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[2010] ZASCA 79
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Commissioner for the South African Revenue Services v LG Electronics SA (Pty) Ltd (428/09) [2010] ZASCA 79; 2012 (5) SA 439 (SCA); 73 SATC 326 (28 May 2010)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case No:
428/09
In the matter between:
COMMISSIONER
FOR THE SA REVENUE SERVICE
Appellant
and
LG
ELECTRONICS SA (PTY) LTD
Respondent
Neutral
citation
:
CSARS v LG
Electronics
(428/09)
[2010] ZASCA 79
(28 May
2010)
Coram:
HARMS
DP, NUGENT, LEWIS, HEHER JJA AND GRIESEL AJA
Heard:
10
May 2010
Delivered:
28
May 2010
Updated:
Summary:
Revenue
– Customs and Excise – tariff determination
video monitors (screens)
and tuners separately imported
whether screens
incomplete reception apparatus for television in terms of General
Rules for Interpretation, Rule 2(a)
whether
separate importation a scheme to defeat payment of legitimate
duties.
____________________________________________________________________________________
ORDER
On appeal from:
North
Gauteng High Court (Pretoria) (Southwood J sitting as court of first
instance):
The
appeal is dismissed with costs including the costs consequent upon
the employment of two counsel.
_______________________________________________________________________
JUDGMENT
___________________________
__________________________________________
Heher JA
(Harms DP, Nugent, Lewis JJA and Griesel AJA concurring)
[1] This is
an appeal against an order made under s 47(9)(e) of the Customs and
Excise Act 91 of 1964 by Southwood J in the Pretoria
High Court. The
learned judge refused leave to appeal but such was granted on
application to this Court.
[2] The
order made by the court
a quo
was
as follows:
‘
1 The
respondent’s application for a referral to evidence is
dismissed.
2 The
respondent’s tariff determination of 23 August 2006 to the
effect that 42” Plasma Display screens with model number
42PX4NVH imported by the applicant must for duty purposes be
classified within Tariff Heading 8528.12.30 of Part 1 of Schedule
1
to the Customs and Excise Act No 91 of 1964 is set aside.
3 The
respondent’s determination is substituted by a determination
that Tariff Heading 8528.21.20 applies.
4 It
is declared that Rebate Item 460.16 of Schedule 4 to Act 91 of 1964
applies to the screens.
5 The
respondent is ordered to pay the costs of this application which
costs shall include the costs consequent upon the employment
of two
counsel and shall be on the scale as between attorney and client.’
The appeal is against
paragraphs 2 to 5 of the order.
[3] The
respondent imports the screens referred to in para 2 of the order by
sea from South Korea. It imports tuners (also called
‘interface
boards’) from the same source by air. When a screen and a tuner
are appropriately combined they constitute
a television set.
[4] During
the period 2004 to 2006 the respondent declared such screens on entry
into the Republic under tariff heading 8528.21.20.
1
The appellant admitted the screens accordingly until July 2006, after
which, following investigation, it issued a revised determination
in
terms of s 47(9)(d)(i)(bb) of the Act in respect of the screens,
placing them under tariff item 8528.12.30.
2
Whereas video monitors attracted a customs duty of 25 per cent and
enjoyed a full rebate on the grounds that they do not incorporate
television reception apparatus, the screens, under the redetermined
heading, attracted the same duty without the benefit of a rebate.
The
redetermination resulted in a credit of R43 530 187.70 in favour of
the appellant for customs duty,
ad valorem
excise duty and value added tax. The
respondent disputed its liability and maintained its refusal to pay
despite several shifts
by the appellant in its justification for the
application of the re-determined tariff heading. Eventually the
respondent put an
end to further debate by applying to the High Court
for relief substantially in the form that was granted in paras 2 to 4
of the
order of Southwood J.
[5] In
granting the application the principal finding made by the learned
judge was that, ‘on the facts the screens are complete
video
monitors and are used for that purpose’. As to a submission
that the separate importation of screens and tuners was
a cloak to
disguise the reality of the entry of television sets into South
Africa with the intention of evading the legitimate
levying of duty
on such sets, the court
a quo
examined
the evidence and concluded that the facts negatived that inference
and clearly showed ‘that the applicant imported
the screens and
tuners in order to service two markets and imported them separately
because that is how they are exported by the
manufacturer worldwide’.
[6] Tariff
Heading 85.28 provided as follows at the relevant time:
Heading
8528
Sub-Heading
8528.1
8528.12
.30
.90
8528.13
.30
.90
8528.2
CD
9
2
5
9
Article
Description
Reception
Apparatus for Television, Whether or Not
Incorporating
Radio-broadcast Receivers or Sound or Video Recording or
Reproducing Apparatus:
Video
Monitors and Video Projectors:
Refer
to General Rebates of Customs Duties and Fuel Levy
460.16
Temporary Rebates of Customs Duties
Refer
to Ad Valorem Excise Duties from Page 691
--Reception
apparatus for television, whether or not incorporating
radio-broadcast receivers or sound recording or reproducing
apparatus:
=
Other
Reception
apparatus, incorporating or designed to incorporate cathode ray
tubes or other screens with a screen size not
exceeding 3m x 4m
-
Other
=
Black and white or other monochrome
Reception
apparatus, incorporating or designed to incorporate cathode ray
tubes or other screens with a screen size not
exceeding 3 m x 4 m
-
Other
--Video
monitors
8528.21
.10
.20
8528.22
8528.30
2
5
1
3
=
Colour
With
a screen size exceeding 3 m x 4 m
With
a screen size not exceeding 3 m x 4 m
=
Black and white or other monochrome
--Video
projectors
18. Tariff Heading 8529
provided as follows:
Heading
8529
Sub-Heading
CD
Article
Description
Parts
suitable for use solely or principally with the apparatus of
headings 85.25 to 85.28:
Refer
to Specific Drawbacks and Refunds of Customs Duties and Fuel Levy
–
516.10
Television and Radio Receiving Sets
8529.10
.10
.90
8529.90
.20
.50
.60
.70
.80
.90
5
3
9
0
8
5
2
9
--
Aerials and aerial reflectors of all kinds; parts suitable for use
therewith:
=
Parabolic aerial reflector dishes of a diameter not exceeding 120
cm
=
Other
--Other:
=
Cabinets for reception apparatus for television
=
Filters or separators, for antennas for reception apparatus for
television
=
Tuners (very high frequency or ultra-high frequency) and tuner
control devices, for reception apparatus for television
=Parts
of moulded plastic or base metal, not incorporating electronic
components for reception apparatus for television
=
Other parts for reception apparatus for television
=
Other
19. The
Explanatory Notes to Tariff Heading 8528 read (to the extent
relevant) as follows:
‘
This
heading covers television receivers (including video monitors and
video projectors), whether or not incorporating radio-broadcast
receivers or sound or video recording or reproduction apparatus.
The heading includes:
(1) Television receivers
of the kind used in the home (table models, consoles, etc.) including
coin-operated television sets.
. . .
(3)
Video
tuners, intended to be used with or incorporated in, e.g., video
recording or reproducing apparatus or video monitors. These
tuners
convert high-frequency television signals into signals usable by
video recording or reproducing apparatus or video monitors.
However,
devices which simply isolate high-frequency television signals
(sometimes called video tuners) are to be classified as
parts in
Heading 85.29.
. . .
(6)
Video
monitors which are receivers connected directly to the video camera
or recorder by means of co-axial cables, so that all the
radio-frequency circuits are eliminated. They are used by television
companies or for closed-circuit television (airports, railway
stations, steel plants, hospitals, etc.). These apparatus consist
essentially of devices which can generate a point of light and
display it on a screen synchronously with the source signals. They
incorporate one or more video amplifiers with which the intensity
of
the point can be varied. They can, moreover, have separate inputs for
red (R), green (G) and blue (B), or be coded in accordance
with a
particular standard (NTSC, SECAM, PAL, D-MAC, etc.). For reception of
coded signals, the monitor must be equipped with a
decoding device
covering (the separation of) the R, G and B signals. The most common
means of image reconstitution is the cathode-ray
tube, for direct
vision, or a projector with up to three projection cathode-ray tubes,
however, other monitors achieve the same
objective by different means
(e.g., liquid crystal screens, diffraction of light rays on to a film
of oil).
Video
monitors of this heading should not be confused with the display
units of automatic data processing machines described in
the
Explanatory Note to heading
84.71.
’
[7] It is
unnecessary for the purposes of this judgment to discuss the general
principles of tariff classification.
3
The respondent’s counsel relied on two main submissions on
appeal. Firstly he accepted that the screens possessed the objective
characteristics of video monitors but submitted that they were in
truth incomplete television sets because
a) they were designed to
be incorporated with the imported tuners and thereby to become
television sets;
b) they
possessed sophisticated refinements not related to their functional
utility as monitors which were intended only to serve
the function of
television receptors; and
c) they lacked the
circuitry necessary for use as monitors in a domestic context as
distinct from the setting of an office or public
place.
For the purposes of this
appeal it may be accepted that these specific characteristics did
attach to the monitors. It is unnecessary
to enter upon a discussion
of the technical aspects which underlie each aspect.
[8] Counsel
for the appellant sought to persuade us that, on the strength of the
additional features thus identified that Rule 2(a)
of the General
Rules for the Interpretation of the Harmonized System (which governs
the classification of goods) applied to the
screens. This Rule
provides as follows:
‘
(a) Any
reference in a heading to an article shall be taken to include a
reference to that article incomplete or unfinished, provided
that, as
presented, the incomplete or unfinished article has the essential
character of the complete or finished article it shall
also be taken
to include a reference to that article complete or finished (or
falling to be classified as complete or finished
by virtue of this
rule), presented unassembled or disassembled.’
Counsel relied only upon
the incompleteness of the sets as presented and did not contend that
the sets were presented unassembled
or disassembled.
[9] This
was not a submission dealt with in terms by Southwood J who was
satisfied that Rule 1 applied
viz
.
‘
For
legal purposes, classification 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 require, according
to the following provisions.’
4
[10] In
response, counsel for the respondent submitted that, for the purposes
of tariff classification, it is not possible for a
product to be
regarded as a complete article of one tariff heading and, at the same
time, to be treated as an incomplete article
of a different tariff
heading. That indeed is the effect of Interpretative Rule 3 which
eliminates the possibility of classification
under more than one
heading. But it does not follow that because an article is complete
for the purposes of one heading it may
not properly be regarded as
incomplete under another or that the former must prevail in all
instances (as counsel submitted). One
may easily envisage an article
of low value and utility complete in itself but also possessing the
essential characteristics of
an incomplete and far more significant
product. Rule 3 may then appropriately be applied to the
determination. It follows that
I do not agree that Interpretative
Rule 2(a) only arises for consideration if the appellant succeeds in
establishing a stratagem
which entitles the court to look beyond the
admitted character of the screens as video monitors to their ‘true’
character
(being, according to the respondent’s contention,
incomplete apparatus for television reception).
[11] As
note (
I
) to Rule 2(a)
emphasises,
‘
The
first part of Rule 2(a) extends the scope of any heading which refers
to a particular article to cover not only the complete
article but
also that article incomplete or unfinished,
provided
that,
as presented, it has the essential character of the complete or
finished article.’
[12] The
evidence is clear: a tuner is the means by which television signals
are received and converted to an optical image on the
screen. Without
a tuner the screen can perform no reception function. In these
circumstances, absent the tuner, the screen would
appear to lack the
essential character of a complete television set. Counsel for the
appellant met this difficulty by the following
submissions:
(a) The
provisions of tariff heading 8529.90.60 proves the argument to be
wrong. That heading provides that the tuner is not a
‘
Reception
apparatus for television
’,
but a part thereof. Because ‘
tuners’
are classifiable as parts
of ‘
Reception
apparatus for television
’,
a ‘
Reception apparatus
for television
’ must,
as a matter of logic, comprise more than just a tuner, and the screen
in the present instance may thus have the essential
character of a
‘
Reception apparatus
for television
’
notwithstanding the fact that it is not fitted with a tuner.
(b) By
definition an incomplete or unfinished article has some part or parts
missing and hence cannot function as a complete product
(as was the
position in the
Komatsu
case).
5
The absence of one component, even if such a component plays an
essential role in the functioning of the product, can in itself
accordingly never be determinative of the question as to whether the
incomplete product has the essential character of the complete
product.
(c) The
aforesaid reasoning is borne out by the various examples given in a
number of Explanatory Notes to the heading of Part 1
of Schedule 1 to
the Act. One example is the General Note to Chapter 87:
‘
An
incomplete or unfinished product
is classified as a corresponding complete or finished vehicle
provided it has the essential character of the latter (see
Interpretative
Rule 2(a)), as for example:
(A)
a motor vehicle, not yet fitted with the wheels or tyres and
battery.
(B)
a motor vehicle not equipped with its engine or with its interior
fittings.
(C)
a bicycle without saddle and tyres.
’
As
far as ‘
the motor
vehicle not equipped with its engine’
is concerned, counsel submitted that although it might serve as a
fully functional chicken coop or trailer and could be used as
such at
the time of importation, the reason why it would not be classifiable
as such is because, if proper regard is had to its
true nature and
characteristics, it is not a complete chicken coop or trailer, but an
incomplete motor vehicle. Similarly, the
reason why the screens are
not to be classified as ‘
Video
monitors
’
notwithstanding the fact that they were fully functional video
monitors at the time of importation is because, based on
the evidence
as to their true nature and characteristics (set out in paragraph 21
above), the intention of the designer and the
manufacturer of the
screens, as ‘
objectively
embodied
’ in the
product, clearly was to design and manufacture a ‘
Reception
apparatus for television
’
i.e. a television set.’
[13] Attractive
as this argument may appear at first glance, I do not think it
withstands closer examination for the reasons which
follow.
[14] I
agree with counsel for the respondent that reliance on tariff heading
8529.90.60 is a red herring because the appellant’s
argument
overlooks Explanatory Note 3 to tariff heading 8528. That note states
that tuners which convert high frequency radio waves
fall under
heading 8528; however, devices which simply isolate high-frequency
television signals (sometimes called video tuners)
are to be
classified as parts in heading 8529. By contrast the wording of the
tariff heading contended for by the appellant
viz
‘reception apparatus
incorporating or designed to incorporate . . . screens with a screen
size not exceeding 3m x 4m’
is indicative that a screen, on its
own, is not regarded as a reception apparatus.
[15] While
it is clear that each determination must be made according to the
salient facts attaching to the goods in question (and,
in particular,
its objective characteristics), and while in one case an engine may
properly be regarded as the essence of the goods,
in another a frame
or chassis may be sufficient to satisfy that test. In
Autoware
(Pty) Ltd v Secretary for Customs and Excise
,
6
Colman J was required to consider whether a vehicle was a panel van
or an incomplete station wagon on importation. The learned
judge
found that the relative simplicity and low cost of modification was
not a decisive criterion, because the enquiry does not
turn on what
the product was going to be or what it will be adapted to be. Rather,
the court must consider what the product was
at the time of
importation. Colman J held
7
that that issue
‘
must
be decided on the basis of the presence or absence, in the unmodified
vehicles, of the essential features or components of
a station wagon
. . . What I mean by an essential feature of a station wagon is not a
feature which is important, for one reason
or another, or even one
which is essential for the proper functioning of a station wagon. I
mean a feature which is essential in
that it embodies the essence of
a station wagon, and differentiates such a vehicle from others which
are not station wagons.’
I
respectfully endorse that approach.
[16] At
the time of entry the screens were, as the appellant concedes,
functional video monitors. They possessed an existence and
utility of
their own which did not include or require the incorporation of a
device capable of receiving high frequency radio waves
and converting
the signal into optical images. But without such a device the use of
the screens as ‘reception apparatus for
television’ was
totally excluded. That the screen was designed to accept such a
device or could be easily modified to accept
it, is, as, Colman J
pointed out, of no consequence if the essential nature does not exist
at the time of importation. Nor does
the ‘unnecessary’
addition of the ‘sophisticated’ features which are
embodied in the respondent’s
screens, make up for the absence
of the means of receiving and converting signals albeit that it
strongly indicates an intention
on the part of the importer that the
product is to offer an alternative use to the ultimate purchaser. It
is the
primary
d
esign
and use which carries most persuasion.
8
[17] For
these reasons I am of the view that Interpretative Rule 2(a) did not
apply to the video monitors on entry and was rightly
not treated as
significant by Southwood J.
[18] The
second leg of the appellant’s argument turned on its having
proved in the court
a quo
that the importation was a sham in the sense I have referred to
above.
9
The contention faced formidable obstacles.
[19] First,
as already emphasised, the screens were per se functional video
monitors and are sold and used as such. Second, the
uncontested
evidence was that the respondent did not itself assemble the screens
and tuners into television sets but sold them
as separate entities to
retailers. Such purchasers might themselves sell the screens and
tuners separately or together or assemble
them and sell the product
as a television set. The respondent neither directed nor controlled
such purchases or the ultimate use
of the two items.
[20]
Prima facie, the modus operandi of the respondent is entirely what it
purports to be,
viz
the
importation of two separate items each having its own commercial
utility. The respondent makes no effort to hide the fact that
the
overwhelming use by retailers and the public of the two items is in
combination, ie as a television set.
[21] At
the outset of the proceedings the appellant implicitly recognised the
difficulties which it faced in attempting to attach
a pejorative
intention to the separate importation. Courts are always reluctant to
find
fraus legis
without
clear evidence; such clarity can generally only be obtained by the
examination of witnesses with due regard to the way in
which
their affairs or those of their businesses have been conducted.
Again, adequate assessment invariably requires insight into
the books
and documents used in the business. The appellant, apparently intent
on exposing what it suspected was a stratagem, called
on the
respondent in correspondence to produce an extensive range of
documentation and wide-ranging information originating both
in South
Korea and South Africa. The respondent (with justification) appears
to have regarded this demand as in the nature of a
fishing expedition
and refused to comply. No aspect of the demand was thereafter pursued
by the Commissioner (although his counsel
sought to draw an adverse
inference from the refusal). Application was made to the court
a
quo
for the question of the
genuineness of the separate importations to be referred for the
hearing of oral evidence. Southwood J refused
the application and his
refusal has not been put in issue before us. Despite all these
considerations the appellant persisted in
contending that the court
a
quo
should have found, on
the papers, that the appellant was engaged in a scheme designed to
deprive the
fiscus
of its legitimate deserts.
[22] The
considerations which counsel urged upon us as, cumulatively,
sufficient to prove that the respondent was engaged in a stratagem,
were the following:
1 The
opinion of its expert witness, Mr Van Wyk, derived from his
identification of the additional features foreign to a video monitor
but necessary to a television set, that
a) the
monitor was designed and manufactured to incorporate the tuner and,
consequently, to be used as a television set;
b) the
tuner was probably designed and manufactured to be connected to, and
thus to function, exclusively with the monitor;
c) the
monitor was not designed simply to be used as a video monitor.
2 On
importation the screens were accompanied by a document titled ‘Plasma
TV Owner’s Manual’.
3 With
the owner’s manual was a pamphlet titled ‘Interface Board
Owner’s Manual’ which contained instructions
as to how to
install the tuner in the screen, and which referred to the owner’s
manual for operating instructions.
4 According
to information downloaded by officials from the respondent’s
website in July 2006, the monitors were supplied
as standard with
tuners.
5 At
a meeting on 4 September 2006 representatives of the respondent
advised the Commissioner’s officials that:
(a) the
information on its website was incorrect and the monitors and tuners
were imported separately;
(b) the
screens had been redesigned in order to allow for the easy fitment of
a tuner after importation.
6 The
respondent’s refusal to comply with the Commissioner’s
request for documents and information.
7 The
evidence that certain large retailers
a) only
ordered complete television sets;
b) received,
as the delivered product, a screen (with a remote control) and an
uninstalled tuner;
c) sold
the product to their customers as television sets;
d) were,
until about March 2007, invoiced by the respondent for television
sets, and, thereafter, for the monitors and tuners separately.
8 The
respondent imported 22063 screens and 25435 tuners from July 2005 to
December 2006. As the tuners had no use apart from their
installation
and use with the screens, the ineluctable inference is that all
screens must have been converted into television sets,
leaving the
respondent with 3372 spare tuners.
9 The
respondent’s explanation as to why it changed its method of
invoicing (‘to avoid any ambiguity that may have existed’)
was disingenuous and illogical. It was open to only one conclusion,
namely that the television sets had all along been ordered,
imported
and delivered in ‘kit form’. As a result of the
Commissioner’s investigation, the paperwork had to be
changed
in order to hide the true facts.
10 If
due attention were paid to the substance of the products, and the
sourcing, purchasing, marketing and onselling of the screens,
the
conclusion of the court
a
quo
should have been that
the respondent was engaged in a scheme designed to evade the payment
of the tariff applicable to the importation
of television sets.
[23] The
crux of the factual findings of the court
a
quo
in relation to the
charge of
fraus legis
was
that the screens were designed to serve two markets, one for video
monitors or information display panels, the other for television
sets, and that the respondent supplied both markets. Neither of these
facts were denied by the Commissioner in the court
a
quo
or disputed on appeal.
[24] Southwood
J also found that cogent commercial reasons existed for the manner in
which the screens were designed, manufactured
and imported into South
Africa. Moreover the modus operandi of the respondent in selling the
screen and tuners as separate items
(despite the contrary description
in the invoices) was not rebutted at all by the Commissioner. The
learned judge disbelieved the
evidence put forward by the
Commissioner concerning both the holding of the meeting on 4
September 2006 and the content of the
admissions allegedly made by
and on behalf of the respondent at that meeting. His grounds for
doing so were well-motivated and
I am unpersuaded that he misdirected
himself.
[25] Affording
due weight to those of the grounds relied on by the appellant which
are either common cause or not seriously denied
by the respondent,
the conclusion of the learned judge that the Commissioner had proved
no stratagem on the part of the respondent
in regard to the
importation of the screens appears to me to have been justified.
There was no evidence to suggest that the respondent
manipulated the
design or manufacturing or the importation process to avoid payment
of duties. This seems clearly to fall within
that category of cases
where a man may legitimately order his affairs so that the tax is
less than it otherwise would be.
10
[26] Southwood
J made a special order of costs against the appellant. Suffice to say
that no ground has been adduced to interfere
with his discretion.
[27] The
appeal is dismissed with costs including the costs consequent upon
the employment of two counsel.
____________________
J
A Heher
Judge
of Appeal
APPEARANCES
APPELLANT
: C
E Puckrin SC with him J A Meyer SC
Instructed
by State Attorney, Pretoria;
State
Attorney, Bloemfontein
RESPONDENT
: A
P Joubert SC with him C J McAslin
Instructed
by DLA Cliffe Dekker Hofmeyr, Sandown, Sandton;
Naudes,
Bloemfontein
1
Ie ‘Video monitors’. The evidence is unclear as to the
tariff heading under which the tuners were admitted.
2
Ie ‘Reception apparatus, incorporating or designed to
incorporate cathode ray tubes or other screens with a screen size
not exceeding 3m x 4m’.
3
The cases are cited in
Commissioner, SARS v Komatsu Southern
Africa (Pty) Ltd
2007 (2) SA 157
(SCA) fn 5.
4
Those ‘provisions’ are contained in the Explanatory Note
to Rule I.
5
Commissioner, SARS v Komatsu Southern Africa (Pty) Ltd
2007
(2) SA 157
(SCA).
6
1975 (4) SA 318
(W).
7
At 327G-328A.
8
Cf Dowling J in
Mincer Motors Ltd v Commissioner of Customs and
Excise
1958 (1) SA 652
(T) at 654G-H.
9
As to the general principles, see eg
Michau v Maize Board
2003
(6) SA 459
(SCA) para 4.
10
IRC v Duke of Westminister
[1936] AC 1
at 19;
Hicklin v
SIR
1980 (1) SA 481
(A) 494G;
Michau v Maize Board
,
above, para 4.