Brief Summary

Customs and Excise — Tariff classification — Dispute regarding classification of water dispensers for customs duty purposes — Applicant challenged the classification under tariff heading 8516.10.90 and sought classification under headings 8418.69.90 or 8479.89.90 — Legal issue centered on the appropriate tariff heading for the imported goods — Court held that the classification must be determined based on the objective characteristics and properties of the goods at the time of importation, affirming the respondent's classification under tariff heading 8516.10.90.

Comprehensive Summary

Summary of Judgment

1. Introduction

This judgment concerns an application to review and set aside a tariff determination made by the Commissioner for the South African Revenue Service (SARS) under the Customs and Excise Act 91 of 1964 (“the Act”), together with an appeal contemplated by section 47(a)(e) of the Act as characterised in the judgment. The dispute arose from the tariff classification, for customs duty purposes, of imported hot and cold water dispensers.

The applicant, Aquazania (Pty) Limited, imported the water dispensers and challenged SARS’s determination dated 10 April 2008. The respondent was the Commissioner for SARS, who had determined that the goods were classifiable under tariff heading 8516.10.90 (electric instantaneous or storage water heaters and immersion heaters: other), resulting in customs duty and VAT being payable.

The application was brought after SARS, following its determination, demanded payment on 29 October 2008 of customs duty and VAT in an amount stated to be R1 170 950.36. The applicant sought orders setting aside SARS’s tariff determination and declaring that the goods should instead be classified under tariff heading 8418.69.90 (other refrigerating or freezing equipment: other), alternatively tariff heading 8479.89.90 (machines and mechanical appliances having individual functions not specified or included elsewhere in Chapter 84), which would render the importation duty free on the applicant’s case.

The general subject matter was therefore the proper application of the General Rules for the Interpretation of the Harmonized System (“GRI”), the relevant Section Notes and Chapter Notes to Section XVI and Chapter 84, and the interpretation of competing tariff headings in Chapters 84 and 85 of Part 1 of Schedule No. 1 to the Act.

2. Material Facts

Aquazania imported water dispensers capable of dispensing both cold water and hot water, in four models. The models shared the same design, save that floor-standing models had a longer base than desktop models. The dispensers were supplied from a single source, namely a replaceable water bottle, and were housed as one unit incorporating both a cooling component and a heating component.

It was not disputed that the cold-water functionality corresponded, at least at a component level, to a water cooler that could fall within the concept of “refrigerating equipment” in tariff heading 84.18, and that the hot-water functionality corresponded, at least at a component level, to a storage water heater contemplated by tariff heading 85.16. It was also uncontroverted that the dispensers were designed to perform two distinct functions, namely cooling water and heating water, and to dispense either cold or hot water on demand.

The applicant relied on certain objective characteristics at importation to support its contention that the cooling function was principal. Those features included that the cold-water tank had a larger capacity than the hot-water tank, that the heating function could be disabled while the cooling function could not, and that most parts (both by number and stated value) related to the cooling function rather than the heating function. These points were advanced to support classification under Chapter 84 rather than Chapter 85.

A further material fact for purposes of the court’s reasoning was procedural and evidentiary: the parties were agreed that the court should ignore the respective expert evidence, on the basis that the expert opinions were mutually destructive, and that the matter could be decided without reliance on that evidence. The court accepted that approach.

3. Legal Issues

The central legal question was which tariff heading was legally appropriate for the imported water dispensers: 8516.10.90 (as determined by SARS), or 8418.69.90, alternatively 8479.89.90 (as contended for by the applicant). This required the court to determine how the Harmonized System, the relevant notes, and the interpretative rules applied to the objective nature and characteristics of the goods at the time of importation.

A further issue concerned the classification methodology required by the Section Notes and Chapter Notes. In particular, the court had to determine whether the goods were properly treated as multi-function machines under Section Note 3 to Section XVI, and, if so, whether a principal function could be identified. If no principal function could be determined, the court had to decide whether GRI 3(c) applied and what its consequence was for classification.

In addition, the applicant’s alternative reliance on Chapter Note 7 to Chapter 84 raised a further legal question: whether the dispensers could be treated as multi-purpose machines within the meaning of Note 7, and whether Note 7 could be invoked where one of the relevant components was classifiable in Chapter 85 rather than Chapter 84. These questions concerned the application of law to largely common-cause facts, rather than disputes of primary fact, and involved an evaluative classification judgment mandated by the structure of the tariff and the interpretative rules.

4. Court’s Reasoning

The court approached the matter within the statutory framework created by section 47(8)(a) of the Act, which makes tariff interpretation subject to the International Convention on the Harmonized Commodity Description and Coding System (done in Brussels on 14 June 1983) and to the Explanatory Notes issued by the World Customs Organisation. The court applied the established approach that the wording of the tariff headings and the relevant section and chapter notes are the “paramount” considerations, with the Explanatory Notes serving a guidance function and not overriding the headings and notes.

Relying on the established authorities cited, the court framed classification as a structured enquiry: interpreting the relevant headings and notes, considering the nature and characteristics of the goods as presented for clearance, and selecting the most appropriate heading. It reiterated that the classification test is generally objective, based on the characteristics and properties of the goods at importation, and that intention or the purpose for which goods are manufactured is generally not determinative unless the tariff wording makes it relevant.

The court’s core reasoning turned on the application of Section Note 3 to Section XVI, which provides that composite machines and other machines designed to perform two or more complementary or alternative functions are to be classified as if consisting only of the component (or being the machine) that performs the principal function. The court treated the dispensers, viewed as a whole, as machines designed to perform two main functions: cooling and heating water, with an on-demand dispensing outcome. It held that the two functions were complementary and alternative in the sense that a user could choose hot or cold water on demand, and that this brought the goods within the scope of Section Note 3.

On the question whether a principal function could be determined, the court concluded that, assessed as a whole, neither function could be described as the principal function. It therefore relied on the Explanatory Notes to Section Note 3, which indicate that where a principal function cannot be determined, it is necessary to apply General Interpretative Rule 3(c). Applying GRI 3(c), the court reasoned that classification must then be under the heading that occurs last in numerical order among those that equally merit consideration. On that basis, the court accepted the respondent’s classification under tariff heading 8516.10.90 as the heading occurring later than the competing Chapter 84 heading relied upon by the applicant.

The court rejected the applicant’s reliance on tariff heading 8418.69.90 based on the Explanatory Notes to heading 84.18 that mention refrigerated water or beverage fountains. The court’s reasoning was that the goods in issue were not only refrigerated-water dispensers but were both refrigerated and hot-water dispensing appliances, and were therefore not captured by treating them as falling simply within the refrigerated-water fountain example.

The applicant’s alternative reliance on Chapter Note 7 to Chapter 84 (multi-purpose machines) and, through it, on heading 8479.89.90, was also rejected. The court accepted the respondent’s argument that Note 7 is a Chapter 84 note, and in context applies to a machine classifiable within Chapter 84 that can be used for more than one purpose. The court further reasoned that the water dispensers comprised two distinct “tools” purposively incorporated—one classifiable as refrigerating equipment and the other as a storage water heater—and were therefore not a single machine merely capable of being used for multiple purposes in the sense contemplated by Note 7. In addition, the court accepted that Note 7 could not competently be applied where one of the purposes would be achieved by a component classifiable in Chapter 85 (the water heater), rather than Chapter 84. Finally, even if Note 7 were engaged, the court held that its proviso makes it subject to Section Note 3, and that where multi-purpose considerations arise in a product that is also multi-functional, Section Note 3 governs the classification outcome.

A further aspect of the court’s reasoning was its treatment of the applicant’s attempt to place weight on “purpose” rather than “function”. The court considered that Section Note 3 is framed in terms of functions and does not incorporate an additional requirement that the functions be directed at achieving a single purpose. It held that the applicant’s argument based on purpose was inconsistent with the governing classification principles and the authorities emphasising objective characteristics over intention or manufacturing purpose.

5. Outcome and Relief

The court dismissed the application, thereby leaving SARS’s tariff determination in place. The practical result was that the water dispensers remained classifiable under tariff heading 8516.10.90 for duty purposes.

The court ordered the applicant to pay the respondent’s costs, including the costs consequent upon the employment of two counsel.

Cases Cited

Secretary for Customs and Excise v Thomas Barlow & Sons Limited 1970 (2) SA 660 (A).

International Business Machines SA (Pty) Ltd v Commissioner for Customs and Excise 1985 (4) SA 852 (A).

The Heritage Collection (Pty) Ltd v Commissioner, South African Revenue Services 2002 (6) SA 15 (SCA).

Commissioner, South African Revenue Service v Baking Tin (Pty) Ltd 2007 (6) SA 545 (SCA).

Commissioner, South African Revenue Service v Komatsu Southern Africa (Pty) Ltd 2007 (2) SA 157 (SCA).

African Oxygen Ltd v Secretary for Customs and Excise 1969 (3) SA 391 (T).

Legislation Cited

Customs and Excise Act 91 of 1964, including section 47(8)(a) and section 47(a)(e) as referenced in the judgment, and Part 1 of Schedule No. 1.

International Convention on the Harmonized Commodity Description and Coding System, done in Brussels on 14 June 1983.

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The water dispensers were held to be multi-function machines within the meaning of Section Note 3 to Section XVI, performing two complementary or alternative functions (cooling and heating water) and designed to dispense hot or cold water on demand. On the court’s assessment, no principal function could be identified for purposes of Section Note 3, with the consequence that General Interpretative Rule 3(c) applied.

Applying GRI 3(c), the goods were classifiable under the tariff heading occurring last in numerical order among the headings equally meriting consideration. The court therefore upheld SARS’s determination that the goods were classifiable under tariff heading 8516.10.90 and rejected the applicant’s contentions for classification under 8418.69.90 or 8479.89.90.

LEGAL PRINCIPLES

The interpretation of tariff headings under the Customs and Excise Act 91 of 1964 proceeds on the basis that the wording of the relevant headings and applicable section and chapter notes is the first and paramount consideration, with the Harmonized System Explanatory Notes serving as an aid in difficult cases but not overriding or contradicting the headings and notes.

Tariff classification is generally based on the objective characteristics and properties of the goods at the time of importation and presentation for customs clearance. The intention of the manufacturer or importer, and the purpose for which goods are manufactured, are generally not determinative unless the tariff wording makes such considerations relevant.

Where goods fall to be treated as composite or multi-function machines under Section Note 3 to Section XVI, they are to be classified according to the component or machine performing the principal function. Where a principal function cannot be determined, General Interpretative Rule 3(c) requires classification under the heading that occurs last in numerical order among those equally meriting consideration.

A Chapter Note (such as Chapter Note 7 to Chapter 84) operates within its chapter context, and the classification mechanism it provides (based on “purpose”) does not displace the operation of Section Note 3 where a product is also properly characterised as a multi-function machine for purposes of Section XVI.

Aquazania (Pty) Limited v Commissioner South African Revenue Services (29658/09) [2011] ZAGPPHC 67 (4 May 2011)