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[2012] ZASCA 88
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Distell Ltd v Commissioner for the South African Revenue Services (526/2011) [2012] ZASCA 88; 2012 (5) SA 450 (SCA); 74 SATC 272 (31 May 2012)
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THE SUPREME COURT OF APPEAL OF
SOUTH AFRICA
JUDGMENT
SCA CASE NO: 526/2011
Reportable
In the matter between:
DISTELL LIMITED
…..............................................................................
APPELLANT
and
THE COMMISSIONER FOR THE SOUTH
AFRICAN REVENUE SERVICE
….....................................................
RESPONDENT
Neutral Citation:
Distell Limited v The
Commissioner for the South African Revenue Service (526/2011)
[2012] ZASCA 88
(31 May 2012)
Coram:
Navsa, Heher and Van Heerden JJA
Heard: 22 May 2012
Delivered: 31 May 2012
Summary:
Excise and customs duty – Custom
and Excise Act 91 of 1964 -classification of beverages under tariff
headings – fermented
or distilled (spirituous) beverages -
International Convention on the Harmonised Commodity Description and
Coding System.
______________________________________________________________
ORDER
______________________________________________________________
On appeal from
: North Gauteng High Court,
Pretoria (Pretorius J sitting as court of first instance):
The appeal is dismissed with costs, including the costs
of two counsel.
______________________________________________________________
JUDGMENT
______________________________________________________________
Navsa and Van Heerden JJA (HEHER JA concurring)
[1] This appeal involves a dispute about a tariff
classification in relation to excisable goods under the Customs and
Excise Act
91 of 1964 (the Act)
1
. The appeal turns on
whether the products in question are fermented or distilled
(spirituous) beverages. The appellants contended
that they are
fermented, and accordingly classifiable under a specific tariff
heading, namely 22.05, alternatively 22.06, of part
1 of Schedule 1
to the Act. The respondent contended that they are spirituous, and
therefore classifiable under tariff heading
22.08. Once that issue is
determined the proper tariff item in part 2A of Schedule 1 under
which the products should be classified
will follow as a matter of
course. Each tariff heading has a corresponding tariff item number.
For ease of reference we shall refer
only to the relevant tariff
heading.
[2] The appellant company is Distell Limited (Distell),
which owns and operates a number of wineries and conducts business as
a
manufacturer and distributor of liquor products. It markets and
sells a number of well-known alcoholic beverages to commercial
outlets. The respondent is the Commissioner for the South African
Revenue Service (the Commissioner).
[3] The facts giving rise to the appeal are set out
hereafter. During 2007
______________________
1
The products in question are goods
manufactured in a customs and excise warehouse which renders them
liable for the payment of
excise duty: see s 37(1) of the Act.
and 2008 the Commissioner determined all of the products
forming the subject matter of this appeal as falling within tariff
heading
22.08 in Part 1 of Schedule 1 to the Act.
2
The
tariff headings themselves and an explanation of how they operate and
are applied will be dealt with in due course. The products
in
question are the following:
(i) Angels' Share Cream;
(ii) Delgado Supremo;
(iii) GoldCup Creamy Vanilla;
(iv) Barbosa;
(v) GoldCup Banana Toffee;
(vi) Zorba;
(vii) Nachtmusik;
(viii) Mokador;
(ix) Alaska Peppermint;
(x) Copperband;
(xi) VinCoco;
(xii) Clubman Mint Punch;
(xiii) Viking;
(xiv) Castle Brand; and
(xv) Brandyale.
[4] As stated above, the tariff determinations were
arrived at on the basis that the products in question are spirituous
beverages.
The Commissioner’s perspective, put simply, is that
the base wines used in the beverages in question are subjected to
processes
in terms of which they are stripped of flavour and colour
and have cane spirits added to them in order to bolster the alcohol
content
significantly, as well as sweeteners, flavourants and
_____________________
2
Section 47(9)(
a
)(i) provides, inter
alia, that the Commissioner may in writing determine the tariff
headings, tariff subheadings or tariff items
of any Schedule under
which goods manufactured in the Republic shall be classified. Section
37(1) of the Act provides, inter alia,
that excise duties are payable
in respect of goods manufactured in a customs and excise warehouse,
on entry for home consumption
thereof at rates determined in terms of
the Act.
colourants, and that they no longer qualify as a wine of
any kind, but are ultimately spirituous and therefore liable to a
tariff
classification attracting higher duties.
[5] At the time of the determination, Distell assumed
the position that the products in issue have a ‘basis of wine
of fresh
grapes’, are fermented, not distilled, and should
resort under one or more of the following tariff headings, namely,
22.04,
22.05 or 22.06, all of which pertain to fermented beverages
and consequently attract lower excise duties. Distell’s primary
contention was that the products in question fell to be classified
under tariff heading 22.04 in that they were ‘wine of
fresh
grapes, including fortified wines’. Alternatively, it contended
that the products in issue are wine of fresh grapes
(fortified wine),
flavoured with plant and aromatic substances and accordingly, fell
under tariff heading 22.05. It contended,
in the further alternative,
that the products are mixtures of fermented beverages and
non-alcoholic beverages, as contemplated
in tariff heading 22.06,
which covers all fermented beverages other than those in tariff
headings 22.03 to 22.05. Distell challenged
the Commissioner’s
determination that tariff heading 22.08 applies, as this heading does
not, so it was contended, include
aperitives ‘with a basis of
wine of fresh grapes’.
[6] Subsequent to the Commissioner’s
determination, set out in paragraph 3 above, Distell lodged an appeal
in terms of section
47(9)
(e)
of the Act to the North Gauteng
High Court
3
on the basis set out in the preceding
paragraph. That court (Pretorius J) found the products to be
spirituous beverages and held
that they thus fell under tariff
heading 22.08. The present appeal is before us with the leave of the
court below. We shall hereafter
use ‘TH’ as an
abbreviation for tariff heading.
____________________
3
Section 47(9)(
e
)
provides that an appeal against any such determination shall lie to
the division of the High Court of South Africa having jurisdiction
to
hear appeals in the area wherein the determination was made, or the
goods in question were entered for home consumption.
[7] The Republic of South Africa is a party to the
General Agreement on Tariffs and Trade and is a member of the World
Customs Organisation,
which
employs an internationally Harmonised System, referred
to in the Act. Part 1 of Schedule 1 to the Act comprising the Section
and
Chapter Notes, the General Rules for the Interpretation of the
Harmonised System and the tariff headings, is a direct transposition
of the nomenclature of the Harmonised System.
[8] Section 47(8)
(a)
provides
that:
‘
The
interpretation of–
any tariff heading or tariff
subheading in Part 1 of Schedule 1;
(
aa
) any tariff item or
fuel levy item or item specified in Part 2, 5 or 6 of the said
Schedule, and
(
bb
) any item specified
in Schedule 2, 3, 4, 5 or 6;
the general rules for the
interpretation of Schedule 1; and
every section note and chapter
note in Part 1 of Schedule 1,
shall be 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
4
to the Harmonised System issued by the Customs
Co-operation Council, Brussels (now known as the World Customs
Organisation) from
time to time: Provided that where the application
of any part of such Notes or any addendum thereto or any explanation
thereof
is optional the application of such part, addendum or
explanation shall be in the discretion of the Commissioner.’
[9] In the court below,
Pretorius J started
her reasoning leading to the conclusion referred to above by
referring to the purpose of the correct tariff
headings, namely, to
determine the excise duty payable in terms of the Act. She considered
TH 22.04, the relevant parts of which,
together with their
Explanatory Notes, read as follows:
_____________________
4
Also referred to as the Brussels Notes.
‘
Wine
of fresh grapes, including fortified wines; grape must other than
that of heading 20.09.
. . .
Wine of fresh grapes
The wine classified in this
heading is the final product of the alcoholic fermentation of the
must of fresh grapes.
The heading includes:
Ordinary wines
(red,
white or
rosé
).
Wines fortified with
alcohol.
Sparkling wines.
These
wines are charged with carbon dioxide, either by conducting the
final fermentation in a closed vessel (sparkling wines proper),
or
by adding the gas artificially after bottling (aerated wines).
Dessert wines (sometimes
called liqueur wines).
These are rich in alcohol and are
generally obtained from must with a high sugar content, only part of
which is converted to alcohol
by fermentation. In some cases they
are fortified by the addition of alcohol, or of concentrated must
with added alcohol. Dessert
(or liqueur) wines include,
inter
alia
, Canary, Cyprus, Lacryma Christi, Madeira, Malaga, Malmsey,
Marsala, Port, Samos and Sherry.’
[10] In regard to this TH, Distell contended that, since
it included wines fortified with alcohol, the beverages in question
should
continue to be regarded as fermented beverages, rightly
resorting under this classification.
[11] As indicated, Distell relied in the alternative on
TH 22.05, the relevant part of which, accompanied by the Explanatory
Notes,
reads as follows:
‘
Vermouth
and other wine of fresh grapes flavoured with plants or aromatic
substances
.
. . This heading includes a variety of beverages (generally used as
aperitives or tonics) made with wine of fresh grapes of heading
22.04, and flavoured with infusions of plant substances (leaves,
roots, fruits, etc.) or aromatic substances.’
[12]
The third alternative TH relied
on by Distell was TH 22.06, the salient provisions and Explanatory
Notes of which, are:
‘
Other
fermented beverages (for example, cider, perry, mead); mixtures of
fermented beverages and mixtures of fermented beverages
and
non-alcoholic beverages, not elsewhere specified or included.
This heading covers all
fermented beverages
other
than
those in
headings 22.03 to
22.05
.’
[13] In contradistinction, the court below referred to
the TH regarded by the Commissioner to be the appropriate one, namely
22.08,
the applicable parts and Explanatory Notes of which, provide:
‘
22.08
– Undenatured ethyl alcohol of an alcoholic strength by volume
of less than 80 % vol; spirits, liqueurs and other spirituous
beverages.
2208.20 – Spirits obtained
by distilling grape wine or grape marc
2208.30 – Whiskies
2208.40 – Rum and other
spirits obtained by distilling fermented sugar-cane products
2208.50 – Gin and Geneva
2208.60 – Vodka
2208.70 – Liqueurs and
cordials
2208.90 – Other
The heading covers,
whatever
their alcoholic strength:
Spirits
produced by
distilling wine, cider or other fermented beverages or fermented
grain or other vegetable products, without adding
flavouring; they
retain, wholly or partly, the secondary constituents (esters,
aldehydes, acids, higher alcohols, etc.) which
give the spirits
their peculiar individual flavours and aromas.
Liqueurs
and
cordials
,
being spirituous beverages to which sugar, honey or other natural
sweeteners and extracts or essences have been added (e.g.,
spirituous beverages produced by distilling, or by mixing, ethyl
alcohol or distilled spirits, with one or more of the following
:
fruits, flowers or other parts of plants, extracts, essences,
essential oils or juices, whether or not concentrated). These
products also include liqueurs and cordials containing sugar
crystals, fruit juice liqueurs, egg liqueurs, herb liqueurs, berry
liqueurs, spice liqueurs, tea liqueurs, chocolate liqueurs, milk
liqueurs and honey liqueurs.
All other spirituous
beverages not falling
in
any preceding heading of this Chapter
. . . .‘
[14] The court below rightly held that it had to decide
the meaning of the words in the various tariff headings, determine
the nature
and characteristics of the products in question, and
thereafter select the most appropriate TH. In this regard Pretorius J
referred
to the following dictum in
International
Business Machines SA (Pty) Ltd
v
Commissioner for Customs and Excise
1985 (4)
SA 852
(A) at 863G-H:
‘
Classification
as between headings is a three-stage process: first, interpretation –
the ascertainment of the meaning of the
words used in the headings
(and relative section and chapter notes) which may be relevant to the
classification of the goods
concerned; second, consideration
of the nature and characteristics of those goods; and third, the
selection of the heading which
is most appropriate to such goods.’
[15] At this stage it is necessary to record, as did the
court below, the proper approach to the consideration of tariff
headings,
Section Notes, Chapter Notes and Explanatory Notes. In
Secretary for Customs and Excise v Thomas
Barlow and Sons Limited
1970 (2) SA 660
(A)
at 675D–676D, the following appears:
‘‘
The
duty which is payable is set out in Schedule 1 to the Act. This
Schedule is a massive part of the statute in which all goods
generally handled in international trade are systematically grouped
in sections, chapters, and sub-chapters, which are given titles
indicating as concisely as possible the broad class of goods each
covers. Within each chapter and sub-chapter the specific type
of
goods within the particular class is
__________________
5
In terms of s 47(9)
(e)
an appeal against a determination by the
Commissioner of a tariff heading is heard as a de novo application
.
itemised by a description of the
goods printed in bold type. That description is defined in the
Schedule as a “heading”.
Under the heading appear
sub-headings of the species of the goods in respect of which the duty
payable is expressed. The Schedule
itself and each section and
chapter are headed by “notes”, that is, rules for
interpreting their provisions.
‘
It is
clear that the above grouping and even the wording of the notes and
the headings in Schedule 1 are very largely taken from
the
Nomenclature compiled and issued by the Customs Co-operation Council
of Brussels. That is why the Legislature in sec. 47(8)
(a)
has
given statutory recognition to the Council’s Explanatory Notes
to that Nomenclature. These Notes are issued from time
to time by the
Council obviously, as their name indicates, to explain the meaning
and effect of the wording of the Nomenclature.
By virtue of sec.
47(8)
(a)
they
can be used for the same purpose in respect of the wording in
Schedule 1. It is of importance, however, to determine at the
outset
the correct approach to adopt in interpreting the provisions of the
Schedule and in applying the explanations in the Brussels
Notes.
‘
Note
VIII to Schedule 1 sets out the “Rules for the Interpretation
of this Schedule”. Para. 1 says:
“
The
titles of sections, chapters and sub-chapters are provided for ease
of reference only; for legal purposes, classification (as
between
headings) shall be determined according to the terms of the headings
and any relative section or chapter notes and, provided
such headings
or notes do not otherwise indicate, according to paras. (2) to (5)
below.”
That, I think, renders the
relevant headings and section and chapter notes not only the first
but the paramount consideration in
determining which classification,
as between headings, should apply in any particular case. Indeed,
right at the beginning of the
Brussels Notes, with reference to a
similarly worded paragraph in the Nomenclature, that is made
abundantly clear. It is there
said:
“
In the
second provision, the expression ‘provided such headings or
Notes do not otherwise require’ (that is the corresponding
wording of the Nomenclature) is necessary to make it quite clear that
the terms of the headings and any relative section or chapter
notes
are paramount, i.e., they are the first consideration in determining
classification.”
It can be gathered from all the
aforegoing that the primary task in classifying particular goods is
to ascertain the meaning of
the relevant headings and section and
chapter notes, but, in performing that task, one should also use the
Brussels Notes for guidance
especially in difficult and doubtful
cases. But in using them one must bear in mind that they are merely
intended to explain or
perhaps supplement those headings and notes
and not to override or contradict them. They are manifestly not
designed for the latter
purpose, for they are not worded with the
linguistic precision usually characteristic of statutory precepts; on
the contrary they
consist mainly of discursive comment and
illustrations. And, in any event, it is hardly likely that the
Brussels Council intended
that its Explanatory Notes should override
or contradict its own Nomenclature. Consequently, I think that in
using the Brussels
Notes one must construe them so as to conform with
and not to override or contradict the plain meaning of the headings
and notes.’
[16] The court below went on to have regard to Rule 1 of
the General Rules for the Interpretation of the Harmonised System,
which
states:
‘
The
titles of Sections, Chapters and sub-Chapters are provided for ease
of reference only; for legal purposes, classification shall
be
determined according to the terms of the headings and relative
Section or Chapter Notes . . . .’
[17] Pretorius J considered the Explanatory Notes to the
Chapter Notes in relation to Chapter 22, under which the tariff
headings
in question reside. Those Explanatory Notes divide the
products in Chapter 22 into four main groups, the relevant two of
which
are:
‘
(B)
Fermented alcoholic beverages (beer, wine, cider, etc.).
(C) Distilled alcoholic liquids
and beverages (liqueurs, spirits, etc.) and
ethyl alcohol.’
It will be recalled that Distell contended that the
products in question fall under category B, whereas the Commissioner
determined
that they fell under category C.
[18] The court below dealt with Distell’s
contention that the products should be classified under TH 22.04, set
out in paragraph
9 above, which refers to wine of fresh grapes,
including fortified wines. Distell’s reliance on this TH was
driven, inter
alia, by the increased alcohol content of the products
in question about which more will be said later. It will be recalled
that
the Explanatory Note to TH 22.04 states that the heading
includes ‘wines fortified with alcohol’ and ‘dessert
wines’.
[19]
In this regard, the learned
judge had regard to additional note 2 to Chapter 22:
‘
The
expressions “unfortified wines” . . . shall be taken to
mean wine . . . with an alcoholic strength not exceeding
16 per cent
of alcohol by volume and the expressions “fortified wine”
. . . shall be taken to mean wine . . . with
an alcoholic strength
exceeding 16 per cent of alcohol by volume’,
He also referred to Explanatory Note (I)(4) to TH 22.04,
the full wording of which is set out in paragraph 9 above. According
to
that note dessert wines are rich in alcohol and in some cases are
fortified by the addition of alcohol.
[20] In deciding whether the contentions by Distell were
justified, Pretorius J took into account the expert evidence of Dr
Loubser
(Loubser), a chemist and the Director: Quality Management and
Research of Distell. In relation to dessert wines, Loubser testified
to the effect that such wines are fermented and only alcohol or
concentrated must, with additional alcohol are introduced to increase
the overall alcohol content. Using the example of Madeira, which is a
dessert wine, Loubser pointed out that no colourants, flavourants
or
sweeteners are added to create dessert wines.
[21] The court below considered the Commissioner’s
submission that the products could no longer be classified as wine or
fortified
wine due to the fact that the wine had been stripped of the
taste and flavour of wine and fortified by the addition of cane
spirits
to increase the alcohol content. The colourants, flavourants
and sweeteners are then added and can thus be distinguished from
dessert
wines to which, as indicated above, no colourants,
flavourants and sweeteners are added. Pretorius J sought assistance
from a dictionary
definition of wine which essentially describes a
wine as an alcoholic liquor product from fermented grape juice.
‘Vinous’
is defined as being of the nature of/or
resembling wine; made of or prepared with wine’.
6
_______________________
6
Taken from the
New
Shorter Oxford English Dictionary
6 ed (2007)
[22] Pretorius J then went on to cite a decision of the
European Court of Justice, namely
Siebrand BV
v Staatssecretaris van Financiën
[2009]
EUECJ C-150/08
.
The
court there was considering a case concerning a fermented
alcohol-based beverage corresponding originally to TH 22.06, to which
a certain proportion of distilled alcohol, water, sugar syrup,
aromas, colouring and, in some cases, a cream base had been added,
resulting in the loss of the taste, smell and/or appearance of a
beverage produced from a particular fruit or natural product.
The
court held that this beverage did not fall under heading 22.06, but
rather 22.08, as contended for in this case by the Commissioner.
Although referring to the
Siebrand
case, Pretorius J considered this decision not to be
binding on South Africa. For that, she relied on the decision of this
court
in the
International Business Machines
case, where the following appears (873J–874B):
‘
Whatever
may be the status of such a decision so far as customs administration
and international organisations are concerned, it
is not, until it is
reflected in an Explanatory Note, authoritative in a South African
Court. Before that, it is no more than an
expression of opinion which
involves the interpretation of the relative tariff headings and the
Notes relating thereto.
Under our system, question of
interpretation of the documents are matter of law, and belong
exclusively to the Court.’
[23] Distell had submitted before the court below that
the Explanatory Notes to 22.07, although not directly applicable,
provided
guidance in reaching a conclusion on the dispute in issue.
The Explanatory Notes to 22.07 provides:
‘
Ethyl
alcohol is the alcohol which occurs in beer, wine, cider and other
alcoholic beverages. It is obtained either by fermentation
of certain
kinds of sugar by means of yeast or other ferments and subsequent
distillation, or synthetically.’
In juxtaposition are Explanatory Notes (A) and (B) to TH
22.08, which appear in paragraph 13 above. That deals with spirits
produced
by distillation and includes liqueurs and cordials.
[24] The court below had regard to a dictionary
definition of ‘spirituous’,
being ‘of or pertaining to spirit or alcohol;
containing (much) spirit or alcohol’.
7
Pretorius J went on to consider Distell’s
submission that TH 22.08 only has application to spirits produced by
distillation
and not by fermentation. According to Distell, the
products in question are not liqueurs or cordials as set out in
Explanatory
Note (B) of TH 22.08, as they are not spirituous
beverages. It is further provided that TH 22.08 does not include ‘(a)
Vermouths,
and other aperitives with a basis of wine of fresh grapes
(
heading 22.05
)’.
Thus, Distell contended TH 22.08 only applies to spirituous beverages
and that, should the court find the products in
question to be
fermented beverages (as is their submission), TH 22.08 will not be
applicable.
[25] Returning to the evidence by Loubser, Pretorius J
considered his explanation that fermentation and distillation were
two distinct
processes and that distillation could lead to an alcohol
content of 96 per cent per volume, while fermentation cannot be
utilised
to attain an alcohol content of more than 16 per cent. In
both instances the alcohol contained in the products is ethyl
alcohol.
Furthermore, Loubser testified that a cane spirit is only
added to the products in question to increase the alcohol content and
the addition thereof does not deprive the wine of its character. Even
when wine is fortified with spirits, the essential base character
remains wine. Furthermore, by volume all the products in issue
contain more wine than spirits and the wine component exceeds the
spirit component (excepting Zorba). The absolute alcohol content of
spirits in the products, excepting Brandy Ale, is higher than
that of
wine. Loubser, however, admitted that the wine is stripped of its
taste and flavour, but did not explain the reason for
so doing.
[26] The court below also took into account evidence on
behalf of the Commissioner by Mr Michael Fridjhon (Fridjhon), an
internationally
recognised wine authority and wine judge and one of
the country’s most
respected wine tasters and widely published wine
writers. Fridjhon testified
about the organoleptic
8
characteristic of the
stripped wine. Fridjhon’s ___________________
7
Taken from the
New Shorter English
Oxford Dictionary
6 ed (2007).
8
Defined in the
Concise Oxford English
Dictionary
12 ed (2011) as ‘involving the use of, the
sense organs’.
conclusions were:
’
19.8.1
the residual aromas and tastes left in the wine after subjecting it
to the stripping process are insignificant and would
definitely not
be discernible in the final product;
19.8.2 the perceptible
difference between the stripped fortified wine and cane spirit
diluted with water to approximately the same
alcoholic strength is
minimal . . . ’
[27] The court noted, on the basis of the evidence of Mr
van Niekerk, the General Manager of Distell, that the wines used in
the
production of the products in question, were selected because
they were low in flavour intensity, colour intensity, acid, phenolics
and sulphur dioxide, and high in alcohol.
[28] The court below considered the Commissioner’s
contention that the products in question should be classified under
TH
22.08, the particulars of which appear in paragraph 13 above and
more specifically that they resorted under subheading 2208.90,
namely
‘other’. In this regard the court below had regard to the
evidence on behalf of the Commissioner by Mr G Taylor
(Taylor), who
is a biochemist from the United Kingdom. According to him, the
presence of spirits in the products in question was
essential to
obtain the required alcohol level and preserve it, as well as to add
to the stability of added flavourants. Taylor,
with reference to the
evidence of Fridjhon, was of the view that it was not necessary to
use the stripped wine as the same products
could be produced by using
neutral spirits as the alcohol base. The opposite was not true as the
required alcohol strength could
thus not be
obtained. The unique characteristics of wine were not
required in the end product.
[29] Pretorius J stated that it was clear from the
processes employed by Distell, which were demonstrated to and
observed by Fridjhon,
that the beverages in question were not only a
mixture of a fermented beverage and
cane spirits, but that they were individually designed,
each with a unique taste and characteristic. She held that the
beverages
in question consisted of several components, but that in
each instance it was spirits that gave these products their essential
character.
[30] The court below found that the Commissioner’s
argument, that the alcohol component that gave the products in
question
their essential character was the spirits and not the wine,
was well founded. Whilst concluding that all the products in issue
were fermented alcohol-based beverages, Pretorius J nevertheless held
that they can ‘by no stretch of the imagination’
be
wines. The following appears in the judgement:
“
The
addition of cane spirit, water, sweeteners, flavourants, colourants
and cream in some instances, have caused new products to
be created,
which have lost all the aroma and taste of wine. Tariff Heading 22.04
can thus not be applicable.’
[31] Turning to the alternative classification, namely
TH 22.05, the court below could not agree that it was an appropriate
TH for
the beverages in question. This conclusion was based on what
she regarded as being common cause, namely that the products were not
‘
Vermouth and other wine of fresh grapes
flavoured with plants or aromatic substances’
.
In this regard the court had regard to the Explanatory Note under
this TH, which made it quite clear that the heading dealt with
‘a
variety of beverages (generally used as aperitives or tonics) made
with wine of fresh grapes of heading 22.04 and flavoured
with
infusions of plant substances (leaves, roots, fruits, etc.) or
aromatic substances’. The addition of spirits, colourants,
flavourants, sweetener and cream is not mentioned and thus, according
to Pretorius J, this TH could never be the appropriate one.
[32] Referring to
Distell Ltd v The Commissioner,
SARS
[2011] 1 All SA 225
(SCA), Pretorius J held that the
beverages are produced in a multiple stage process – two
beverages are not mixed to get
the relevant product. The colourant,
flavourant and sweetener mixture cannot be described as ‘lemonade
like’ or ‘cooldrink
like’ (as Distell contended),
does not constitute a non-alcoholic beverage and thus could not fall
under one of the ‘mixtures’
referred to in TH 22.06 which
is set out in paragraph 12 above.
[33] Finally, the learned judge concluded that the wine
in the products in issue does not contribute to the organoleptic
characteristics
of the final products as it is neutral and cannot
give it its essential character. Accordingly, the court found that
all of the
products in issue are spirituous and resort under TH 22.08
and, more particularly, under TH 2208.90.20.
[34] Thus it is the correctness of the reasoning and the
conclusions set out above that are at issue in this appeal.
[35] Before us, reliance on TH 22.04 was abandoned by
Distell. Its case in the present appeal is that two of the beverages
in question,
namely Zorba and Brandyale, fell under TH 22.05 and the
remaining 13 under TH 22.06. The reason for this distinction, so they
contended,
was because, in the case of the former two products, water
was not added, and they could thus not be considered to be mixtures
as contemplated in TH 22.06.
[36] It is now necessary to follow the approach set out
in the
International Business Machines
case
,
described
in paragraph 14 above. First, we have to interpret the tariff
headings concerned. Starting with TH 22.05, it is clear
that this TH
refers to wine which is the fermented product derived from fresh
grapes. The Explanatory Note states that the beverages
under this
heading include a wide variety of beverages (generally used as
aperitives or tonics) made with wine of fresh grapes
of TH 22.04 and
flavoured with infusions of plant substances or other aromatic
substances. It is clear that what is dealt with
in this paragraph is
a product derived through the fermentation process to which fresh
grapes are subjected, with plants or aromatic
substances being added
to the fermented liquid.
[37] It was Distell’s case that the addition of
spirits does no more than ‘fortify’ the stripped wine
used in
the making of the beverages. TH 22.04, so it was contended,
provides for the fortification of wines of fresh grapes by way of the
addition of alcohol in whatever form. According to Distell this
fortification process does not in any way change the essential
vinous
character of the base of stripped wine. Following that logic, Distell
submitted that the two products in question, therefore,
resided more
logically and appropriately under TH 22.05.
[38] On behalf of the Commissioner it was contended that
the base of stripped wine was no longer wine and that this liquid
could,
even if alcohol be added to it, not qualify as fortified
‘wine’, as none of the base liquid’s essential
vinous
qualities were retained. Moreover, they submitted that the
ingredients added at the end of the process can hardly be described
as being ‘flavoured with aromatic substances’.
[39] We now turn to consider TH 22.06. This TH covers
all fermented beverages other than those provided for in TH 22.03, TH
22.04
and TH 22.05. TH 22.06 refers to ‘
[o]ther fermented
beverages (for example, cider, perry, mead); mixtures of fermented
beverages and mixtures of fermented beverages
and non-alcoholic
beverages, not elsewhere specified or excluded’.
It was common cause that the beverages in question do
not fall within the genus under which cider, perry and mead reside.
We were
required to consider whether the beverages were mixtures of
the kind contemplated in this TH. The mixtures that are contemplated
are clearly of a combination of fermented beverages or of fermented
beverages with non-alcoholic beverages added, which do not
properly
reside under any other TH.
[40] In respect of the remaining 13 products, Distell
contended in relation to TH 22.06 that these products were mixtures
of fermented
beverages and non-alcoholic beverages. The non-alcoholic
beverage on which Distell relied, is the mixture of water and
flavourants,
sweeteners and colourants. Distell argued that TH 22.06
does not require that a mixture of a fermented beverage (eg fortified
wine)
and a non-alcoholic beverage should retain the character of a
particular type of fermented beverage, for instance wine.
Furthermore,
they argued, that whatever the processes the wine was
subjected to, in order to reduce it to an almost wholly neutral
alcoholic
liquid, it still retains its essential character, namely,
of wine. Lastly, Distell contended that, in any event, the mixture
resulting
in the products is not spirituous in character, in that the
volume of the stripped wine is greater than that of the cane spirits,
except for one of the products, and they submitted that the mixture
in itself does not have the essential characteristics of spirits.
[41] In making the argument referred to in the preceding
paragraph, Distell submitted that one could not argue, as the
Commissioner
does, that what we were dealing with in relation to the
products in question was a mixture or combination of a once fermented
beverage
with a distilled beverage. In order to counteract the
Commissioner’s contention in this regard, Distell was driven to
submitting
that the addition of the cane spirits was merely a
fortification of the existing stripped wine. In this sense, so it was
submitted,
one was dealing with a fortified wine which on its own was
undoubtedly a fermented beverage to which the non-alcoholic
components,
which flavoured, coloured and sweetened the beverage,
together with the water were added.
[42] It is now necessary to have regard to the evidence
about the nature of the beverages in question. The parts of
Fridjhon’s
evidence, referred to in paragraph 26 above, were
dealt with by Loubser, as stated hereafter. Loubser’s response
was not
to contest that the flavour and aroma of the stripped wine is
negligible. Loubser adopted the position that a fermented product
such as wine can only change its ‘essential character’
when distilled and not when subjected to the processes in question.
However, in Loubser’s founding affidavit the following is
stated:
‘
Wine
is selected for its sensory and analytical characteristics
.’
This is in line with Fridjhon’s primary
assertions. In Fridjhon’s answering affidavit he refers to the
Oxford Companion
of Wine, in which flavour is said to be ‘arguably
a wine’s most important distinguishing mark’. Fridjhon
went
on to state that vinosity is the defining element of wine.
[43] The evidence of Taylor, referred to in paragraph 28
above, is important. Loubser’s evidence concerning a fortified
wine
such as Madeira, in support of Distell’s case, is
unhelpful. It is true that Madeira, a fermented product, has brandy,
which
is a distilled product, added to it to increase its alcohol
content. Fridjhon’s responding affidavit makes it clear that
like all recognised fortified wines, the addition of spirits does not
cause Madeira to lose its essential vinosity. On the contrary,
its
vinosity is bolstered by the addition of spirits.
[44] It was common cause that the stripped wine’s
maximum alcohol content was between 12.5 per cent and 16 per cent,
the latter
of which is recognised as a general maximum for an
unfortified wine. The addition of the cane spirits increased the
alcohol content
to between 18 per cent and 23 per cent.
[45] Another important part of the evidence on behalf of
Distell is that the production sequence in relation to the beverages
ultimately
produced was unimportant. More particularly the stripped
wine could have been added at the end of the production process.
[46] It is clear from the evidence that the wine was
subjected to the stripping process to neutralise its taste and aroma.
Final
fermented products, even in the case of fortified wines, do not
lose their essential vinous characteristics. Much as distillation
changes the essential characteristic of a fermented product, so too
do the processes which result in the stripped wine. The following
question posed by Taylor illustrates the point:
‘
If, as
is argued, these are wine based products and the wine is an integral
component, why then is the base wine neutralised? If
the wine
character is that important, then surely it should be retained and
the fortification be utilised to enhance that character
and help
carry it into the final product? The fact that the wine character is
removed prior to fortification strongly suggests
not only that the
wine character is not required, but that it is actually undesirable.’
[47] In our view, Distell’s reliance on the
overall volume of the stripped wine in relation to the cane spirits
is misplaced.
Clearly, one could have a greater volume of water
overwhelmed by a lesser volume of an intense different liquid. It is
a question
of which essential ingredient is dominant. In this regard
General Rules of Interpretation 3(b) provides that in the case of
mixtures,
the goods are to be classified as if they consisted of the
material or component
which gives them their
essential character
, in so far as this
criterion is applicable.
[48] It is now necessary to revisit TH 22.05, set out in
paragraph 11 above. As stated earlier, the essential characteristic
of
a beverage resorting under this TH is that of a ‘wine of
fresh grapes’. For the reasons set out in the preceding
paragraph
it cannot be, in our view, said that the stripped wine
forming the basis of the two beverages in question qualifies as wine
under
this TH, for the reasons provided by Fridjhon and Taylor and
due to the common cause facts mentioned above. As Fridjhon, supported
by Taylor and Dr Croser, the wine maker who also testified on behalf
of the Commissioner, pointed out:
‘
What
such processes would have removed would have been precisely what
fermentation contributed in the first place: the essential
vinosity
of the product. The restoration of the alcohol to the fluid left
after the flavour and alcohol had been removed would
not thereby
produce wine . . . ’
[49] Distell’s contention that, even though the
stripped wine has lost much of its flavour and aroma, it is
nevertheless a
fermented product and a wine is, in our view, for the
reasons stated above, fallacious. Consequently, the two products in
question
do not fit under TH 22.05.
[50] Turning to the remaining 13 beverages, we now
reconsider TH 22.06. In our view, Distell’s reliance on this TH
is also
unjustified. An essential requirement of this TH, for the
purposes of Distell’s argument, was that the fermented beverage
used in the production of the products was fortified wine (‘wine’
in the sense of TH 22.04). As we have already demonstrated,
the
‘stripped wine’ cannot be regarded as wine for the
purposes of TH 22.04, and therefore cannot be made ‘fortified
wine’ in the sense used in TH 22.06. Furthermore, a fortified
wine does not itself lose any of its vinous qualities and it
appears
that, if anything, the vinosity is thereby enhanced. That is not the
case with the beverages in question. The fact that
the sequence of
production is irrelevant demonstrates further that the submission by
Distell is unsustainable.
[51] Following on the conclusions reached in the
preceding paragraphs it follows that the next enquiry is whether the
beverages
in question rightly resort under TH 22.08, which is set out
on paragraph 13 above. It is clear, when one has regard to the TH,
that the beverages do not resort under tariff sub-heading 2208.20, in
that they are not spirits obtained from distilling grape wine
or
grape marc. It is common cause that they do not fall under any of the
other tariff sub-headings between 2208.30 and 2208.70.
It is equally
clear that they cannot be classified under tariff notes (A) or (B).
As set out above, the cane spirits was added
to the stripped wine to
boost alcohol content significantly. According to Taylor, he had
tested all 15 beverages organoleptically
and concluded that they all
have a distinct spirituous character. Considering our line of
reasoning set out above, in relation
to the beverages in question,
and in particular paragraph 47, the compelling conclusion is that the
ultimate distinctive nature
of the beverages is spirituous, that they
rightly resort under TH 22.08, and are covered by tariff note (C).
[52] Distell’s reliance on the decision of this
court in
Distell Ltd and Another v Commissioner for SARS
[2011] All SA 225
(SCA) is misplaced. In that case it was common
cause that TH 22.06 applied. The dispute was whether the beverages
fell under the
first or second part of the item. It was submitted on
behalf of Distell that there was no difference to the facts of this
case
in that the ‘wine coolers’ in issue in that case
constituted wine, to which flavourants and water had been added. It
was submitted that the vinous nature of the ‘wine coolers’
were not challenged in that case and that in the present
case,
neither should the vinous character of the beverages in question. It
was submitted on behalf of the Commissioner that, contrary
to this
case, there had been no attempt in the first Distell case to mask the
flavour of the wine by a stripping process. We agree
that the facts
of that case are poles apart from those in the present appeal.
[53] We were referred by the Commissioner to another
decision by the European Court of Justice (ECJ), namely
Paderborner
Brauerei Haus Cramer KG v Hauptzollamt Bielefeld
[2011] EUECJ
C-196/10.
In that case, the ECJ was called upon by the Finanzgericht
Düsseldorf to make a preliminary ruling on whether ‘a
liquid
described as a “malt beer base”, such as that in
issue in the main proceedings, with an alcoholic strength by volume
of 14% and obtained from brewed beer which has been clarified and
then subjected to ultra-filtration, by which the concentration
of
ingredients such as bitter substances and proteins has been reduced,
must be classified under tariff heading 2208 of the CN’.
[54] The ECJ found that the ‘malt beer base’
was not a beverage for the following reasons. Although suitable for
human
consumption in the sense that it was drinkable, it was not an
end product primarily intended for consumption, but rather an
intermediate
product for use in the production of another product;
the malt beer base was not sold to consumers as an end product; it
was not
obtained purely and simply by fermentation, but was after
fermentation subjected to ultra-filtration which caused it to lose
its
‘objective properties and characteristics particular to
beer’. The Explanatory Note to TH 22.08 expressly states that
the heading also covers ethyl alcohol, whether intended for human
consumption or for industrial purposes and, although this Explanatory
Note excludes from that heading alcoholic beverages obtained from
fermentation, the malt beer base, not being a beverage, was not
affected by the exclusion. Finally, the fact that the malt beer base
was not completely devoid of any aroma did not exclude it
from being
classified under TH 22.08. The malt beer base, after being treated,
was ethyl alcohol and as a consequence must be classified
under TH
22.08.
[55] Counsel for the Commissioner submitted that, like
the malt beer base, the stripped wine is not produced purely and
simply by
fermentation; is devoid of the vinous character of wine of
fresh grapes; is not sold to customers as an end product; is an
‘intermediate
product’ specifically ‘prepared’
to be used, and used, in the production of the products in issue, and
that it
satisfies the requirements of the Explanatory Note proviso to
TH 22.08. Thus, following the analysis and interpretation of the ECJ
in this case, the stripped wine is not ‘wine’ as
contemplated by TH 22.04 and would be classifiable under TH 22.08.
[56] We were warned on behalf of Distell to be cautious
about the dangers of relying on decisions by the ECJ. According to
counsel,
the ECJ had simply made a ‘preliminary ruling’
concerning the interpretation of the combined nomenclature of the
common
customs tariff. The main proceedings were before the
Düsseldorff Court. This ‘preliminary opinion’ is a
non-binding
opinion, the admissibility and status of which should not
be over-emphasised. Moreover, counsel contended the
Parderborner
case does not support the Commissioner’s contentions. The
treatment of wine does not change the essential character of wine,
and the Commissioner did not lay any factual foundation why the
process used in the
Parderborner
case (ie to treat the malt
beer base by ultra-filtration) is comparable to the processes used by
Distell in respect of the wine
it used in the manufacturing of the
beverages in issue.
[57] None of these submissions is convincing. Clearly
the decisions of the ECJ are not binding on South African courts.
They may
have persuasive force, but it is up to the South African
court to decide the relevance of the foreign decision in question. It
was also not necessary for the Commissioner to demonstrate that the
processes followed in the
Parderborner
case were identical to
those followed by Distell in relation to the beverages in question.
[58] Whilst the conclusions in
Parderborner
and
Siebrand
accord with our own, we have arrived at our decision
by applying the Harmonised System as catered for by the Act and
following the
line of logic and reasoning set out in the preceding
paragraphs.
[59] In the result, the appeal is dismissed with costs,
including the costs of two counsel.
_______________________
MS NAVSA
JUDGE OF APPEAL
_______________________
BJ VAN HEERDEN
JUDGE OF APPEAL
APPEARANCES:
FOR
APPELLANT: A.P. Joubert SC (with him C Louw)
Instructed
by
Shepstone
& Wylie Attorneys
Pretoria
Webbers
Attorneys
Bloemfontein
FOR RESPONDENT: C.E. Puckrin SC (with him J.A. Meyer SC
and I A Enslin)
Instructed
by
The
State Attorney
Pretoria
The
State Attorney
Bloemfontein