ειδικών εις δεδομένην περίπτωσιν συνθηκών, θεσπίζει, κατά παρέκκλισιν από των γενικώς ισχυόντων, κανόνας ειδικούς βάσει αντικειμενικών κριτηρίων δικαιολογημένους εκ γενικωτέρου κοινωνικού ή δημοσίου συμφέροντος, τούτο δε πάντως εντός των ακραίων ορίων, πέραν των οποίων η ρύθμισις αντίκειται εις το κοινόν περί δικαίου συναίσθημα.'

In the case of City of Cleburne, Texas, et al., Petitioners v. Cleburne Living Center, Inc., et al. 473 US 432, 87 L Ed 2d 313, it was said at p. 440:-

'.the Courts have themselves devised standards for determining the validity of state legislation or other official action that is challenged as denying equal protection. Thegeneral rule is that legislation is presumed to be valid and will be sustained if the classification drawn by the statute is rationally related to a legitimate state interest When social or economic legislation is at issue, the Equal Protection Cause allows the States wide latitude."'

The Greek Council of State, in relation to Article 4(1) of the Constitution of 1975 which provides that the Greeks are equal before the Law, held in Case No. 895/86, NomicoVema (Legal Tribune) (1988) Part 2, p. 334, that:-

"... εάν γίνει με νόμο δικαιολογημένη ειδική ρύθμιση για ορισμένη κατηγορία προσώπων και αποκλεισθεί από τη ρύθμιση αυτή, κατ' αδικαιολόγητη δυσμενή διάκριση, άλλη κατηγορία προσώπων, ως προς την οποία, λόγω της ουσιώδους ομοιότητας των περιπτώσεων, συντρέχει ο ίδιος λόγος που δικαιολογεί την ειδική εκείνη μεταχείριση, η διάταξη που εισάγει τη δυσμενή αυτή διάκριση είναι ανίσχυρη ως αντισυνταγματική. Προς αποκατάσταση δε της συνταγματικής αρχής της ισότητας πρέπει να εφαρμοσθεί και για εκείνους εις βάρος των οποίων έγινε η δυσμενής διάκριση, η διάταξη που ισχύει για την κατηγορία υπέρ της οποίας εθεσπίσθη η ειδική ρύθμιση..."

(See, also, Greek Council of State, Cases 4/87, 5/1987, and Cases 53/1983, 1821/1983, 1411/1984, 1107/1986 AriosPagos.)

In Basu's Commentary on the Constitution of India, 6th Edition, Volume B, at p. 262, on the "Equal Protection and Aliens", we read that the State may not discriminate against a person simply on the ground that he is an alien.

In the present case the tonnage tax is prescribed by the Law. The State by legislation made a concession of 30% to two out of the three categories of Cyprus ships. The owners of the two above categories are Cypriots, either physical persons or legal entities, corporations registered and operating in the Republic. The applicants, on the other hand, are incorporated abroad. For the registration of their ships in Cyprus the authority of the Council of Ministers is required; such authority may be given if the controlling interest, that is 51% of the shares, is vested in Cypriots.

The power of the State to classify for purposes of taxation is of wide range and flexibility. A State may impose on foreign corporations taxation more onerous than that imposed on domestic corporations, as a condition for the privilege of doing business within the state. It would be arbitrary to subject a foreign corporation to discriminatory taxation after it has built up a business under an unequivocal Iicence to do business in the State - (Hanover Fire Ins. Co. v. Carr[1926]:272 U.S. 494).

In tax matters, the State is allowed, to pick and choose districts, objects, persons, methods and. even, rates for taxation if it does so reasonably.

The ownership of ships is different from the carrying out of business in the country, even upon licence. If two corporations, a local and a foreign, carry on business in Cyprus they are in, all respects same except of the origin of the one. In the present case a Cypriot and a Cypriot company have objective dissimilarities in respect of the social, economic and. other aspects from a foreign company. The ownership of the ships is not an operation or business in the country, is not the same as the carrying on of other business in the Republic.

In my view, there exist factors which appear to justify a differentiation as regards the treatment for purposes. of reduction of payable tonnage tax in respect of the two categories of Cyprus ships on the one hand and the ships owned by the applicants on the other. The Law challenged is neither inconsistent nor repugnant to the Constitution. It does not violate the principle of equality.

For all the foregoing reasons, this recourse fails and it is hereby dismissed, but in all the circumstances of the case no order for costs is made.

Recourse dismissed. No order as

to costs.

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