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[2021] ZAGPPHC 130
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Samsung Electronics SA (Pty) Ltd v Commissioner for the South Africa Revenue Service (2018/68900) [2021] ZAGPPHC 130; 83 SATC 304 (18 March 2021)
REPUBLIC OF SOUTH
AFRICA
IN THE HIGH COURT OF
SOUTH AFRICA
GAUTENG
DIVISION, PRETORIA
Case No: 2018/68900
NOT REPORTABLE
NOT OF INTEREST TO
OTHER JUDGES
REVISED
In
the matter between:
SAMSUNG
ELECTRONICS SA (PTY) LTD
Applicant
and
THE COMMISSIONER FOR
THE SOUTH
AFRICAN
REVENUE SERVICE
Respondent
JUDGMENT
MNGQIBISA-THUSI,
J
[1]
The
applicant, Samsung Electronics SA (Pty) Ltd, seeks an order, in terms
of s 47(9)(e)
[1]
of the Customs
and Excise
[2]
(“the Act”),
setting aside the decision of the respondent, the Commissioner for
the South African Revenue Service,
made on 11 April 2018, to withdraw
a tariff determination under tariff heading 8517.12.10 and its
replacement by tariff determination
under tariff heading 8517.62.90;
and costs.
[2]
At the time of importation, the applicant
had sort clearance of the product under TH 8517.12.10.
[3]
The applicant is a company duly registered
in terms of the company laws of the Republic of South Africa.
The applicant is
an importer and distributor of multi-functional
smart devices (cellular telephones) which include the Samsung Galaxy
S7 model (“the
product”) and other products. The
respondent is the public officer vested, in terms of s 2(1) of the
Act, with the
administration of the Act, including the interpretation
of schedules thereto.
[4]
In terms of the Act and the Schedules
thereto import transactions are classified according to an
appropriate tariff heading which
informs the rate of duty payable on
a particular commodity.
[5]
On 3 July 2017 the applicant applied for a
tariff determination for its imported multi-functional devices, the
Samsung Galaxy S7
(“the product”), under tariff heading
8517.62.90 or tariff heading 8517.69. The applicant’s
attorneys having
received on 10 August 2017 a tariff determination
under tariff heading 8517.62.90 for an Apple iPhone 6s on behalf of
another client,
submitted applications for refunds of the customs
duty on previously imported goods. However, the respondent’s
officials
declined the applicant’s refund applications.
[6]
As
a result of the rejection of the applicant’s refund
applications, on 6 September 2017 a meeting between the applicant’s
representative(s) and the respondent’s tariff- and refund
sections was held. On 12 September 2017 the applicant submitted
the product’s technical specifications as requested by the
respondent
[3]
.
[7]
On
27 September 2017 the respondent informed the applicant that after
consideration of the products’ specifications, it has
determined that the products were “… smart devices
classifiable under tariff sub-heading 8517.62.90”.
On 27
September 2017 the applicant received a formal tariff determination
under tariff heading 8517.62.90
[4]
.
[8]
Despite earlier undertakings to process the
applicant’s refund applications and after several inquiries in
this regard made
by the applicant, on 20 November 2017 the respondent
sent the applicant a notice of intention to withdraw the applicant’s
determinations with retrospective effect.
[9]
On
11 April 2018, the respondent withdrew the tariff determination made
on 27 September 2017, with retrospective effect from 4 August
2017,
and made a new determination in terms of which the product was
classified under tariff heading 8517.12.10
[5]
.
The effect of the withdrawal of the previous determination was to
void any entitlement the applicant had with respect to
previous
imports and made it liable for duties in respect of the imported
products.
[10]
The issue to be determined is whether the
product should be classified under TH 8517.62.90 as contended for by
the applicant or
under TH 8517.12.90.
[11]
In terms of s 47(9)(a)(i)(aa) of the Act,
the respondent is vested with the power to determine tariff headings
and sub-headings
under which imported goods shall be classified.
S 47(9)(d)(i)(bb) of the Act enjoins the respondent to amend any
determination
or withdraw a right and make a new determination if it
was made in error.
[12]
Section 47(8)(a) of
the Act provides that in interpreting a tariff heading or sub-heading
in Part 1 of Schedule 1, the general
rules for the
Interpretation of Schedule 1 and every section note and chapter note
Part 1 of Schedule 1 shall be in line with the
International
Convention on the Harmonised Commodity Description and Coding System
done in Brussels on 14 June 1983 and the explanatory
notes to the
Harmonised System issued by the Customs Co-Operation Council,
Brussels (the World Customs Organisation) from time
to time.
[13]
In
International
Business Machines SA (Pty) Ltd
v
Commissioner for Customs and Excise
[6]
the
court set out the legal principles to be applied in tariff
classification and the manner in which they must be interpreted and
applied as follows
:
“
Classification
as between headings is a three-stage process: first, interpretation –
the ascertainment of the meaning of the
words used in the headings
(and relevant 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”.
[14]
In
Commissioner,
SARS v Komatsu Southern Africa (Pty) Ltd
[7]
this
court stated that:
“
[8]
…
It is
clear from the authorities that the decisive criterion for the
customs classification of goods is the objective characteristics
and
properties of the goods as determined at the time of their
presentation for customs clearance. This is an internationally
recognised principle of tariff classification. The subjective
intention of the designer or what the importer does with the goods
after importation are, generally, irrelevant considerations. But they
need not be because they may in a given situation be relevant
in
determining the nature, characteristics and properties of the goods”.
[15]
In
CSARS
v The Baking Tin (Pty) Ltd
[8]
the court was of the view that what was said by the court in
Komatsu
matter (above) with regard to the role in certain circumstances of
the subjective intention of the maker of goods or the use the
goods
by the importer in determining the nature, characteristics and
properties of goods, suggested that they ‘may affect
what
appears to be the objective characteristics of the goods and thus
change their classification’.
[16]
The product relevant to these proceedings
fall under Part 1 of Schedule 1 of the Act under Tariff Heading 8517
titled:
“
Telephone
sets, including telephones for cellular networks or for other
wireless networks; other apparatus for the transmission
or reception
of voice, images or other data, including apparatus for communication
in a wired or wireless network (such as a local
or wide area network)
(excluding transmission or reception apparatus of heading 84.23,
85.25 or 85.28)”.
[17]
Tariff Heading 8517 is further subdivided
into two sub-headings relevant to these proceedings, namely, 8517.1
(Telephone sets, including
telephones for cellular networks or other
wireless networks) and 8517.6 (Other apparatus for transmission or
reception of voice,
images or other data, including apparatus for
communication in a wired or wireless network (such as a local or wide
area network).
[18]
Tariff Heading 8517.12.10 under which the
applicant’s goods are classified is headed ‘Designed for
use when carried
in the hand or on the person’, whereas the
withdrawn tariff heading 8517.62.90 is headed ‘Other’.
[19]
Note 3 of section XV1 under tariff heading
85.17 which provides that:
“
Unless
the context otherwise requires, composite machines consisting of two
or more machines fitted together to form a whole and
other machines
designed for the purpose of performing two or more complementary or
alternative functions are to be classified as
if consisting only of
that component or as being that machine which performs the principal
function”.
[20]
However, if it is not possible to determine
the principal function of the device, the General Interpretative Rule
3(c) applies which
it provides that:
“
(c)
When goods cannot be classified by reference to 3(a) or 3(b), they
shall be classified under the
heading which occurs last in numerical
order among those which equally merit consideration”.
[21]
It is common cause that the product is a
multi-functional device which can be used as a telephone; for
automatic data processing;
video call messaging; a camera; music
player; internet connection etc.
[22]
It is the applicant’s contention that
the correct classification of the product for customs duty is TH
8517.62.90 rather than
TH 8517.12 10 as contended for by the
respondent.
[23]
On behalf of the applicant it was submitted
that the principal function of the product relates to the connection
to the internet,
social media, music and games and not the making of
telephone calls and the appropriate classification would be under TH
8517.62.90.
However, the applicant concedes that telephones for
cellular networks do not only have the telephony function but can
also perform
images and data functions.
[24]
It is the applicant’s contention that
in order to properly determine the correct classification for its
product the primary
step should be to describe the word ‘telephone’
in ‘telephones for cellular network as envisaged under tariff
heading 8517. In its founding affidavit the applicant sets out
the meaning ascribed to the word by various sources.
The common
denominator in the meanings ascribed to the word ‘telephone’
by these sources is the reference to the phrase
‘transmission
of sound’.
[25]
In support of this contention, the
applicant relies on the report of Dr Jacques Van Wyk, an IT
specialist, who submitted an affidavit
in which he described the
design features and the characteristics of the products.
Dr Van Wyk further asserts that
over and above the telephony function
of the product, it uses fixed programmes (‘apps’) which
are not available in
a traditional cellphone; makes and receives
calls through the GSM network or using either 3G or LTE or using
Wi-Fi (WLAN) internet
connection; makes video calls, messaging and
pictures (SMS and MMS) and data communication (emails, skype,
WhatsApp).
[26]
Dr Van Wyk concludes that:
25.1
the best fitting description of the product
is apparatus which allows for the connection to a wireless
communication network for
the transmission or reception of speech or
other sounds, images or data;
25.2
voice transmission is not the principal
function of the product; and
25.3
the product likely has, as its principal
function, those relating to connection to the internet, social media,
music and games,
rather than that for making traditional voice calls.
[27]
Further, the applicant relies on a number
of market survey reports attached to Dr Van Wyk’s affidavit
which indicate that
the principal function of smartphones like the
Samsung S7, are mainly used not for telephony but for internet
connection, social
media, music and games and not for traditional
voice calls and that therefore the appropriate classification of the
product would
be under TH8517.62.90.
[28]
In the alternative, it was further
submitted on behalf of the applicant that since its product could
fall under either TH8517.6
or TH8517.1, the provisions of General
Interpretative Rule 3(c) should be invoked. It is the
applicant’s contention
that since tariff heading 8517.62 occurs
after TH 8517.12, its product should be classified under TH
8517.62.90.
[29]
On behalf of the respondent it was
submitted that it is inexplicable why the applicant would choose to
seek the meaning of the word
‘telephone’ in order to
explain its position rather the meaning of ‘telephones for
cellular networks’ as
indicated in the tariff heading in light
of the development in telephone technology. As correctly
pointed out on behalf of
the respondent, the technology for the
telephones has tremendously developed over time. Therefore, in
seeking to define the
word ‘telephone separately from the
phrase ‘cellular network’, the applicant is attempting to
define the principal
function of the product out of context.
[30]
It was further submitted on behalf of the
respondent that tariff heading 8517.1 the subdivisions under the
heading are divided by
a semi-colon which divides the sub-divisions
under the tariff heading into 8517.1 and 8517.6 (other apparatus for
transmission
or reception of voice, images or other data, including
apparatus for communication in a wired or wireless network (such as a
local
or wide area network). According to the respondent the
use of the semi-colon is indicative of mutually exclusive division
between telephones (Th8517.1) and other machines other than a
telephone (TH8517.6). Further, that due to the
mutually exclusive division between the two sub-divisions of 8517,
there cannot be any overlapping between the two sub-divisions
since a
‘telephone’ cannot be something other than a telephone.
[31]
It was argued on behalf of the respondent
that the use of the product using the wireless network to make
WhatsApp call, Skype, etc.
falls under operating as a telephone ‘for
other wireless networks under sub-heading 8517.12.
[32]
With regard to the objective
characteristics of the product, in paragraph 15.5 of its answering
affidavit, the respondent surmises
that the product is a telephone
facility network because:
“
1.
the design is such that they are small enough to be carried in the
hand or on the person
with a high resolution touchscreen of
approximately 5 inches;
2.
it has a speaker at one end which is audible when placed against the
operator’s
ear and at the other end has a microphone to receive
speech or voice from the operator’s mouth;
3.
it has slots for the insertion of sim cards to operate as telephones
and communicate
on a cellular network; and
4.
it has electronic keypads and software which enable the user to dial
a telephone
number to initiate a telephone call and to terminate a
telephone call.”
[33]
Attached to the respondent’s
answering affidavit are supporting affidavits of Mr Otis Tichatonga
Nyandoro and Professor Ling
Cheng.
[34]
Mr Nyandoro, after setting out the typical
functions of the product and contrasting it and other smartphones
with laptops and desktops,
concludes with regard to the product that
is a ‘telephone for cellular network and not some other device
other than a telephone’.
[35]
In paragraph 32.10 of his supporting
affidavit, Professor Cheng concludes by stating that:
“
The
Samsung Galaxy S7, like other smartphones, is manufactured such that
it can be held in one hand to the side of the user’s
face such
that the device will have a speaker next to the ear and a microphone
that will pick up speech from the user’s mouth
to enable a user
to hold a telephone conversation. The primary considerations of
Samsung Galaxy S7 design are for cellular
telecommunication and
convenience as a phone handset. As such the Samsung Galaxy S7
is manufactured as a cellular network
handset, which is designed to
maintain a two-way communication with the base station of a cellular
mobile communication system”.
[36]
It is common cause that the product is a
composite device which can be used, inter alia, as a telephone and
can also perform functions
of data processing, video calling
messaging, a camera, and a music player.
[37]
It is trite that in determining the
classification of imported goods for purposes of customs duty, the
decisive criterion for determining
the appropriate tariff heading the
goods should fall in is the objective characteristics and properties
of the goods as determined
at the time of presentation for customs
clearance. Furthermore, it is common cause that the intention
of the manufacture
or the use of the goods after importation is not
determinative of their classification under the Act.
[38]
As correctly pointed out by counsel for the
respondent, I am also of the view that it would be inappropriate to
try to give meaning
to the word ‘telephone’, thereby
disjoining it from the tariff heading telephones for cellular
networks. We are
not dealing with what is referred to as a
traditional telephone which was the norm before the advent of
smartphones.
[39]
The applicant’s assertion that the
product is not a telephone for cellular networks but is a machine
akin to a laptop or desktop
is disingenuous, taking into account that
the applicant has conceded that its product has telephony functions.
That fact
that the product has functions found in laptops and
desktops does not detract from its principal function of being a
telephone
for cellular networks. Mr Nyandoro and Professor
Cheng have clearly analysed the design, systems and functions of the
product
and have in my view correctly concluded that it is a
telephone for cellular networks.
[40]
Further, as shown by the respondent, the
product has all the features which conform with the description of
tariff heading 8517.12.90
in that it hand-handled and that its
principal function is telephony. I am not convinced that the
product is a machine other
than a smartphone. Its usage through
the internet does not change its nature and objective
characteristics.
[41]
I am of the view that the applicant appears
to have premised its proposition that the product is not a telephone
for cellular networks
on the post-usage of the device and not on the
criterion as set out in the
Komatsu
matter (above).
[42]
I am further not convinced that the
functions of the product straddle between tariff heading 8517.1 and
tariff heading 8517.6 and
that the provisions of General
Interpretative Rule 3(c) should applicable.
[43]
Having read the documents filed and
considered counsel’s submissions, the following order is made:
‘
The
application is dismissed with costs’.
NP MNGQIBISA-THUSI
Judge
of the High Court
Date of hearing: 12
November 2019
Date of judgment: 18
March 2021
Appearances
For Applicant: Adv
C E Puckrin SC and Adv J P Vorster SC (instructed by Cliffe Dekker
Hofmeyer Attorneys)
For Respondent: Adv
J Peter SC, assisted by Adv W Mothibe (instructed by the State
Attorney)
[1]
Section
47(9)(e) of the Act which makes provision for a person aggrieved by
a determination made by the respondent to appeal to
the High Court
against such a determination.
[2]
Act
91 of 1964.
[3]
On
7 September 2017 the respondent requested the applicant to provide
it with technical specifications for all products and indicated
that
should the technical specifications qualify under the determination
of the products under TH8517.62.90, the applicant’s
refunds
would be processed.
[4]
Tariff
determination heading: “Machines for the reception, conversion
and transmission or regeneration of voice, images
or other data”.
[5]
TH8517.12.10
is a classification for “telephones for cellular networks or
for other wireless networks designed for use when
carried in the
hand or on the person”.
[6]
1985
(4) SA 852
(A) 863G-H.
[7]
2007
(2) SA 157 (SCA).
[8]
2007(6)
SA 545 at para [13].