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[2019] ZAKZPHC 58
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Acti-Chem SA (Pty) Ltd v Commissioner for the South African Revenue Service (8540/2017) [2019] ZAKZPHC 58; 81 SATC 363 (15 August 2019)
IN
THE HIGH COURT OF SOUTH AFRICA
KWAZULU-NATAL
DIVISION, PIETERMARITZBURG
Reportable
Case No: 8540/2017
In
the matter between:
ACTI-CHEM SA (PTY)
LTD
Applicant
and
COMMISSIONER FOR THE SOUTH AFRICAN
REVENUE SERVICE
Respondent
JUDGMENT
GORVEN
J
[1]
The applicant contends that it is entitled to a
rebate on goods imported by it. The position is governed by the
Customs and Excise
Act (the Act).
[1]
The rebate item in question is item 306.07 of Schedule 3 to the
Act. This concerns ‘[p]repared waxes, not emulsified
or
containing solvents.’ The industry under which it is listed is
‘Polishes and Creams’ (the industry). A full
rebate is
allowed for such goods. The applicant is a rebate registrant in
respect of this item. Claims by the applicant for rebates
have been
allowed over the past 30 years. Following an inspection of the
applicant’s books and documents in September 2013,
the
respondent (the Commissioner) issued a determination letter dated 25
February 2014. This asserted that the imported goods had
been used
‘otherwise than in accordance with the item under which entry
was intended for.’ Demand was made of the applicant
to pay duty
on the goods together with VAT, penalties and interest.
[2]
That determination prompted the present
application. It is brought in terms of s 47(9)
(e)
of the Act. In the Act, this is framed as a wide appeal which allows
for a retrying of the issues.
[2]
On this basis the applicant asks for orders:
‘1.
Declaring that the respondent’s determination dated 25 February
2014 .
. . is set aside.
2.
Declaring that rebate item 306.07 is applicable to the importation of
the products
in question, namely AC 540 and AC 673P.
3.
The respondent is liable to pay the costs of the application on an
attorney and
client scale, including the costs occasioned by the
employment of two counsel.’
In
argument, the applicant did not persist in the punitive costs order
or that for two counsel.
[3]
Section 75(1)
(a)
provides that specified goods:
‘…shall
be admitted under rebate of any customs duties or excise duty
applicable in respect of such goods at the time
of entry for home
consumption thereof, to the extent and for the purpose or use stated
in the item of Schedule No. 3 in which they
are specified .’
And
s 75(2)
(a)
provides:
‘A
rebate of duty in respect of any goods described in Schedule No. 3
shall be allowed –
a)
only in respect of goods entered for use in the production or
manufacture of
goods in the industry and for the purpose specified in
the item of the said Schedule in which those goods are specified.’
This
requires an interpretation of the relevant provisions.
Section 47(8)
(a)
of the Act governs the approach to
interpretation of provisions in the Act:
‘(
a
) The
interpretation of—
. . .
(ii) (
bb
)
any item specified in Schedule No. 2, 3, 4, 5 or 6;
. . .
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 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.’
[4]
The relevant note
[3]
to Schedule 3 reads:
‘The
imported goods . . . shall . . . be admitted for use in connection
with the production or manufacture of goods in the
industries
specified . . .’.
The
imported goods must accordingly be used ‘in connection with the
production or manufacture of goods’ in the industry.
[5]
The approach to interpretation of documents was
summarised in
Natal Joint Municipal Pension
Fund v Endumeni Municipality
:
[4]
‘The “inevitable point of departure is the language of
the provision itself”, read in context and having regard
to the
purpose of the provision and the background to the preparation and
production of the document.’ (Reference omitted)
To
this must be added:
‘There
are three important interrelated riders to this general
principle, namely:
(a)
that statutory
provisions should always be interpreted purposively;
(b)
the relevant
statutory provision must be properly contextualised; and
(c)
all statutes must be construed consistently with the
Constitution, that is, where
reasonably possible, legislative
provisions ought to be interpreted to preserve their constitutional
validity. This proviso to
the general principle is closely related to
the purposive approach referred to in
(a)
.’
[5]
(References omitted)
So,
the approach is to consider the meaning of the words used, in the
context in which they appear, the purpose of the provision
and the
circumstances in which it came into being, the result of all of which
must be consistent with the Constitution. These factors
are all
material and interlinking, and result in the interpretation to be
given. Inevitably, the approach goes beyond a purely
grammatical
construction of words conducted, as it were, in a vacuum and without
reference to the other factors.
[6]
The following facts form common ground between
the parties. The imported goods are AC 540, an Ethylene-Acrylic Acid
Copolymer and
AC 673P, an Oxidised Polyethylene Homopolymer (the
imported goods). The products manufactured by the applicant using the
imported
goods are Quecolin ESP and Quecolin HW1 (Quecolin). Neither
of these is a polish or cream. They can be used in the manufacture of
polishes or creams. The applicant does itself not use them to do so.
They can also be used to manufacture goods other than polishes
or
creams. Most, but not all, of the customers of the applicant to whom
they are sold (the customers) manufacture polishes or creams
from the
Quecolin. None of these customers is a rebate registrant for rebate
item 306.07.
[7]
As I understand it, the applicant relies on two
submissions. First, it says that the manufacture of Quecolin, without
regard to
the use to which it is put, is sufficient to justify the
rebate. Secondly, and in the event that this is not sufficient,
because
the predominant use of Quecolin is for the manufacture of
polish or cream, the rebate is warranted. I shall deal with each in
turn.
[8]
The first argument of the applicant is that it
satisfies the test by using the imported goods to manufacture
Quecolin. For this
proposition, the applicant relies on the
definitions section of Schedule 1 to the Act which is made applicable
by note 2 to Schedule
3. The relevant definitions are:
‘“goods”
means both materials and products’.
‘“material”
means any ingredient, raw material, component or part used in the
manufacture of the product’.
‘“product”
means the product being manufactured, even if it is intended for
later use in another manufacturing
operation’.
As
I understand it, the argument proceeds as follows. The imported goods
are materials. They are used by the applicant as ingredients
to
manufacture Quecolin. Quecolin is thus a product as defined. It is
one intended for later use in another manufacturing operation.
Because ‘goods’ includes products, Quecolin falls within
the definition of goods. It is a good manufactured from the
imported
goods. Because it is capable of being used to manufacture polishes
and creams, the criterion is satisfied. Actual use
for that purpose
is not required.
[9]
The Commissioner says that the use requirement is
crucial. The note says that ‘[t]he imported goods . . . shall .
. . be admitted
for use in connection with the production or
manufacture of goods in the [industry]’. It therefore cannot be
said that the
mere manufacture of Quecolin means that the imported
goods have been used ‘in connection with the production or
manufacture
of goods in the [industry]’ solely because they are
capable of such use. It is the final product which determines whether
the imported goods have been so used. That final product must be a
polish or a cream. Quecolin is neither.
[10]
The applicant, in response to this submission,
says that the requirement is that the imported goods are used ‘for
use in connection
with’ the manufacture of goods in the
polishes and creams industry. The words ‘in connection with’
imply something
other than actual use. In support of this submission,
the applicant points to an extract from Part 1 of Schedule 3.
[11]
The extract contains three industry headings. The
first is the one in this matter, ‘Polishes and Creams’.
The second
is ‘Disinfectants, Insecticides, Fungicides, Rat
Poisons, Herbicides, Anti-Sprouting Products, Plant-Growth Regulators
and
Similar Products, put up in Forms or Packings for Sale by Retail
or as Preparations or Articles’. The third is ‘Chemical
Preparations’. The applicant points to items under the first
heading which specify that the items listed are either ‘for
use
as active ingredients in . . .’ or ‘for the manufacture
of . . .’. It continues to say for which product
they
must be used as active ingredients or what must be manufactured from
them. Similarly, under heading three, items are said
to be ‘for
the manufacture of . . .’. The kind of product is then
specified for each item. In contrast, the applicant
says, the present
item is simply listed as ‘Prepared waxes, not emulsified or
containing solvents’. No specific use
is mentioned. As a
result, says the applicant, the imported goods need not be used to
manufacture polishes or creams.
[12]
The fallacy of this submission becomes clear on a
perusal of the items listed under the other two headings. The
headings are general
while the specified uses are particular to a
range of products falling under the heading. Thus, each of the
imported goods listed
under the first heading is required to be used
variously as active ingredients in the manufacture of pesticides or
for the manufacture
of disinfectants or of fungicides. Examples under
the third heading are that starch must be used to manufacture
adhesives and rape
seed oil to manufacture emulsifiers. The failure
to specify under the heading ‘Polishes and Creams’ that
the imported
goods under discussion must be used for a particular
product within that industry does not mean that they need not be used
in the
industry, only that any product which is a product or cream is
acceptable.
[13]
That there is such a general use requirement is
made clear in s 75(2)
(a)
of the Act and in the explanatory note. As mentioned, the section
requires them to be used:
‘
.
. .
in the production or manufacture of goods in the industry
and for the purpose specified in the item of the said Schedule in
which
those goods are specified . . .’
while
the note requires that they be used:
‘. .
. in connection with the production or manufacture of goods in the
industries specified . . .’.
The
industry is polishes and creams. This does not contain numerous
categories such as the list in the second heading, nor is it
necessary to specify which detailed product must be manufactured as
is necessary under the extremely broad heading of chemical
preparations.
[14]
This then returns us to the issue as to whether
the words ‘in connection with’ mean that the imported
goods need not
ultimately be used to manufacture polishes or creams.
If this were so, no ‘connection’ would be established.
The connection
requires polishes or creams to ultimately be
manufactured from the imported goods. In my view, the phrase ‘in
connection
with’ simply means that the initial importer need
not itself manufacture polishes or creams from the imported goods.
This
can be done by a subsequent entity. However, the manufacture of
polishes or creams from the imported goods is necessary before it
can
be said that they have been used ‘in connection with the
production or manufacture of goods in the [industry]’.
Thus,
unless Quecolin is used for that purpose, it cannot be said that
there has been use of the imported goods ‘in connection
with .
. . the [industry]’. The connection is not established if this
does not take place.
[15]
It should be mentioned that it is not the
contention of the Commissioner that the applicant must itself
manufacture polishes or
creams. It may manufacture a product from the
imported goods which is then used to do so. If Quecolin is used by
others to do so,
the applicant’s use is one ‘in
connection with’ the manufacture of polishes or creams. I
accordingly find that
the manufacture of Quecolin without more does
not qualify the applicant for the relevant rebate. It must ultimately
be used to
manufacture polishes or creams in order to do so.
[16]
This brings into focus the second argument of the
applicant. It concedes that Quecolin is in fact used for other
purposes. It says,
however, that it is sufficient if the ‘predominant
use’ of Quecolin is to manufacture polishes or creams. This
argument
hinges on whether predominant use or exclusive use for the
prescribed purpose is required. On the other hand, the Commissioner
says that the Quecolin must exclusively be used for that purpose. In
addition, this must be done by an entity which is itself a
rebate
registrant. In other words, there must be use of the imported goods
to manufacture polishes or creams by a rebate registrant,
whether or
not this is the applicant. If Quecolin is not used for the
manufacture of polishes or creams, the rebate does not apply
to the
applicant. Nor does it apply if the polishes or creams are
manufactured from Quecolin by an entity which is not a rebate
registrant.
[17]
In support of its contention that predominant use
is sufficient, the applicant calls in aid the matter of
Warren
Marine (Pty) Ltd v Secretary for Customs and Excise
.
[6]
In that matter, a 100% rebate was given to engine fuel used in
‘coasting ships’. The appellant claimed the rebate.
Vessels used for pleasure were excluded. The Commissioner denied that
the vessel of the applicant was a ‘coasting ship’
within
the meaning of those words. In the court
a quo
and on appeal it was found as a fact that it was not. The test was
whether the vessel was used as a ‘ship which plies between
the
ports or along the coast of the same country’. The vessel was
used on three kinds of trips, all from its base in Hout
Bay. Of
these, one was a return trip to Seal Island, one a Sunset Cruise to
Cape Town Harbour and back and the third a Night Trip
where no detail
was given. Rabie ACJ assumed in favour of the appellant that the
second of these gave rise to a use as a ‘coasting
ship’
although expressing some doubt. He held, however, that the other two
trips predominated. The vessel was thus used for
pleasure and it
could not be said that the ‘predominant use to which it was
put’ was as a ‘coasting ship’.
[7]
The rebate was disallowed.
[18]
In
Warren Marine
,
the court based its approach on that taken in
Kommissaris
van Doeane en Aksyns v Mincer Motors Bpk
.
[8]
Here the issue was the classification of the imported goods. Vehicles
designed to convey goods were all manufactured and delivered
with two
front seats only. They were then fitted with a further seat in the
goods area which, when folded flat, restored all available
storage
space in that area. A window was also installed in the rear. The
Commissioner contended that this meant that the vehicles
should be
classified as passenger vehicles. The duty was claimed because a
rebate had been allowed on the basis that the vehicles
were goods
vehicles. The court held that, although the vehicles could convey
passengers, the purpose for which they were primarily
built was to
convey goods. The rebate was thus allowed. The present matter is
distinguishable. It concerns the use to which the
goods must be put
rather than the classification of the imported goods themselves.
[19]
The question, then, is whether the ‘predominant
use’ of Quecolin in the polishes and creams industry is
sufficient.
In this regard, it would be interesting to know what the
outcome of
Warren Marine
would have been if the vessel’s predominant use had been as a
‘coasting ship’. In other words, if the court had
adopted
that approach to qualify the ship for the rebate rather than to
disqualify it. I have considerable difficulty with this
notion
applying to the present matter. In the first place, the wording of
the present provision does not support this interpretation.
If that
were intended, the note would presumably read ‘for predominant
use’ and not simply ‘for use’. Secondly,
the clear
purpose of the rebate is to promote the polishes and creams industry.
This seems to me to require that the imported goods
are ultimately
used to manufacture polishes or creams. If this were not so, the
rebate would not serve its purpose.
[20]
In addition, the regulatory framework set up
under the Act for this rebate item supports an exclusive use
interpretation. The Rules
promulgated under the Act seem to me to
provide important contextual and purposive clues in this regard. Some
material provisions
are:
(a) Rule 75.01 requires
registration of the premises where the goods imported under Schedule
3 will be used
or stored by the rebate registrant, with a plan of the
premises showing the exact location of the store.
(b) Rule 75.03 requires the
books, documents, stocks and premises of every registrant under any
item to
be available for inspection.
(c) Rule 75.04 requires a
registrant to ‘carry out under the supervision of an officer .
. .
any manufacturing operation in which materials specified in and
entered under any item referred to in rule 75.01 are being used.’
(d) Rule 75.06 does not allow a
registrant to ‘perform or permit or arrange to be performed any
process
or operation or any portion of the manufacture of any goods
on any premises other than his registered premises.’
(e) Rule 75.11 provides
that a ‘registrant may transfer any goods entered under any
item referred
to in rule 75.01 to any other registrant who is
registered under the same item or to the same or any other registrant
who is registered
under any other item in which the same goods are
specified if the extent of the rebate under such items at the time of
such transfer
is the same, provided such goods were acquired as a
result of an unconditional sale and are owned by the first-mentioned
registrant
at the time of such transfer and an application on form DA
62 for such transfer is submitted to and approved by the Controller
prior to such transfer. If the extent of the rebate under such items
is not the same the Controller may require the application
on form DA
62 to be accompanied by a statement of the circumstances in which the
transferor desires to transfer the goods in question.
If such
application is granted any difference in duty payable as a result of
such transfer shall be paid to the Controller by the
transferor
before such transfer.’
(f) Rule 75.13 provides
that the transferor of goods referred to in rule 75.11 remains
liable
for the duty on such goods until they have been delivered to
the transferee.
(g) Rule 75.14 requires every
registrant to keep a stock record to show full particulars of all
goods obtained
under rebate as well as the use or disposal of such
goods.
(h) Rule 75.15 permits the
Commissioner to impose an obligation on rebate registrants to keep a
production
record containing all receipts at the factory ex rebate
store with details of the nature and quantities of the materials used
and
of the finished articles manufactured therein.
[21]
These Rules form a raft of regulatory measures
designed to empower the Commissioner to establish whether the rebate
has been correctly
claimed. Since the applicant does not manufacture
polishes and creams from Quecolin, this must ultimately be done by a
subsequent
entity for the rebate to apply. Without these powers, the
Commissioner must perforce rely on the say so of the applicant or
entities
to which Quecolin is sold that this is the case. The
Commissioner would not be able to verify this unless the entities
which claim
to do the manufacturing choose to co-operate. The Rules
allow the Commissioner to use these provisions without having to rely
on
the co-operation of that entity. The Rules relating to the
inspection of premises and processes enable the Commissioner to
establish
whether the entity is capable of using the products to
manufacture polishes or creams. Those concerning inspection of the
stock
records and books empower the Commissioner to ascertain whether
the products manufactured from Quecolin are in fact polishes or
creams. It may also well be that any transfer of Quecolin by the
applicant is hit by rules 75.11 and 75.13. This last point was
not
specifically argued before me and I therefore do not make a finding
to that effect.
[22]
The language of the provisions, the context of
granting the Commissioner the powers in question and the purpose of
rebates being
to promote the industry all coalesce to show that the
ultimate, exclusive use of the imported goods must be for the
manufacture
of polishes or creams. Also that the polishes and creams
must be manufactured by a rebate registrant. This interpretation is
consistent
with the Constitution. No argument to the contrary has
been raised by the applicant. Since the applicant does not
manufacture polishes
and creams and the entities to which the
applicant sells Quecolin are not rebate registrants, the rebate
claimed by the applicant
does not apply.
[23]
In the result, the application is dismissed with
costs, such costs shall include those consequent upon the employment
of two counsel
wherever this was done.
GORVEN
J
DATE
OF HEARING:
21 June 2019
DATE
OF JUDGMENT: 15
August 2019
FOR
THE APPLICANT:
JPV McNally SC
instructed by Prinsloo Incorporated, locally
represented by Colin Msizi Mnguni Attorneys.
FOR
THE RESPONDENT: J Peter SC
(with him S Kazee)
instructed by The State Attorney,
locally represented by Cajee Setsubi Chetty
Incorporated.
[1]
Customs and Excise Act 91 of 1964.
[2]
Pahad Shipping CC v Commissioner, SARS
[2010] 2 All SA 246
(SCA) para 14.
[3]
Note 1.
[4]
Natal Joint Municipal Pension Fund v Endumeni Municipality
2012 (4) SA 593
(SCA) para 18. Approved by the Constitutional
Court in
Democratic Alliance v African National Congress &
another
2015 (2) SA 232
(CC) para 136.
[5]
Cool Ideas 1186 CC v Hubbard & another
2014
(4) SA 474 (CC)
;
2014 (8) BCLR 869
;
[2014] ZACC 16
para 28,
after referring to
Endumeni
.
[6]
Warren Marine (Pty) Ltd v Secretary for Customs and Excise
1982 (3) SA 828 (A).
[7]
Warren Marine
at 839D-G.
[8]
Kommissaris van Doeane en Aksyns v Mincer Motors Bpk
1959 (1)
SA 114
(A).