Sasol Oil Proprietary Limited v Commissioner for the South African Revenue Service (923/2017) [2018] ZASCA 153; [2019] 1 All SA 106 (SCA) (9 November 2018)

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[2018] ZASCA 153
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Sasol Oil Proprietary Limited v Commissioner for the South African Revenue Service (923/2017) [2018] ZASCA 153; [2019] 1 All SA 106 (SCA); 81 SATC 117 (9 November 2018)

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THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case
No: 923/2017
In the
matter between:
SASOL
OIL PROPRIETARY
LIMITED                                                             APPELLANT
and
THE COMMISSIONER FOR
THE SOUTH
AFRICAN REVENUE
SERVICE                                                                   RESPONDENT
Neutral
citation:
Sasol
Oil v CSARS
(923/2017)
[2018] ZASCA 153
(9 November 2018)
Coram:
Lewis,
Ponnan, Cachalia and Makgoka JJA and Mothle AJA
Heard:
21
August 2018
Delivered:
9
November 2018
Summary:
Contracts
for the sale of crude oil by one entity within the Sasol Group, to
another, and the back to back sale of the same oil
to yet another
entity in the group, were not simulated in order to avoid a liability
to pay tax; nor were they entered into solely
for the purpose of
avoiding the payment of tax for the purpose of s 103(1) of the Income
Tax Act 58 of 1962.
ORDER
On
appeal from:
Tax
Court, Johannesburg (Mali J sitting with two other members):
1 The appeal is upheld
with the costs of two counsel.
2 The order of the Tax
Court is set aside and is replaced with the following order:
‘
The
appeal against the additional assessments issued to the appellant on
30 April 2010 by the Commissioner for the South African
Revenue
Service for the 2005, 2006 and 2007 years of assessment is upheld and
those assessments are set aside.’
JUDGMENT
Lewis JA (Ponnan and
Cachalia
JJA
concurring)
[1] In
this appeal against the decision of the Tax Court sitting in Gauteng
(Mali J and two other members), there are two main issues.
First,
whether two contracts for the sale of crude oil sourced in the Middle
East, acquired by a company in the Sasol Group in
the Isle of Man,
sold to another company in the Sasol Group based in London, and in
turn sold and shipped to Sasol Oil (Pty) Ltd
(Sasol Oil), the
appellant, in Durban, were simulated transactions and should be
disregarded by the Commissioner for the South
African Revenue
Service, the respondent, in the assessment of taxation in 2005, 2006
and 2007. I use the term ‘Sasol Group’
loosely to include
all the holding companies and subsidiaries that are relevant to this
appeal.
[2]
Second whether, if the transactions were not simulated, they fell
within the provisions of s 103(1) of the Income Tax Act 58
of 1962,
and were thus to be disregarded for the purpose of assessing
liability for income tax in the hands of Sasol Oil. The Commissioner

issued additional assessments in the years in question, against which
Sasol Oil appealed. The amounts in dispute are in excess
of R68
million, penalties in terms of s 76 of over R68 million and interest
in terms of s 89
quat
.
[3]
The two contracts in issue before the Tax Court were entered into
between Sasol Oil and Sasol International Services Ltd (SISL),
and
between SISL and Sasol Oil International Ltd (SOIL). In terms of
these, SISL agreed to sell crude oil and deliver it to Sasol
Oil on a
DES (delivered ex ship) basis, and SOIL agreed to procure crude oil
and deliver it to SISL on an FOB (free on board) basis.
[4] The Tax Court found
that the impugned transactions were simulated and did not therefore
consider the implications of s 103(1).
It upheld the Commissioner’s
assessments and confirmed the imposition of penalties and the
obligation to pay interest. This
appeal is with the leave of the Tax
Court. I shall deal with the relevant provisions of the Act in due
course. It is important
first to describe the Sasol Group entities
and the roles they played at various times.
Sasol Oil
[5] Sasol Oil was at all
times a subsidiary of Sasol Ltd. The business of Sasol Oil was the
refining of crude oil and the marketing
of fuels produced from coal.
It did this at a refinery inland. It made its profits by buying crude
oil at a lower price than the
refined products that it sold and
supplied throughout South Africa. Before oil sanctions were lifted in
1991, Sasol Oil purchased
its crude oil from the State’s
Strategic Fuel Fund. When sanctions were lifted, Sasol Oil started
sourcing and importing
crude oil from a number of suppliers in the
Middle East, mostly from Iran, Saudi Arabia and Kuwait. It had in
place term contracts
for the supply of crude oil, which gave it
security of supply and lower prices than were available in the open
market, for crude
oil bought on the spot.
Other corporate
entities in the Sasol Group
[6] From 1991 to 1997
Sasol Oil purchased and shipped crude oil from the suppliers in the
Middle East, and spot oil from Western
African suppliers. At that
time as well, the Sasol Group started to ‘globalize’.
There were companies established in
different locations, the relevant
ones being Sasol Trading International Ltd (STI), incorporated in
November 1997 in the Isle of
Man. Sasol Trading Services Limited was
incorporated in the United Kingdom, based in London, in December
1997. Its name was changed
to Sasol International Services UK (SISL)
in February 1998. STI and SISL were wholly owned subsidiaries of
Sasol International
Holdings (Pty) Ltd (SIH), incorporated in South
Africa in September 1997.
The period from
December 1997 to July 2001
[7] The Sasol Group
undertook a major restructuring of entities within the group. The
restructuring resulted in a change of oil
procurement functions. From
1997 STI, rather than Sasol Oil, started procuring from Middle
Eastern suppliers, and sold the crude
oil acquired in terms of term
contracts to Sasol Oil. It shipped the oil to the Durban port on a
DES basis (delivered ex ship).
Sasol Oil paid STI for the oil and its
services.
The period from July
2001 to July 2004
[8] STI procured crude
oil from the Middle Eastern suppliers in terms of their term
contracts and sold it to SISL, delivering on
an FOB basis (Free on
Board). SISL in turn sold the crude oil to Sasol Oil, delivering it
to Sasol Oil at the Durban port on a
DES basis. The name of SIH was
changed to Sasol Investment Company (SIC) in June 2002. In April
2004, Sasol Oil International (SOIL)
was established in the Isle of
Man, as a wholly owned subsidiary of Sasol Oil. STI and SISL remained
wholly owned subsidiaries
of SIC.
The implication of the
changes from 2000 to July 2004
[9]
The Sasol Group, from 1997, had one office in the Isle of Man, the
business establishment of STI, which procured crude oil for
on sale
to Sasol Oil. And there was an office in London where SISL performed
shipping and marketing services, mostly for STI. By
the end of 2000,
the people running the businesses of STI and SISL were concerned
about the duplication of office accommodation
and staff required. The
principal players were Mr Desmond Gird, who had joined the Sasol
Group in 1981 and Mr Henri Loubser, a
chemical engineer, who joined
the Group in 1982. Gird was Sasol Oil’s trading manager. He
moved to SISL in London in February
1998, where he was the head of
the company and from 2000 also a director. Loubser oversaw the
chemical processes in Secunda, South
Africa, and the refinery in
Sasolburg – Natref. In May 2001 he was appointed as a director
of SISL.  I shall discuss
their evidence in more detail later.
[10]
In brief, Gird testified about oil trading and the need for crude oil
to be procured for Sasol Oil. He and Loubser, who was
his immediate
manager, had discussed rationalization of the offices in the Isle of
Man and London. When the Sasol Group had started
the
internationalization project, they had envisaged a base in London,
which was the leading oil trading and financial centre,
and which had
excellent shipping infrastructure. But because of UK tax rates they
had also needed to set up a business establishment
on the Isle of Man
which was considered to be a ‘tax haven’, and the
decision had been made to locate the trading function
there, hence
STI’s incorporation in the Isle of Man in 1997.
[11]
This evidence is supported by an application made through Investec
Bank to the South African Reserve Bank (SARB) in September
1997. It
was anticipated that the profits made by STI would serve as capital
for foreign expansion and would not be subject to
South African
exchange control regulation.
[12]
In September 1998, STI and Sasol Oil entered into a crude oil supply
agreement (the Original Supply Agreement) in terms of
which STI would
procure crude oil and sell and ship it to Sasol Oil on a DES basis.
STI would be near London and would therefore
benefit from SISL’s
expertise in marketing intelligence in tracking crude oil prices and
from introductions to other traders
operating in London.
[13]
In 2000 the Sasol Group made a bid to acquire a German chemicals
group, Condea. The board of directors of SIH (the holding
company of
STI and SISL) requested a review of the SIH structure in anticipation
of the acquisition of Condea. Gird was instructed
to review the
operations of STI and SISL and to submit a restructuring proposal,
after a professional firm’s review of it,
to the board in
February 2001. Pursuant to this, Gird prepared a proposal in early
December 2000, suggesting that the crude oil
trading function be
relocated from STI in the Isle of Man to SISL in London.
[14]
Loubser presented the proposal prepared by Gird to the Sasol Oil
Board on 8 February 2001. The essence of the presentation
was
that there was an ‘unavoidable duplication of effort by STI,
SISL and Sasol Oil’; the costs of maintaining their
offices and
business contacts was too high in the light of lack of growth of the
business; and the costs of commuting between the
Isle of Man and
London should be avoided. The cost saving of rationalizing the
respective functions of STI and SISL was estimated
to be R3 million
per year. Gird’s proposal, presented by Loubser, further
suggested that the oil and products trading be
relocated to SISL in
London. Any South African products trading would be relocated from
STI to Sasol Oil.
[15] On 20 February 2001,
the board of Sasol Oil resolved that the Gird proposal should be
considered by the Group Executive Committee
(GEC) of the Sasol Group.
Pursuant to this, Loubser who was a member of the Sasol Oil Board and
was present at the meeting, requested
Gird, who was in London at the
time, to obtain a legal opinion on the UK tax implications of the
proposed restructuring, which
Gird did. He consulted Mr Kevin Ashman
of the solicitors’ firm Lovells shortly thereafter. Gird and
Ashman met on 21 February
2001.
The Lovells advice
[16]
On 7 March 2001, Ashman wrote to Gird setting out his advice. He
confirmed that the proposed relocation of the crude oil trading

function from the Isle of Man to London would not have any adverse UK
implications for SISL, save that there would be an increase
in SISL’s
UK tax as a result of the increase in the ambit of the business. The
proposal put to him was that while STI would
remain in the Isle of
Man to continue its other activities there, the crude oil trading
function would be moved to London. That
had staffing and office
implications for SISL and STI. SISL would need additional staff in
London, and Mr Jan Bredenkamp of STI,
as the principal oil trader at
STI, with considerable experience and many contacts in the crude oil
trading market, would have
to move to London.
[17]
Bredenkamp’s move to London, as part of the Gird proposal, was
a key component of the proposed new structure. But it
transpired,
after Gird had taken advice from Lovells, that Bredenkamp was not
willing to move away from the Isle of Man, as I shall
discuss
shortly. It was partly for this reason that the Sasol Group decided
not to follow the Lovells advice in its entirety. Equally

importantly, Ashman suggested that a clean break be made between the
STI contracts for the purchase of crude oil with Middle Eastern

suppliers and new contracts to be negotiated by SISL with the
suppliers.
[18]
Sasol Oil’s chief concern expressed to Ashman was that
historical profits made by STI in the Isle of Man might be taxed
by
UK Inland Revenue since there was a possibility that SISL might be
regarded as a branch of STI: if this were so, historical
profits made
by STI could be exposed to UK corporation tax.
[19]
The commercial reasons for relocating the STI operation to London –
rationalization of staff and proximity to the London
trading market –
had thus to be weighed against the disadvantages of relocating the
crude oil supply there as well. The particular
problem that the Sasol
Group anticipated was the cancellation of the term contracts –
that might give the Middle Eastern
suppliers the opportunity not to
renegotiate contracts with the Sasol Group and to find other
purchasers. Gird testified that the
Sasol Group had been fortunate in
securing these term contracts as there were many entities waiting in
line for the allocation
of crude oil on a term contract.
[20]
The second problem not anticipated by Loubser and Gird when they made
the original proposal to the Sasol Group was that, after
receiving
the Lovells advice, they ascertained that Bredenkamp was not willing
to move to London – thus achieving the clean
break that Lovells
suggested was necessary. Bredenkamp had established a presence on the
Isle of Man and had bought a home there.
He wished to remain on the
Isle of Man. His skills and contacts were essential to the
acquisition of crude oil. He was also needed
on the Isle of Man for
other Sasol Group businesses he conducted there, such as a chemical
business. Bredenkamp, who died some
years before the additional
assessments were issued by the Commissioner, wrote a memorandum for
the Sasol Group dated 14 June 2001.
[21]
Bedenkamp recommended that the crude oil trading function
(acquisition from the Middle Eastern suppliers) remain with STI,
and
all other business, such as shipping, be moved to SISL in London. As
Bredenkamp said in his proposal ‘This will entail
SISL buying
the crude oil on a FOB basis, arrange the shipping insurance,
inspections etc and assume the risk’. He said also
that it
would entail cancelling the supply agreement between STI and Sasol
Oil.
[22]
Bredenkamp’s proposal was accepted by the STI board of
directors on 23 June 2001. Gird’s evidence was that the
only
change to the original proposal that he and Loubser had conceived was
that the crude oil procurement would remain with STI
on the Isle of
Man, which, having bought it, would sell it in turn to SISL, and SISL
would sell the oil, and ship it to Sasol Oil.
That is the chief
element in the structure that the Commissioner complains of. There
was no reason, he contended, for STI, having
procured the crude oil,
to sell it to SISL and for SISL to sell it (back to back) to Sasol
Oil in South Africa. The ‘interposition’
of SISL was an
element that could not be explained other than as a stratagem to
avoid the payment of tax in South Africa. That
is the Commissioner’s
chief reason for the argument that the sales of crude oil by STI to
SISL and then from SISL to Sasol
Oil were simulated.
[23]
The policy of the Sasol Group was to submit proposals and draft
agreements to the tax department in the group for approval.
Gird
accordingly sent the modified proposal for the relocation of shipping
to London by SISL to Mrs Beulah van Wyk, who at the
time was the
chief financial officer of Sasol Oil. She in turn sent it to Mr Eric
Louw who was in the Group Tax department of Sasol
Ltd for advice on
whether the proposed structure was optimal from a tax point of view.
Louw was formerly a tax director at the
accounting firm Price
Waterhouse Coopers (PWC). He issued an opinion on 5 July 2001
confirming that the modified proposal was tax
compliant and optimal.
He asked PWC for a confirmatory opinion, which was provided on 16
July 2001.
[24]
Mr Okkie Kellerman (the senior tax manager) and Mr Mark Badenhorst
(the tax partner) of PWC repeated the structure of the modified

proposal in their written advice. They pointed out that SISL already
had access to oil market information which, before the relocation,

had been transmitted to STI in the Isle of Man. SISL also had
‘experience and expertise in managing volatile shipping rates,

oil losses during transportation, insurance, demurrage, deadfreight,
loss control and inspection costs and negotiating co-freight

arrangements and other oil companies’. STI, they said, ‘has
experience and expertise in the negotiation of contracts
for the
supply of crude oil on the open market. It does not have the
expertise to arrange shipping of the purchased oil’.
[25]
However, PWC cautioned that there had to be ‘sufficient
commercial justification for SISL to sell the crude oil to Sasol
Oil
and to undertake the shipping of the crude oil’. If not, the
use of SISL could be seen as a scheme to avoid tax in SA
and the new
structure could be disregarded for SA tax purposes, they said. They
also advised that ‘sufficient real risks
and functions should
be transferred into SISL to provide sufficient commercial
justification and to limit the UK and SA transfer
pricing risks’.
[26] The GEC approved the
modified structure presented at a meeting by Loubser on 5 July 2001.
The minutes of the meeting record
that:
‘
A
presentation by Mr Henri Loubser emphasised the need to review
Sasol’s structure in light of certain legislative changes.
The proposal was to
cease the contract between STI and Sasol Oil and move is to [SISL].
This would optimize the tax regime.’
[27] The Commissioner’s
contention both in the Tax Court and on appeal is that the scheme was
devised by Gird and Loubser
in order to avoid the payment of a newly
introduced residence tax in 2001. Gird and Loubser denied that this
was so. Loubser denied
that the minutes correctly reflected his
presentation. He pointed out that he had made the presentation to the
GEC but had said
nothing about the tax implications of the
transactions proposed. He was a chemical engineer and not a tax
expert, he said, and
would never have presumed to advise on legal or
tax matters. I shall return to their evidence and the cross
examination of them
in due course.
Tax advice in South
Africa
[28]
The argument by the Commissioner that the back to back sales were
simulated transactions, or abnormal in the sense of s 103(1),
is
based not only on the advice that PWC gave in respect of the
structure in response to the Gird and Loubser proposal that was
sent
to PWC by Van Wyk. He also relied on tax advice given by PWC to the
Sasol Group on 14 March 2001 in respect of the change
of the income
tax regime from being source based to being residence based, which
came into effect in June 2001. The advice was
recorded in a letter to
the directors of Sasol Ltd written on 3 April 2001. This followed a
meeting of the GEC (for the whole Sasol
Group), the minutes of which
recorded that ‘Mr Louw of PWC made a presentation on Residence
Tax Legislation, which would
be introduced for Sasol on 1 June 2001’.
Mr Rynhart van Rooyen ‘stated that Sasol is currently very weak
on tax planning
and that urgent actions are required to remedy the
situation.’
[29] That was why the
Sasol Group, through Van Wyk, approached PWC and consulted them on 14
March 2001. Kellerman and Louw advised
on 3 April 2001 that a UK
based company should be used for oil trading activities in order to
avoid residence based tax. They suggested
that STI should sell crude
oil that it had sourced to a company in the UK, the UK resident
company, and that the UK company should
sell that oil to Sasol Oil,
which is what Loubser and Gird had proposed earlier in the year.
Their evidence was that the proposal
evolved because of the Lovells
advice, and the realization subsequently that STI needed to keep
Bredenkamp on the Isle of Man,
and that it would be foolish to
terminate the term crude oil contracts with the Middle Eastern
suppliers.
The residence based
tax introduced in 2001
[30] The Act was amended
in 2001 to insert a new s 9D. The purpose of the amendment was
explained in an explanatory memorandum issued
by the National
Treasury in 2002.
‘
Under the
residence (ie worldwide) taxing system [introduced by the amendment],
South African residents are subject to tax on their
income earned
domestically and abroad. One important facet of this system is how to
address income earned by South African owned
foreign companies and
other South African owned foreign entities of a similar nature. If
this latter form of income goes untaxed,
South African residents can
avoid tax simply by shifting their income to foreign entities, and
the income earned by foreign entities
will be taxed only once
repatriated as a dividend. . . This failure to impose immediate tax
is of great significance because taxpayers
often delay repatriation
for years or never repatriate funds at all.
Section 9D is designed to prevent
deferral through South African owned foreign entities. However,
international law only allows
South Africa to tax foreign residents
on their South African source income. International law does not
allow South Africa to directly
tax foreign entities on their foreign
source income, even if those foreign entities are completely owned by
South African residents.
However, in order
to remedy the problem of deferral while complying with international
law, section 9D (like other internationally
used regimes of this
kind) taxes South African owners on the foreign income owned by their
foreign entities as if those foreign
entities immediately repatriated
their foreign income when earned.’
[31]
The Commissioner’s additional assessments attributed the income
of SOIL (which had stepped into STI’s shoes in
the Isle of Man)
to Sasol Oil in 2005, 2006 and 2007, invoking s 9D in order to do so,
on the basis that the sales from SOIL to
SISL and then on to Sasol
Oil were simulated transactions, in fraudem legis. The Commissioner’s
contention is that the structure
conceived by Gird and Loubser in
2001, which changed after the Lovells advice, was designed to avoid
the implications of the new
residence based tax, and was not as a
result of the factors that Gird and Loubser adverted to (the
importance of maintaining term
contracts for the supply of crude oil,
and the fact that Bredenkamp was determined to remain on the Isle of
Man).
[32] Before dealing with
the PWC presentations and the advice that it had given to the Sasol
Group, it is convenient to set out
the relevant provisions of s 9D as
they were in the tax years under consideration.
‘
Net income
of controlled foreign companies
(1)
For
the purposes of this section—
‘
business
establishment’ in relation to a controlled foreign company,
means-
(a)
a
place of business with an office, shop, factory, warehouse or other
structure which is used or will continue to be used by the
controlled
foreign company for a period of not less than one year . . . .
‘
controlled
foreign company, means any foreign company where more than 50 per
cent of the total participation rights in that foreign
company are
held, or more than 50 per cent of the voting rights in that foreign
company are directly or indirectly exercisable,
by one of more
residents’ ….
(2A) For the purposes of this section
the ‘net income’ of a controlled foreign company is
respect of a foreign tax year
is an amount equal to the taxable
income of that company determined in accordance with the provisions
of this Act as if that controlled
foreign company had been a
taxpayer, and as if that company had been a resident for purposes of
the definition of ‘gross
income’. . . .
(9) In determining the net income of
the controlled foreign company in terms of subsection (2A) there must
not be taken into account
any amount which –
…
(b)
is
attributable to any business establishment . . . of that controlled
foreign company in any country other than the Republic: Provided
that
the provisions of this paragraph shall not apply to any net income
that is attributable to –
…
(ii) any amounts derived from –
(aa) any sale of goods by that
controlled foreign company to any connected person (in relation to
that controlled foreign company)
who is a resident, unless—
(A)
that
controlled foreign company purchased those goods within the country
of residence of that controlled foreign company from any
person who
is not a connected person in relation to that controlled foreign
company;’
(My
emphasis.)
Section 1 of the Act
defines a ‘connected person’, in relation to a company as
its holding company, or its subsidiary
or any other company where
both such companies are subsidiaries of the same holding company.
[33]
It is common cause that in the years of assessment (2005 to 2007)
SOIL was a controlled foreign company of Sasol Oil. SOIL
was resident
in the Isle of Man and had a foreign business establishment there.
SOIL (as STI had done prior to SOIL’s incorporation
in 2004),
received amounts of money (or the rights to it accrued) from the sale
of crude oil; these amounts would have fallen within
the taxable
income of SOIL if it had been a resident and these amounts were
attributable to the foreign business establishment.
Accordingly,
unless such amounts were derived from sales of crude oil to a person
connected to SOIL, the connected person being
a resident of South
Africa, those amounts were not to be taken into account in
determining the net income of SOIL for the purposes
of s 9D.
[34]
SISL too was not resident in South Africa, but in the UK. Thus if the
crude oil was sold by SOIL to SISL, the foreign business
exclusion
would apply and these amounts would not be taken into account in
determining the net income of SOIL for the purpose of
s 9D. On the
other hand, if SOIL had sold the crude oil directly to Sasol Oil,
which was both a connected person and a South African
resident, the
foreign business exclusion did not apply (in terms of the proviso in
(ii)(
aa
)
of 9D(9)(
b
)).
If SOIL had purchased crude oil within its country of residence from
any entity that was not a connected person, the subparagraph
(A)
exclusion would apply.
[35]
The back to back sale of crude oil by SOIL, which procured it from
the Middle Eastern suppliers, to SISL, and the sale and
the supply
then by SISL to Sasol Oil in South Africa were attacked by the
Commissioner as being simulated, designed only to achieve
the
avoidance of residence based tax in the hands of Sasol Oil. He
considered that he was entitled to disregard the sales from
SOIL to
SISL and to regard the sales as having been directly to Sasol Oil.
[36] There were
essentially two grounds for this assessment. The first was that the
real substance of the supply agreements was
a sale of oil directly to
Sasol Oil, and that SISL’s role was a sham – the
substance over form principle. The alternative
ground was that s
103(1) applied as the transactions were abnormal and had the effect
only of avoiding a tax liability. Mali J
in the Tax Court found that
the transactions were indeed simulated and that SISL’s role in
the scheme was a sham such that
the Commissioner was entitled to
disregard it in his assessments for the 2005 to 2007 tax years. Mali
J also found that the exclusion
in 9D(9)(b)(ii)(
aa
)(A) did not
apply. And having found that the sale to SISL and the sale to Sasol
Oil were sham transactions, she did not consider
it necessary to
consider the application of s 103(1). The Tax Court held that Sasol
Oil was liable for s 76 penalties and s 89
quat
interest. These
are the issues that require consideration by this court in the
appeal.
Substance over form
and the evidence led for Sasol Oil
[37]
The appeal by Sasol Oil to the Tax Court was based on the contention
that the transactions in question were genuine. Five witnesses

testified about the reasons for the sale of crude oil to SISL, and
the implementation of the transactions, and Sasol Oil led the

evidence of an expert in procuring and shipping crude oil, Mr Harvey
Forster. No evidence was led for the Commissioner, but that
is hardly
surprising as it would not have had access to the internal workings
of the Sasol Group. All the witnesses were rigorously
cross examined
and the Commissioner was very critical of the evidence, labeling it
inconsistent and unreliable. Mali J found that
the testimony for
Sasol Oil was not credible, a serious finding with which I shall deal
in due course. But first I shall set out
the essence of the testimony
for Sasol Oil.
[38]
Gird testified that the new supply agreements – between STI and
SISL and between SISL and Sasol Oil – were implemented
once the
GEC had approved them, in July 2001. The agreements were signed only
in December of that year, but the effective date
of each was agreed
to be 1 July 2001. There was no agreement of sale between STI and
Sasol Oil. The Sasol entities had intended
that once STI had procured
crude oil, it would sell it to SISL, which acquired ownership of the
oil while it was shipped to Sasol
Oil. In turn SISL transferred
ownership pursuant to its supply agreement to Sasol Oil in South
Africa. Gird relied on invoices
between the respective parties to
show the sales figures and prices at which STI sold to SISL and SISL
sold to Sasol Oil. SISL
issued quarterly credit notes to Sasol Oil to
account for losses borne by it – differences in actual volumes
delivered and
demurrage.
[39]
Acting as both owner and shipper of the crude oil, SISL issued
instructions to STI regarding the detail for the bills of lading
and
STI issued instructions to the crude oil suppliers. Bills of lading
were issued to STI and then endorsed by STI to SISL. SISL
thus had
the right to claim delivery of the crude oil. The Middle Eastern
suppliers had different requirements as to credit arrangements

between them and STI. One, the Saudi Arabian Oil Company, referred to
as Aramco, required a standby letter of credit for every
purchase of
crude oil. It would issue bills of lading at load port directly to
STI, which would endorse them in favour of SISL.
[40]
Mr Philip du Toit of STI, later a director of SISL, and when SOIL was
incorporated, of SOIL, testified that he personally endorsed
the
bills of lading on behalf of STI to SISL. Du Toit had taken over the
procurement function of the Sasol Group from Bredenkamp.
At the time
of giving evidence, Du Toit was employed by SISL in London and had
assumed responsibility for the procurement of crude
oil for the
refinery.
[41]
Another supplier, Naftiran Intertrade Company Limited, required
documentary letters of credit for every purchase of crude oil.
The
issuing bank required from the seller the bills of lading, invoices,
certificates of quantities and of quality before it issued
the letter
of credit. After reviewing the documents and confirming compliance
the bank would endorse the bills of lading to STI.
Du Toit then
endorsed them to SISL.
[42]
Gird testified that the SISL annual financial statements accorded
with the supply agreements and reflected their implementation.
The
2002 statement described SISL’s principal activities in the
year as ‘the provision of market information to the
Sasol
Group’ and added that ‘from July 2001 the company
participated in inter-group oil trading and shipping of crude
oil’.
The same statement reflected SISL’s ownership of the crude oil
while being shipped and reflected the oil in its
balance sheet as
trading stock in transit.
[43]
Gird’s view was that as owner of the crude oil in transit, SISL
bore the risk and losses in respect of the oil. (The
supply agreement
to Sasol Oil in any event provided that this was the case.) his
evidence accorded with the description of SISL’s
business by
Ernst and Young in a study on Sasol Limited’s transfer pricing.
The study stated that while SISL took ownership
of the oil and sold
it on to Sasol Oil, SISL was ‘essentially a distributor of oil
and [it] has no sophisticated procurement
function’. Its
primary function was the arrangement of shipping to Sasol Oil.
[44]
Gird was asked to deal with the term of the supply agreement that
SISL bore the risks in respect of the crude oil being shipped.
He
explained that the risks were real: SISL did not necessarily deliver
the same quantity of crude oil to Sasol Oil that it had
bought from
STI. In the majority of cases the quantity that was loaded was less
when it reached South Africa and was pumped off
the vessel onto which
it had been loaded. This was because of evaporation, clingage of oil
to walls, and the vessel needing to
depart before all the oil had
been pumped out. Secondly, loss could be incurred with demurrage
charges – exceeding the number
of hours allocated, in which
case the vessel owner would charge for ‘standing time’.
It was standard, he said, when
offloading at Durban, that there would
be standing time. Another loss factor was what Gird termed ‘dead
freight’ –
using less capacity than a vessel could hold,
but for which SISL would be charged. The changing price of crude oil,
in a notoriously
volatile market, was another factor that can affect
the risk. Yet Sasol Oil was not obliged to pay for the lesser
quantity of oil
than that reflected on the bill of lading. Gird
outlined further risk factors but there is no need to deal with them
all.
[45]
Mr Harvey Foster testified as an expert in crude oil trading and
shipping. It was his view that it was commercially advantageous
for
the shipper of oil to South Africa – SISL – to be based
in London. At the time, London was the hub of the shipping
world. The
people with the skills in crude oil trading and with the expertise in
shipping were based in London. Personal interaction
between traders
was essential. London was the choice location for oil trading houses.
[46]
Foster also testified about the risks involved in shipping. These
included finding a suitable vessel for both the load port
and the
discharge port; availability within the loading window; the quality
and quantity loaded; piracy along the West and East
coasts of Africa;
and arrival and discharge times, and the types of losses that Gird
had described. While conceding that most of
these risks were insured
against, he considered that there was nonetheless risk where the
insurer repudiated the policy on the
basis that the shipper had not
acted reasonably in guarding against the risk foreseen.
[47]
When cross-examined on the risk it was put to him that in the
transfer pricing study undertaken by KPMG for the Sasol Group,
it was
stated that the risk of losses during transit were minimal because
SISL was fully insured. The shipping fees earned by SISL
were
therefore justifiably low. The study indicated that the losses
incurred by SISL were less than 0.5% of the volume of oil shipped.

Foster maintained, however, that there was nonetheless risk of loss
that was not insurable and that if the shipper used people
who were
not experts in the field the risks were very high. Although the fees
charged per barrel by SISL were low, the total sums
earned when
millions of barrels of crude oil were shipped were not to be
underestimated.
[48]
The other point of contention related to whether the shipper
necessarily needed to acquire ownership of the crude oil while
it was
in transit. This is important to the Commissioner’s argument
that the right that SISL acquired in respect of the crude
oil was a
hollow one, since it could do nothing with the oil but ship it to
Sasol Oil. It did not have the normal entitlements
of ownership. I
shall thus return to the issue when applying the general principles
of the law to the facts. Suffice it to say
for the moment that Foster
testified that it was more efficient for the shipper to acquire
ownership of the crude oil while it
was in transit since it was then
able to manage its own risks. This practice, which was common
according to Foster, also ensured
that the shipper had an insurable
interest and that the insurer would indemnify it against the losses
incurred.
[49] Foster also
testified that crude oil procurement and crude oil shipping required
different skills, and were performed by some
traders using different
teams of people. It was common to have one procuring entity (in this
case STI and later SOIL) and one shipping
entity (SISL). SISL’s
lack of a sophisticated procurement function, and STI’s
continued procurement role, was consistent
with general practice in
the industry.
Incorporation of SOIL
[50]
It will be recalled that SOIL took over the functions of STI when it
was incorporated in 2004. The Sasol Group had undergone
considerable
restructuring as a result of the introduction, in November 2000, by
the Minister of Minerals and Energy of a Liquid
Fuels Charter which
required all South African companies dealing with petroleum and
liquid fuels to enable the empowerment of historically
disadvantaged
people in the country. The Sasol Group, in implementing its
obligations under the charter, sought to enter into mergers
with
non-South African entities. In the rearrangement, SIH’s
interest in STI was transferred to Sasol Oil.
[51] STI continued with
its other businesses on the Isle of Man, and the procurement of crude
oil was moved to SOIL, when it was
incorporated, also in the Isle of
Man. SOIL was a wholly owned subsidiary of Sasol Oil. When the
Reserve Bank approved the new
structures, STI assigned to SOIL the
supply agreements with the crude oil suppliers. Invoices issued by
SOIL to SISL showed that
SOIL started on-selling crude oil to SISL in
2004. The bills of lading issued by the Middle Eastern suppliers were
endorsed by
Du Toit on behalf of SOIL in favour of SISL. The annual
financial statement of STI in 2004 reflected that the functions of
the
procurement of crude oil and its sale to SISL were transferred to
SOIL.
The substance over
form argument
[52] The assessments in
question and the arguments of the Commissioner before the Tax Court
and on appeal are that the impugned
transactions were devised by Gird
and Loubser, and approved by the GEC, in order to tailor the Sasol
Group’s liability for
tax when s 9D was introduced. The
apparent transfer of the shipping function to SISL by STI and the
sale to SISL and the onward
sale to Sasol Oil were transactions that
were simulated in order to avoid Sasol Oil paying tax on income
earned by an entity that
was resident in South Africa. A key
component in the argument is that in the advice given by PWC to the
Sasol Group in April 2001,
before the transactions were concluded in
July 2001, Louw and Kellerman stated:
‘
The
following ultimate modus operandi is recommended to minimize Sasol’s
tax liability on its oil trading activities:
A company is
incorporated in the UK (“SUK”) with 100% of its shares
being held by SIH.
STI continues to
purchase oil on the open market at market-related prices but sells
the oil to SUK at a market-related margin
that will reflect the
risks assumed and the functions performed by STI.
SUK owns the oil
but it only bears the shipment risk, which it is insured against.
The product and all other risks involved in
oil trading remain with
STI, which earns a market-related margin for the acceptance of such
risks.
The
existence and use of SUK must have commercial justification
.
(My emphasis.)
SUK then on-sells
the oil to Sasol Oil, adding a small margin for bearing only the
shipment risk.
SUK buys oil,
drilling fluids, solvents and other chemicals from Sasol Oil and
other SA group companies and on-sells them to STI.
Again, SUK only
bears the shipment risk for the product delivered to STI while the
product and all other risks involved in selling
the product are
accepted by STI. A small profit margin for bearing only the shipment
risk is realized by SUK in the UK.
STI on-sells the
products in the open market at a market related price to earn a
market-related margin for the acceptance of all
the other risks and
functions.’
The advice continued:
‘
To ensure
that the use of SUK is not seen as a scheme to avoid tax in SA it is
important to ensure that commercial justification
exists for the use
of SUK. The transferring of real risks and functions into SUK could
provide sufficient commercial justification.’
[53] The opinion, the
Commissioner argues, is what informed the entire stratagem. There was
no real reason for the sale of the oil
by STI, and then SOIL, to SISL
and no intention to transfer ownership of the oil while it was in
transit to SISL. The substance
of the transactions was in reality a
sale by SOIL to Sasol Oil. SISL’s real role was as a shipper.
While conceding that the
passing of ownership is not an essential
element of a contract of sale, the Commissioner contends that Sasol
Oil’s entire
case is based on the contention that the crude oil
was transferred to SISL, and that it did not discharge the onus of
proving that
it was STI’s, and later, SOIL’s intention to
pass ownership to SISL rather than to Sasol Oil, and that the supply
contracts
were simulated dishonestly. It must be recalled, however,
that when the back to back supply agreements were first concluded, in

2001, neither STI nor SISL were subsidiaries (foreign controlled
companies) of Sasol Oil: Sasol Oil would not have been liable,
at
that stage, and until 2004, for residence based tax on STI’s
income. The transactions thus did not have the effect of
avoiding
liability for tax. And so the Sasol Group could not have anticipated,
in 2001, that subsequently a subsidiary of Sasol
Oil itself would
have earned income for which it would become liable for tax.
The test for
simulation
[54] This court has held
on several occasions that the mere production of agreements does not
prove that the parties genuinely intended
them to have the effect
they appear to have. In
Erf 3183/1 Ladysmith (Pty) Ltd v CIR
[1996] ZASCA 35
;
1996 (3) SA 942
(SCA), Hefer JA, dealing with a contention that
agreements should be given effect in accordance with their tenor
(form), said (at
953B-D):
‘
This is plainly not so. That
the parties did indeed deliberately cast their arrangement in the
form mentioned, must of course be
accepted; that, after all, is what
they had been advised to do. The real question is, however, whether
they actually intended that
each agreement would
inter
partes
have effect
according to its tenor. If not, effect must be given to what the
transaction really is.’
And
similarly in
CIR
v Conhage (Pty) Ltd
1999 (4) SA 1149
(SCA) Hefer JA confirmed that a taxpayer must show
on a balance of probabilities that the agreements reflect the actual
intention
of the parties. (See also
CSARS
v NWK Ltd
[2010] ZASCA 168
;
2011 (2) SA 67
(SCA) para 40.
[55] The principle urged
upon us by Sasol Oil, on the other hand, is that stated more than a
century ago in
Zandberg v Van Zyl
1910 AD 302
at 309.
In
Zandberg
Innes
JA said:
‘
Now, as a general rule, the
parties to a contract express themselves in language calculated
without subterfuge or concealment to
embody the agreement at which
they have arrived.  They intend the contract to be exactly what
it purports; and the shape which
it assumes is what they meant it
should have.
Not
infrequently, however (either to secure some advantage which
otherwise the law would not give, or to escape some disability
which
otherwise the law would impose), the parties to a transaction
endeavour to conceal its real character. They call it by a
name, or
give it a shape, intended not to express but to disguise its true
nature. And when a Court is asked to decide any rights
under such an
agreement, it can only do so by giving effect to what the transaction
really is: not what in form it purports to
be.  The maxim then
applies
plus
valet quod agitur quam quod simulate concipitur.
But the words of the rule indicate its limitations. The Court must be
satisfied that there is a real intention, definitely ascertainable,

which differs from the simulated intention.
For
if the parties in fact mean that a contract shall have effect in
accordance with its tenor, the circumstances that the same
object
might have been attained in another way will not necessarily make the
arrangement other than it purports to be.
The enquiry, therefore, is in each case one of fact, for the right
solution of which no general rule can be laid down.’
(My
emphasis.)
[56] This very famous
statement was repeated in
Commissioner of Customs and Excise v
Randles, Brothers and Hudson
Ltd
1941 AD 369
at 395 by
Watermeyer JA where, referring to the passage cited, he said:
‘
I wish to
draw particular attention to the words “a real intention,
definitely ascertainable, which differs from the simulated

intention”, because they indicate clearly what the learned
Judge meant by a “disguised” transaction. A transaction

is not necessarily a disguised one because it is devised for the
purpose of evading the prohibition in the Act or avoiding liability

for the tax imposed by it.
A
transaction devised for that purpose, if the parties honestly intend
it to have effect according to its tenor, is interpreted
by the
Courts according to its tenor, and then the only question is whether,
so interpreted, it falls within or without the prohibition
or tax.
’
(My emphasis.)
[57]
In
NWK
I pointed out the difficulties inherent in applying this test. The
test itself is uncontroversial. We must ascertain the intention
of
the parties having regard not only to the terms of the impugned
transactions but also to other factors, including the improbability

of the parties intending to give them effect. Applying the same test,
the judges in that case were divided in their approach to
the
application of the principle to the facts.
[58] I suggested in
NWK
that
‘
[T]he test to determine
simulation cannot simply be whether there is an intention to give
effect to a contract in accordance with
its terms. Invariably where
parties structure a transaction to achieve an objective other than
the one ostensibly achieved they
will intend to give effect to the
transaction on the terms agreed. The test should thus go further, and
require an examination
of the commercial sense of the transaction: of
its real substance and purpose. If the purpose of the transaction is
only to achieve
an object that allows the evasion of tax, or of a
peremptory law, then it will be regarded as simulated. And the mere
fact that
parties do perform in terms of the contract does not show
that it is not simulated: the charade of performance is meant to give

credence to their simulation.’
[59]
The judgment in that matter was apparently thought to have changed
the law. It did not. It pointed out merely that in order
to establish
simulation one could not look only at the terms of the disputed
transaction. And it suggested that simulation was
to be established
not only by considering the terms of the transactions but also the
probabilities and the context in which they
were concluded.
[60] Wallis JA has twice
explained the passages that have apparently given rise to confusion.
He explained in
Roshcon (Pty) Ltd v Anchor Auto Bodybuilders CC
2014 (4) SA 319
(SCA) paras 35 to 37 what the misconceptions had been
and said:
‘
The notion
that
NWK
transforms our law in relation to simulated transactions, or requires
more of a court faced with a contention that a transaction
is
simulated than a careful analysis of all matters surrounding the
transaction, including its commercial purpose, if any, is incorrect.

The position remains that the court examines the transaction as a
whole, including all surrounding circumstances, any unusual features

of the transaction and the manner in which the parties intend to
implement it, before determining in any particular case whether
a
transaction is simulated.’
[61] And in
CSARS v
Bosch
[2014] ZASCZ 171;
2015 (2) SA 174
(SCA) Wallis JA said,
referring (in para 40) to
Roshcon
:
‘
There I
stressed that simulation is a question of the genuineness of the
transaction under consideration. If it is genuine then
it is not
simulated and if it is simulated then it is a dishonest transaction,
whatever the motives of those who concluded the
transaction.  .
. . .Tax evasion is of course impermissible and therefore if a
transaction is simulated, it may amount to
tax evasion. But there is
nothing impermissible about arranging one’s affairs so as to
minimize one’s tax liability,
in other words in tax
avoidance.’
The pillars of the
Commissioner’s argument as to simulation
The PWC advice
[62]
One of the pillars of the Commissioner’s argument in respect of
simulation is that the Sasol Group followed PWC’s
advice on the
‘ultimate modus operandi’. The purpose of that advice was
to minimize the Group’s tax liability,
and in particular the
newly introduced residence based tax in effect from June 2001. There
is nothing sinister in that.
[63] As I said in
NWK
(para 42)
‘
It is trite that a taxpayer may
organize his financial affairs in such a way as to pay the least tax
permissible. There is, in principle,
nothing wrong with arrangements
that are tax effective. But there is something wrong with dressing up
or disguising a transaction
to make it appear to be something that it
is not, especially if that has the purpose of tax evasion, or the
avoidance of a peremptory
rule of law.’
And
see the statement of Wallis JA in
Bosch
above.
[64]
Much was made by the Commissioner of the fact that Sasol Oil had not
alluded to the PWC letter of 3 April 2001. And Gird and
Loubser were
cross-examined as to whether they had been aware of this advice when
proposing the back to back sales in 2001. They
denied knowledge of
PWC’s April 2001 opinion at the time of concluding the STI,
SISL and Sasol Oil transactions. They were
not legal or accounting
professionals, and did not sit on the boards of the companies that
eventually concluded the transactions.
Loubser, as I have already
said, denied having referred to tax legislation when he made his
presentation to the GEC on 5 July 2001.
The minutes had mistakenly
attributed this to him, but he had not seen the minutes before the
additional assessments were issued.
[65]
Loubser was firm in testifying about his role at the GEC meeting. He
said that it was not the practice in the Sasol Group for
the
management, as business people, to make recommendations as to tax.
That was the function of the members of the GEC, following
advice
taken by them. The Commissioner put to him that he was not being
truthful, which he denied. The Commissioner continues to
argue that
Loubser must have known of the PWC advice and structure. In my view,
it is perfectly plausible that Loubser knew only
of the advice that
Van Wyk and Louw obtained from PWC in July 2001, after his
presentation to the GEC. And the fact that he was
aware that there
would be tax implications in respect of the placing of SISL in the
supply chain is neither here nor there. He
knew the structure had to
be approved from a tax compliance point of view, and that was why he
had asked Van Wyk to get approval
from PWC.
[66] In any event, the
mere fact that parties have followed professional advice (in this
case from PWC) in order to minimize the
tax payable by them is not
wrong nor does it point to deceit. The real question is whether they
actually intended a sale by STI
(then later SOIL) to SISL and whether
SISL intended to acquire ownership of the crude oil from STI (SOIL).
Or did they dishonestly
purport to do so
solely
for the
purpose of avoiding the tax that would be payable by Sasol Oil?
Ownership of the crude
oil by SISL
[67]
Apart from attacking the credibility of Gird and Loubser in
particular, the Commissioner argues that the right SISL purported
to
acquire in the crude oil while shipping it to Durban was a hollow
one. It was not ownership in the true sense. SISL could not
freely
dispose of the crude oil: it had to deliver it to Sasol Oil in
Durban. That was in terms of the supply agreements between
the Middle
Eastern suppliers and STI (SOIL). The port of destination had to be
known to the suppliers. So SISL could not change
the destination of
the oil once it was on board. Moreover SISL did not need or use the
oil – it was but a shipper. And SISL’s
requirements met
those of Sasol Oil exactly. SISL did not determine either the
quantity or quality of the crude oil that would
be sourced by STI
(SOIL). In addition, the price that would be paid by Sasol Oil to
SISL was agreed in advance by a guaranteed
price formula.
[68]
And although SISL bore the risk in the crude oil while it was in
transit, this was provided for in the supply agreement between
SISL
and Sasol Oil. The Commissioner argues that this provision in the
contract would not have been necessary if in fact ownership
was
transferred to SISL. As owner, SISL would have borne the risk. As
pointed out by Sasol Oil, however, the fact that the normal

consequences of a transfer of ownership are spelled out in a contract
is a result of the caution exercised by the drafters of the
contract,
rather than being necessary to give effect to the contract.
[69]
Sasol Oil points out that this is very little different from the
issue in
Randles
.
I discussed the facts in that matter in
NWK
,
as did Wallis JA in
Bosch
,
and there is no reason to repeat the detail. In summary, the parties
to a number of contracts had agreed that ownership of material
would
be passed by the importer of the material to manufacturers of
garments. But the terms of their contracts took all the entitlements

of ownership, including to use and dispose of the material, away from
the manufacturer. The contract was agreed so that the importer
could
obtain a customs rebate. Watermeyer JA said, however, in
Randles
,
that there was no requirement that the parties intended to transfer
an untrammeled right. He found that the parties had intended

ownership to be transferred, and thus it had been.
[70] Was SISL’s
right to the crude oil comparable to that of the manufacturer’s
rights of ownership in the material?
It is true that SISL’s
right in the crude oil was fettered. It could not do with it what it
chose. In
Randles
the majority was clear that the parties had
so much wanted ownership to pass that they must have intended that as
a consequence
of their contract. Sasol Oil, on the other hand, is in
a stronger position than was the importer in
Randles
. Indeed,
Sasol Oil is able to show commercial justification for the sale of
the oil to SISL in London, which the importer in
Randles
could
not do. And there were reasons for SISL controlling and managing the
risk as owner while the oil was in transit, as described
by Gird and
Foster.
Delivery to SISL
[71]
The Commissioner contends that the Sasol Oil witnesses were not clear
on how the oil was delivered to SISL. Loubser testified
that actual
delivery took place at the load point both to STI and then to SISL
where the connecting hose from the Middle Eastern
supplier was linked
to the vessel that SISL had chartered. Loubser considered that
delivery to STI and SISL took place simultaneously,
which the
Commissioner argues is a false construction. Du Toit, on the other
hand, considered that delivery had taken place when
the bill of
lading was endorsed first to STI and then to SISL. If that were the
case, since the vessel would already have sailed
when the bill of
lading was sent to the vessel, SISL would only have acquired
ownership when the oil was already in transit.
[72] The supply agreement
between STI (and later SOIL) and SISL did not expressly cater for the
manner of delivery. The Commissioner
argues that it is inconceivable,
if the parties had genuinely intended that ownership would pass to
SISL, that their contract made
no provision for the mode of delivery.
Sasol Oil argues, however, that there was constructive delivery to
STI and then to SISL
in both the Isle of Man and London, and actual
delivery to Sasol Oil in Durban. Whether there is actual or
constructive delivery
is a matter of law. There was no need to
provide for the mode of delivery in the contracts of sale.
The complexity of the
structures proposed by PWC
[73]
The Commissioner argues that the introduction of SISL into the supply
chain resulted in a more complicated structure than was
originally
envisaged by Gird and Loubser. After reviewing the work of STI and
SISL in late 2000, it will be recalled, their proposal
was to
simplify the structures within the Sasol Group and to save costs.
They had anticipated that one entity would procure crude
oil and ship
it to Sasol Oil. That proposal did not work, because they needed the
services of Bredenkamp, and needed to keep the
term supply agreements
in place, so that STI’s functions could not be transferred to
SISL in London. After obtaining the
Lovells advice, they proposed
bringing SISL into the supply chain as well as STI. That complicated
the structures rather than simplifying
them, as they had intended to
do.
[74] This argument does
not take into account the evidence of Gird and Loubser as to the
reasons for not following the Lovells advice.
It is true that the
proposal they had made initially was different from that ultimately
adopted. But they both explained the changes
in a perfectly plausible
fashion, and no evidence was led to controvert the reasons for STI
remaining in the supply chain. There
was a good commercial reason for
SISL, in London, taking over the supply of crude oil to Sasol Oil,
and the fact that the estimated
savings in costs anticipated by the
rationalization of the Isle of Man and the London offices were lost,
was probably justified
by the profits that Sasol Oil would make and
the fees that SISL would earn in terms of the supply agreements.
Inconsistencies in
documents
[75]
The Commissioner contends that in a number of documents extraneous to
the supply agreements, such as filings with the United
States
Security and Exchange Commission, Sasol Ltd described SISL as a
‘services company’ and STI as a ‘trading
company’.
So too in the KPMG transfer pricing study of 2002 and 2003, it was
stated that SISL’s primary function was
‘to provide
shipping services’ and that it took on a ‘small level of
risk in connection with the provision of
these services’. This
shows, he argues, that SISL was in fact nothing more than a shipper
of crude oil to Sasol Oil, and
that the purchase by SISL of crude oil
was nothing more than a charade – a shipping contract dressed
up to look like a sale.
These documents show, he argues, that Sasol
Oil could not keep up the pretence of buying oil directly from STI
and later SOIL,
and in general regarded SISL simply as a shipping
company. He also relies on a report to the UK Revenue Authority, in
2004, in
which SISL indicated that although SISL took ownership of
the crude oil that it shipped, it bore minimal risk. The revenue
authority
queried this, asking why it took ownership of the oil that
it was shipping and why it bore minimal risk. SISL’s response
was that there were three risks that it bore, two of which were
unlikely to occur and the third, discharging less oil than it had

taken on board in the first place, was insured against. I have
already dealt with the loss of oil and Foster’s evidence.

Suffice it to say that it was a risk, and that over a period the
losses might be considerable.
[76] The documents
referred to by the Commissioner must of course be considered as part
of the factual context in which the transactions
were disregarded in
the tax years in question. But they must also be weighed against the
evidence of the Sasol Oil witnesses as
to the reasons for SISL
acquiring ownership in the crude oil that it shipped, advanced by
Gird, Loubser and Foster, the expert
witness. Although that evidence
was labeled as unreliable and not credible by the Commissioner, I
consider that evaluation to be
unwarranted.
Artificial features of
the transactions
[77] The Commissioner
contends that several features of the supply agreements between STI,
SISL and Sasol Oil have an aura of artificiality,
and that there was
no commercial justification for them. He argues that the
interposition of SISL in the supply chain served no
commercial
purpose. The requirements of Sasol Oil would have been met had STI
continued to supply the crude oil it had procured
directly to Sasol
Oil. The fact that the crude oil was sold at the same price to SISL
and then to Sasol Oil, and SISL made no profit,
is also regarded as
artificial. And the fact that the effective date of the agreements
was agreed to be I July 2001 (which coincided
with the introduction
of residence based tax) rather than when the agreements were signed,
later in that year.
Sasol Oil’s
response to the argument on substance over form
[78]
Sasol Oil refutes all of these contentions as I have already
explained in relation to ascertaining the intention of the parties.

In addition, Sasol Oil argues that the documents prepared before, and
for years after the supply agreements were concluded, demonstrate

that there was no artifice in the arrangements. Minutes of board
meetings would have to have been falsified and reports to the
GEC
deliberately disguised. False documentation would have to have been
consistently produced from the beginning of 2001 until
the end of
2007, the last year of the additional assessments. Financial
statements for STI and SOIL would have to have been false
and bills
of lading fraudulently endorsed. On the Commissioner’s
contentions, senior staff in a major conglomerate would
have been
complicit in an elaborate fraud over years.
[79]
There is not a shred of evidence that this was the case. The
evaluation of Sasol Oil’s witnesses as untruthful and
unreliable
is simply not fair. It is premised on the argument that
the key to the whole restructuring in 2001 was the PWC advice in
April
2001. Sasol Oil’s witnesses denied this. They plausibly
explained the genesis of the proposal and its development. And the

adoption of PWC’s advice is not wrong or dishonest. It was
repeatedly put to them that the structure served no purpose other

than tax avoidance. They explained why the structure was commercially
beneficial and why they intended that SISL would take delivery
of the
crude oil from STI, then SOIL, and in turn sell and transfer it to
Sasol Oil in Durban. It is irrelevant that PWC advised
on the
transactions in anticipation of their being concluded. And as I have
already said, Sasol Oil, until 2005, would not in any
event have been
liable for residence based tax on income received by STI since it was
not a controlled foreign company of Sasol
Oil.
[80] In conclusion on the
substance over form argument, I consider that Sasol Oil has
discharged the onus of proving that the supply
agreements between STI
(SOIL), SISL and Sasol Oil were genuine transactions, which they
implemented from 1 July 2001 through to
the years of assessment being
2005, 2006 and 2007. The transactions had a legitimate purpose. There
was nothing impermissible about
following the PWC advice, and so
reducing Sasol Oil’s tax liability. The transactions were not
false constructs created solely
to avoid residence based taxation.
There was good commercial reason for introducing SISL into the supply
chain, as explained by
the witnesses for Sasol Oil, and SISL had,
from the beginning of 2001, been envisaged as the oil trader and
shipper in the supply
chain. The PWC advice was not the trigger for
the transactions.
The subparagraph (A)
exclusion
[81] Sasol Oil argues
that the effect of s 9D(9)(b)(ii)(
aa
)(A) is that its liability
for tax on SOIL’s net income is excluded. The argument is based
on the premise that if SOIL purchased
crude oil within its country of
residence (the Isle of Man) from any person who was not a connected
person in relation to SOIL,
the net income of SOIL would not be
attributable to Sasol Oil. The Commissioner did not contend that SOIL
did not have a foreign
business establishment on the Isle of Man.
(The Tax Court wrongly held that it did not.) The question that
immediately comes to
mind is whether SOIL purchased crude oil from
Middle Eastern suppliers in the Isle of Man, or in the Middle East.
Where were these
contracts concluded?
[82]
Du Toit, who had taken over the procurement function from Bredenkamp,
testified about the contract renewal processes that occurred

annually. SISL would indicate to SOIL what was needed by the
refinery. SOIL would request a renewal of the contract, specifying

the crude oil grades and quantities for the following year. The
request could be made at a meeting, or over the telephone, or fax,
or
telex, and later email. The crude oil producer, if it accepted the
request, would issue a new contract to SOIL, and send it
by telex or
fax to the office in the Isle of Man. Sasol Oil thus argues that the
‘goods’ were purchased in the Isle
of Man, hence the
exclusion of liability to tax in the hands of Sasol Oil.
[83] The Commissioner
takes the view that the exclusion in para(A) does not apply as Du
Toit’s evidence as to where the supply
contracts were concluded
was inconclusive as to where the contract was concluded. Moreover, he
contends that the exclusion applies
only to goods purchased within
the country of residence, not to oil sourced in the Middle East,
purchased in the Isle of Man. This
interpretation is consistent with
the Treasury’s explanation of the exclusion, which is that the
controlled foreign company
must have a nexus with the place in which
the goods are produced. It is, however, not necessary to decide this
in view of my conclusion
that the supply agreements were not
simulated.
Section 103(1) of the
Act
[84] The provisions of s
103(1) of the Act read as follows in the years of assessment.
‘
Transactions,
operations or schemes for purposes of avoiding or postponing
liability for or reducing amounts of taxes on income
‘
Whenever the
Commissioner is satisfied that any transaction, operation or scheme
(whether entered into or carried out before or
after the commencement
of this Act, and including a transaction, operation or scheme
involving the alienation of property) –
(a)
has
been entered into or carried out which has the effect of avoiding or
postponing liability for the payment of any tax, duty or
levy imposed
by this Act or any previous Income Tax Act, or of reducing the amount
thereof; and
(b)
having
regard to the circumstances under which the transaction, operation or
scheme was entered into or carried out –
(i) was entered into or carried out -
(aa)
in the case of a
transaction, operation or scheme in the context of business, in a
manner which would not normally be employed for
bona
fide
business purposes, other than the obtaining of a tax benefit; and
(bb)
in
the case of any other transaction, operation or scheme, being a
transaction, operation or scheme not falling within the provisions
of
item
(aa)
,
by means or in a manner which would not normally be employed in the
entering into or carrying out of a transaction, operation
or scheme
of the nature of the transaction, operation or scheme in question;
(ii) has created
rights or obligations which would not normally be created between
persons dealing at arm’s length under a
transaction, operation
or scheme of the nature of the transaction, operation or scheme in
question; and
(c)
was
entered into or carried out solely or mainly for the purposes of
obtaining a tax benefit,
the Commissioner
shall determine the liability for any tax, duty or levy imposed by
this Act, and the amount thereof, as if the
transaction, operation or
scheme had not been entered into or carried out, or in such manner as
in the circumstances of the case
he deems appropriate for the
prevention or diminution of such avoidance, postponement or
reduction.’
[85]
The Commissioner argues that, even if the supply agreements are found
to be genuine, they nonetheless must be disregarded in
the assessment
of Sasol Oil’s income tax liability. For the section to be
applied by the Commissioner he must be satisfied
that a transaction,
operation or scheme has been entered into; if so, did it have the
effect
of avoiding, postponing or reducing the liability for the payment of
tax; if so, it must have entered into the transaction, operation
or
scheme solely or mainly for the
purposes
of obtaining a tax benefit (the purpose requirement) and it must have
been abnormal in one of the respects referred to in para
(
b
).
[86]
If so satisfied, the Commissioner’s remedy was to disregard the
transaction, operation or scheme, or to determine Sasol’s
Oil’s
tax liability in such a way as to prevent the avoidance, postponement
or reduction which was the effect of the transaction,
operation or
scheme. Section 103(4) provided that if it was proved that that the
transaction, operation or scheme resulted in the
avoidance of
liability for tax, it was presumed, until the contrary was proved,
that it was concluded solely or mainly for the
purpose of avoiding a
tax liability. Sasol Oil would then bear the onus of proving that
avoidance of tax was not the sole or main
purpose of the transaction,
operation or scheme. However, the Commissioner would still bear the
onus of showing that the effect
requirement was met and that it was
abnormal.
[87]
The Commissioner contends that the relevant transactions are the
supply agreement between SOIL and SISL, and the supply agreement

between SISL and Sasol Oil. I shall refer to them as the ‘impugned
transactions’. Did they satisfy the other requirements
of s
103(1)? And if so, which remedy should be invoked?
[88]
Sasol Oil argues that the impugned transactions must, in order to
fall foul of s 103(1), have the effect of getting out
of the way
of, escaping or preventing, an anticipated tax liability (
Smith
v CIR
1964 (1) SA 324
(A) at 333E and
Hicklin
v SIR
1980 (1) SA 481
(A) at 492H). Thus it must have anticipated liability
for tax, which it avoided through the impugned transactions. If the
parties
had not entered into the impugned transactions, would Sasol
Oil have had a liability for tax that it avoided, or escaped from, by

entering into them?
[89]
In answering this question one must determine what liability for tax
Sasol Oil had avoided by entering into the impugned transactions.
The
Commissioner stated in his Rule 10 Statement that the impugned
transactions ‘had the effect of avoiding liability for
the
payment of tax imposed’ under the Act. This was because if the
oil had been sold to Sasol Oil by SOIL, the amounts received
by or
accrued to SOIL from such sales would have been included in
determining the net income of SOIL for the purposes of s 9D.
Such
inclusions would have resulted, in terms of 9D(2), in amounts being
included in the income of Sasol Oil for the 2005 year
of assessment.
[90]
Sasol Oil points out that this proposition is flawed: after the
conclusion of the impugned transactions, the controlled foreign

company in the Isle of Man was STI; STI was wholly owned by SIH; STI
did not sell oil to Sasol Oil directly; even if it had, STI’s

net income would not have been included in Sasol Oil’s income.
This is because the shares in STI were held by SIH. Thus Sasol
Oil
did not have any participation rights in STI. Accordingly, it was not
obliged to include the net income of STI in its income
for income tax
purposes. In addition, Sasol Oil argues, the foreign business
exclusion applied.
[91]
In July 2001, when the supply chain including SISL was created, Sasol
Oil had no anticipated liability for tax based on the
application of
s 9D. This did not change in 2004 when SOIL was incorporated and took
over the procurement function. There was never
an intention that SOIL
would have sold crude oil to Sasol Oil, and the Commissioner did not
prove that there was. If Sasol Oil
had done nothing to avoid an
anticipated tax liability it would still have not had a tax liability
as a result of the application
of s 9D. There was no imminent tax
liability in respect of SOIL’s income anticipated in 2001. And
of course there was no
evidence as to what was contemplated by the
Sasol Group in relation to its restructuring that resulted from the
adoption of the
Liquid Fuels Charter: we do not know who conceived of
the change of shareholding between 2001 and 2004 and how that was
implemented.
[92]
The Commissioner has not shown that the impugned transactions had the
effect of avoiding liability for tax or that there was
anything
abnormal about them. The fact that STI could have sold the crude oil
directly to Sasol Oil does not mean that it was abnormal
for STI to
sell to SISL and then for SISL to sell to Sasol Oil.
[93] The Commissioner’s
assessments for the 2005 to 2007 years were based on the incorrect
assumption that Sasol Oil had participation
rights in STI. It quite
simply did not. In 2001 the participation rights in STI were held by
SIH. It was only from 2004 and onwards
that the participation rights
in SOIL were held by Sasol Oil. It is accordingly not necessary to
consider the other requirements
of s 103(1) in any detail. The
application of s 103(1) by the Commissioner in the additional
assessments was therefore unfounded.
Interest and penalties
[94]
The Tax Court confirmed the imposition of s 76 penalties and s 89
quat
interest on Sasol Oil, having determined that the impugned
transactions were simulated. In view of my findings that the
transactions
were not simulated and that the application of s 103(1)
was ill-founded, it follows that Sasol Oil should not be required to
pay
these sums.
[95] In the result—
1 The appeal is upheld
with the costs of two counsel.
2 The order of the Tax
Court is set aside and is replaced with the following order:
‘
The
appeal against the additional assessments issued to the appellant on
30 April 2010 by the Commissioner for the South African
Revenue
Service for the 2005, 2006 and 2007 years of assessment is upheld and
those assessments are set aside.’
_________________________
C H Lewis
Judge of Appeal
Mothle
AJA
dissenting
(with Makgoka JA)
[96] I have read the
judgment of Lewis JA (the first judgment) wherein she upholds the
appeal. I am of the contrary view that the
supply agreements defining
the supply chain for crude oil to Sasol Oil in South Africa are a
simulation. I therefore respectfully
disagree with the analysis of
the evidence and the conclusion reached in that judgment. In my view
the appeal should be dismissed
with costs.
[97] A summary of the
background facts appear in the first judgment and will not be
repeated in this judgment. Only the salient
points will be referred
to for purposes of context.
[98] The litigation
giving rise to this appeal concerns additional tax assessments for
the years 2005, 2006 and 2007 issued by SARS
against Sasol Oil. The
total additional tax from the assessment, excluding interest, was R
68 644 584.
[99] It is common cause
that Sasol Oil was in the business of acquiring and refining crude
oil. Prior to 2001, it received its supply
of crude oil from Sasol
Trading International Limited (STI), a subsidiary company of Sasol
Investment Holdings (SIH). STI was based
in the Isle of Man,
strategically positioned to purchase crude oil from the Middle East
sources for sale to Sasol Oil in South
Africa. The transaction was
expressed in a Supply Agreement (the original agreement) concluded
between STI and Sasol Oil.
[100] The crude oil
purchased from the Middle East sellers, was transported by STI with
the assistance of a shipping and marketing
company, Sasol
International Services UK (SISL), another subsidiary of SIH. Both
Sasol Oil and SIH were members of the Sasol Group
of Companies (Sasol
Group).  I shall revert to this important relationship later in
this judgment.
[101] During the year
2000 and through to 2001, the Sasol Group recognised the need to
restructure the foreign based enterprise
(FBE) so as to avoid
duplication of costs between the subsidiaries, STI and SISL. This
duplication was said to be the primary reason
for the expenditure of
R3 million per year. The restructuring process was driven by Mr Gird
(Sasol Oil’s trading manager
and director of SISL) and
Mr Loubser (SISL’s director and Sasol Oil’s manager:
manufacturing, supply and trading).
During
February 2001 Mr Loubser and Mr Gird produced a restructuring
proposal, in which the following is stated:
‘
Unavoidably there is a
duplication of effort between STI, SISL and Sasol Oil on the
international oil and products trading side.
The cost to these
parties to maintain their offices and business contacts in the
international oil and products market is simply
too high in view of
the lack of growth in business as discussed above. It should be
mentioned that the cost of an air ticket between
Johannesburg and UK
is not much higher than a ticket from the Isle of Man to London. It
is estimated that rationalising the trading
activities could save
around R3 million per year cost duplication.’
[102]
This proposal was approved by the Sasol Oil board of directors,
subject to approval by the Group Executive Committee (GEC),
and an
opinion on the United Kingdom (UK) tax implications. The GEC approved
the proposal. On 7 March 2001 the tax advice was received
from
Lovells Solicitors, who advised that the proposal would not have any
adverse UK tax consequences, other than an increase in
SISL’s
UK tax liability.
[103]
I pause here to mention that during the same period, Sasol Group
became aware that new tax legislation would apply to the
group as
from 1 June 2001. It sought advice from PricewaterhouseCoopers (PwC)
in this regard. PwC’s advice was contained
in three letters
dated 3 and 18 April 2001 and 16 July 2001. In its letter of 3 April
2001, PwC mentions that towards the end of
2000, it was requested by
Sasol Oil to consider and advise on the tax implications of the
mooted restructuring.
The
letter is co-signed by Mr Eric Louw, in his capacity as a tax partner
at PwC. Later Mr Louw appears as the addressee of the
third PwC
letter of 16 July 2001 and referred to as being in the employ of
Sasol Limited in the division of Group Tax.
[104]
PWC recommended an ‘ultimate modus operandi to minimize Sasol’s
tax liability on its oil trading activities’.
This entailed the
interposition of SISL in the oil supply chain between STI and Sasol
Oil.
[105]
From the content of the opinion letter of PwC, it was evident that
the advice expressed therein was in response to the anticipated

change in tax legislation concerning FBEs. The letter also
recommended
the
establishment of a new company (SUK), with trading functions, to be
located in the UK and interposed between STI and Sasol Oil.
It also
recommended the retention of STI in the Isle of Man and not its
transfer (as was the original intent in terms of the proposal
by Mr
Gird and Mr Loubser).
Sasol
Oil, through its Board of Directors and the GEC accepted this
proposal by PwC. It implemented it by concluding two supply

agreements.
[106] The supply
agreements provided that STI in the Isle of Man would purchase crude
oil from sources in the Middle East and sell
it to SISL in the UK
with SISL in turn on-selling the crude oil and ensuring its delivery
to Sasol Oil in South Africa. The one
supply agreement provided for
the first leg of the sale transaction between STI and SISL and the
other for the sale and delivery
transaction between SISL and Sasol
Oil. Unlike before, STI no longer supplied the crude oil directly to
Sasol Oil.
[107]
This arrangement attracted the attention of SARS. Acting in terms of
s 76 of the Income Tax Act 58 of 1962 (the Act), SARS
in April 2010,
issued
the
additional assessments against Sasol Oil. Section 9D, quoted in the
first judgment, provides in essence that SARS may levy tax
in
relation to income that is due to a South African resident company,
from a controlled FBE, in accordance with the residence-based
tax
system. By 2005, STI had been replaced by another company in the
Sasol Group, Sasol Oil International Limited (SOIL), where
STI
assigned SOIL the role of purchasing the crude oil from the Middle
East sources for sale to SISL.
[108] On 14 July 2010,
Sasol Oil raised an objection against the additional assessments,
which SARS disallowed on 24 June 2011.
Sasol Oil appealed to the Tax
Court (Mali J, sitting with two members) which ruled in favour of
SARS and upheld the additional
assessments. It is against the Tax
Court’s judgment and orders that Sasol Oil appeals to this
Court.
[109] The two main
questions raised by SARS as its main contention for consideration by
the Tax Court, were:
(a) Whether the substance
of the supply agreements differed from their form, in which event
whether the relevant amounts were excluded
from SOIL’s net
income for purposes of s 9D, on the basis that the requirements of
paragraph (A) of subsection 9(
b
)(ii) were satisfied; and
(b) In
the alternative, whether the requirements of s 103(1) were satisfied.
[110]
Both the substance over form and the s 103(1) issues depend on SOIL’s
income being taxable in Sasol Oil’s hands
in terms of s 9D.
Since the Tax Court found that the assessed amounts were included in
SOIL’s net income, the Tax Court did
not deal with the s 103(1)
question. The substance over form debate was at the centre of this
appeal.
[111]
The Tax Court concluded, with reference to the evidence and in answer
to the question of substance over form raised by SARS
that the
interposition of SISL in the crude oil supply chain from SOIL to
Sasol Oil was a sham in that there was no commercial
justification
for the role of SISL in the supply chain. In arriving at this
conclusion, the Tax Court found the interposition of
SISL to be an
unusual feature in the supply chain as provided for in the supply
agreements.
[112]
The question whether there was a commercial justification for SISL’s
role in the supply agreement is best understood
within the context of
the restructuring alluded to earlier in this judgment.
[113]
Before the Tax Court, Sasol Oil presented oral evidence of five
factual witnesses and an expert witness. Two of these witnesses
were
Mr Gird and Mr Loubser, erstwhile employees of Sasol Oil who, as
stated already, were central to co-ordinating the restructuring

process.
[114] There is no doubt
that the genesis of the structure of the FBE of the Sasol Group of
Companies, adopted and implemented from
July 2001, is found in the
written opinion by PwC dated 3 April 2001, referred to earlier.
[115] The structure
expressed in the supply agreements conforms to the structure adopted
by Sasol Oil save that instead of incorporating
a new subsidiary
company in the UK (SUK), SISL was clothed with trade functions to be
part of the supply chain of crude oil. What
is more, the eventual
supply agreements concluded between STI and SISL and between SISL and
Sasol Oil, copy the narrative of the
PwC letters. Another important
feature of the opinion letter is a strong recommendation that the
company to be interposed between
STI and Sasol Oil should be
established with a commercial justification.
[116]
In essence, the 3 April 2001 letter from PwC, introduced a new
approach to the restructuring, which took the Sasol Group in
a
direction opposite to the initial restructuring that was mooted. The
initial restructuring had its intent to eliminate duplication
and
save costs by collapsing STI, one of the subsidiary companies. The
staff and operations of STI in the Isle of Man were to be
transferred
to SISL in the UK. The proposal by PwC was to the effect that STI
should be retained in the Isle of Man and a new company
to be
interposed between the STI and Sasol Oil in the crude oil supply
chain. Thus, the consequence of the PwC recommendation,
which was
adopted and implemented, was that instead of having one company in
the UK conducting the acquisition and selling of crude
oil to Sasol
Oil as initially mooted, two companies, both Sasol Group
subsidiaries, were recommended for the trade functions.
[117]
The purpose was clearly to avoid Sasol Oil from having to purchase
crude oil from STI, as was the case prior to the restructuring.
In
that instance, the supply and sale would have been taxable at the
hands of STI’s holding company, SIH, a residence based
company
in South Africa. The interposed UK Company would ensure that there
would be a distance between Sasol Oil and STI in order
to ensure that
the supply chain should fall outside the ambit of s 9D.
[118] Consequent to the
PwC letters, the following developments emerged. First, no new
company was incorporated in the UK. SISL
was introduced and clothed
with trading functions to be the interposed company. Secondly, Sasol
Oil contended that for a dishonest
transaction to take place there
would have had to be a conspiracy involving a number of officials and
companies. In my view, that
consideration does not find application
in this case, for the following simple reason. Both STI and SISL were
subsidiaries of SIH.
In turn, SIH was a member of the Sasol Group. In
the final analysis, all these companies were members of the Sasol
Group. Sasol
Group and its GEC were in effective control of the
affairs of each of its subsidiaries.  Thus, all it took was a
meeting of
its Sasol Group’s GEC to approve the recommended
structure. The question of the need for commercial justification was
included
in the PwC opinion but there is no evidence that the meeting
of 5 July 2001 expressed itself on how that question should be
addressed.
That being so, there is no basis to conclude, in the
absence of evidence, that it would require a conspiracy not to
address the
question of commercial justification. Thirdly, on the
documents submitted and the evidence presented before the Tax Court,
and
contrary to a strong and repeated recommendation by PwC, there is
no explanation as to the commercial justification of SISL in the
new
supply chain structure.  Fourthly, as recommended by PwC, the
supply agreements were put in place, one providing for the
purchase
and sale of crude oil between STI and SISL and the other between SISL
and Sasol Oil, to streamline the supply chain.
[119]
The supply agreements present unusual features of independent trading
companies. Firstly, the agreements provide that the
crude oil
acquired by STI was intended to be sold to SISL and to no other third
party. Similarly, the crude oil purchased by SISL
from STI, was
intended to be sold to Sasol Oil and to no other external party.
Secondly, the agreements ensured that the purchase
price remained
constant in that, from STI to Sasol Oil, there was no room to change
the price, by either STI or SISL, with a view
to making a profit. In
essence therefore, SISL traded by purchasing crude oil only from STI
and on- selling it only to Sasol Oil
without making any profit.
Thirdly, the sale of crude oil by STI to SISL does not result in
transfer of ownership in the sale transactions
involving SISL. SARS
contends that this is a sham. I agree. The absence of transfer of
ownership, though not necessarily invalidating
the transaction, would
within the context of the two supply agreements, be one of the
relevant factors indicative of a simulated
transaction.
[120]
As stated already, historically, and prior to July 2001, Sasol Oil
purchased crude oil directly from STI in terms of an agreement

concluded between the parties in 1998. Thus, only STI performed the
function of buying and selling term crude oil. SISL performed
only a
shipping service. The supply agreement in terms of which SISL’s
functions would include the buying and selling of
crude oil, had to
be commercially justified.
[121] In all three
letters (of 3 April 2001, 18 April 2001 and 16 July 2001) PwC
emphasised the need for sufficient commercial justification
for
SISL’s interposition in the supply chain to sell crude oil. For
example, in the 16 July 2001 letter, the following is
explained:
‘
However, we
need to stress that sufficient commercial justification must exist
for now using SISL to sell the crude oil to Sasol
Oil and to
undertake the shipping of such crude oil.  If not, the use of
SISL could be seen as a scheme to avoid tax in SA
and the new
structure could be disregarded for SA tax purposes.’
[122]
It must be borne in mind that Sasol Oil bore the onus to establish a
commercial justification for the interposition of SISL
in the supply
chain. It thus fell upon the witnesses testifying for Sasol Oil to
explain to the court such commercial justification.
Did Sasol Oil,
through its witnesses, discharge that onus? In this regard, it is
important to have careful regard to the contemporaneous
documents and
the evidence. As a general observation, it is instructive that in the
contemporaneous documents, including correspondence
between PwC and
Sasol Oil, no such commercial justification is recorded, other than
the duplicated costs under the existing structure.
The closest Sasol
Oil comes to identifying such justification, is recorded in a letter
dated 22 November 2001. There, Mr Gird,
in a submission to SISL,
projected the adoption of the PwC structure as a normal part of the
Sasol Group’s Business. But
it was not. The main purpose of the
PwC structure was tax avoidance, of which there is nothing wrong in
principle. But, in any
event, this letter was written months after
the Sasol Group had decided to implement the PwC structure. What is
more, apart from
the duplication of costs, there is no discernible
problem recorded or identified with the existing structure.
Startlingly, the
PwC structure, instead of doing away with
duplication, entrenches it by the interposition of SISL in the buying
and selling of
crude oil. It makes no commercial sense at all.
[123]
The documentary evidence demonstrates that the initial motivation for
restructuring was intended to collapse STI and end up
with only one
company doing all the trade for the acquisition and supply of crude
oil. When it became evident on the advice of
PwC, that that approach
would attract the imposition of tax in terms of s 9D, the Sasol Group
accepted the PwC model which entrenched
the duplication by imposing
SISL in the supply chain between STI and Sasol Oil.
[124]
I hasten to add that there was nothing untoward about what at that
time appeared to be a tax avoidance scheme. Much has been
written
about tax avoidance schemes. In
Helvering
v Gregory
,
[1]
the court, per Judge Hand, said as follows:
‘
Anyone may
so arrange his affairs that his taxes shall be as low as possible; he
is not bound to choose that pattern which will
best pay the Treasury;
there is not even a patriotic duty to increase one’s taxes.’
Later,
Judge Hand, expanded on this in his dissent in
Commissioner
v Newman
[2]
,
and stated:
‘
Over and
over again the Courts have said that there is nothing sinister in so
arranging one’s affairs to keep taxes as low
as possible.
Everybody does it, rich and poor and all do right, for nobody owes
any public duty to pay more than the law demands.’
[125]
These sentiments have since been echoed in a line of decisions
[3]
in South Africa, including the seminal judgment of
Commissioner
of Customs and Excise v Randles
Brothers
and Hudson Ltd
1941 AD 369.
In that case the court contrasted the two scenarios of
tax avoidance and tax evasion as follows:
[4]
‘
A
transaction is not necessarily a disguised one because it is devised
for the purpose of evading the prohibition in the Act or
avoiding
liability for the tax imposed by it. A transaction devised for that
purpose, if the parties honestly intend it to have
effect according
to its tenor, is interpreted by the Courts according to its tenor,
and then the only question is whether, so interpreted,
it falls
within or without the prohibition or tax.
A disguised
transaction in the sense in which the words are used above is
something different. In essence it is a dishonest transaction:

dishonest, in as much as the parties to it do not really intend it to
have,
inter
partes
,
the legal effect which its terms convey to the outside world. The
purpose of the disguise is to deceive by concealing what is
the real
agreement or transaction between the parties. The parties wish to
hide the fact that their real agreement or transaction
falls within
the prohibition or is subject to the tax, and so they dress it up in
a guise which conveys the impression that it
is outside of the
prohibition or not subject to the tax. Such a transaction is said to
be in
fraudem
legis
,
and is interpreted by the Courts in accordance with what is found to
be the real agreement or transaction between the parties.’
[126] The courts have
equally not hesitated to express a strong view against disguised
transactions, as  in the English case
of
Ensign Tankers
(Leasing) Ltd v Stokes (Inspector of Taxes)
[1992] 2 All ER 275
(HL) at 295, where the House of Lords expressed a view thus:
‘
Unacceptable
tax avoidance [which] typically involves the creation of complex
artificial structures by which, as though by the wave
of a magic
wand, the taxpayer conjures out of the air a loss or a gain, or
expenditure, or whatever it may be, which otherwise
would never have
existed. These structures are designed to achieve an adventitious tax
benefit for the taxpayer, and in truth are
no more than raids on the
public funds at the expense of the general body of taxpayers, and as
such are unacceptable.’
[127] SARS contended that
the evidence presented by Sasol Oil is inconsistent with the stated
intention of the transactions. It
argued, with reference to
CSARS
v Bosch & another
[2014] ZASCA 171
;
2015 (2) SA 174
(SCA)
para 40, that in determining whether the transactions were genuine or
simulated, the court stated thus:
‘
. . .The
true position is that the "court examines the transaction as a
whole, including all surrounding circumstances, any
unusual features
of the transaction and the manner in which the parties intend to
implement it, before determining in any particular
case whether a
transaction is simulated.’”
[128]
In this case, one needs to examine the evidence of the PwC letters of
3 and 18 April 2001 and the transfer pricing documents.
These
documents, including reports and minutes of SIH, reveal undisputed
evidence, some of which, according to SARS’s contention,
finds
expression in the following documents: (a) The 2003 and 2004 Sasol
Limited filings with the USA Security and Exchange Commission
refers
to SISL consistently as a ‘service company’  and STI
is referred to, correctly so, as a trading company;
(b) SIH’s
Board minutes of 22 November 2002 and 28 February 2003, state that
SISL’s main business is to act as a ‘service
company’
while STI’s business is to act as a trading company; (c) SISL’s
transfer pricing report (2002/2003)
by KPMG states that SISL’s
‘primary function is to provide shipping services’ and
that it ‘takes on a small
level of risk in connection with the
provision of these services’. KPMG further reports that SISL
had only one employee (based
in the UK) who is responsible for
‘facilitating the shipment of oil to [SA]’; (d) The
transfer pricing study of Sasol
Limited dated 30 June 2003, repeats
that ‘SISL’s primary function is that of arranging
shipping of oil to Sasol Oil’;
and (e) The Sasol Oil resolution
dated 14 May 2004 in which the main object of SOIL (which took over
from STI) is described as:
‘[t]o act as an international
trading company mainly for Sasol Oil’.
[129]
SARS further refers to instances where the description of the role of
SISL in the supply chain was sharply contradicted and
irreconcilable
with the role as described in the supply agreements and the oral
evidence presented by Sasol Oil’s witnesses
in the Tax Court.
Sasol Oil made no effort to explain these glaring contradictions and
inconsistencies. While these instances,
when individually considered,
might not say much, their cumulative effect reveals, in the Sasol
Group’s own words, the true
nature and identity of SISL’s
function as shipping, and never the buying and selling of crude oil.
[130]
The Tax Court found that some of the witnesses presented by Sasol Oil
were not credible in that they resorted to denials and
obfuscation
when required to explain the commercial justification for SISL’s
role in the supply chain, considering that prior
to July 2001, STI
was able to solely conduct the supply directly to Sasol Oil. One such
witness was Mr Gird, who testified that
the restructuring he had
proposed could not have been informed by tax considerations as he is
not a tax expert. However, there
is evidence that he commissioned an
opinion on the tax implications of the initial proposed structure
from Lovell. In addition,
he received the PwC report from Ms Van Wyk,
a fact he did not deny. He was thus alive to the possible impact of
tax issues on any
mooted restructuring.
[131] Similarly Mr
Loubser was confronted, during cross-examination, with a copy of the
minutes as evidence of his presentation
to the Board at its meeting
of 5 July 2001. The minutes of the meeting stated the following:
‘
A
presentation by Mr Henri Loubser emphasised the need to review
Sasol’s structure in light of certain legislative changes.
The
proposal was to cease the contract between STI and Sasol Oil and move
it to Sasol International Services.
This
would optimise the tax regime.
’
(My
emphasis.)
Mr
Loubser’s answers in cross-examination on this aspect were most
unsatisfactory. He sought to distance himself from the
clear minutes
of the meeting by stating that because he is not a tax expert, but an
engineer, he could not have referred to the
legislative changes or
the tax regime. The suggestion of course was that the minutes
incorrectly attributed those remarks to him.
This assertion was
disingenuous to the Tax Court. Up to the point in the trial when he
was confronted with these minutes, there
is no suggestion that he had
ever sought to correct that which he claims had been wrongly
attributed to him. Further, there is
neither evidence that the
tendency to attribute reports to officers who knew nothing of the
subject was common place at Sasol Oil,
nor was there any plausible
reason as to why it would occur.
[132]
Messrs Gird and Loubser were not candid with the Tax Court in their
attempt to explain the commercial benefit of SISL in the
supply
chain. During cross-examination on this point, Mr Gird referred to a
14 June 2001 presentation by Mr Bredenkamp, who was
responsible for
the STI operations in the Isle of Man, as outlining the commercial
justification for the interposing of SISL in
the supply chain. A
careful reading of that presentation indicates that it is a repeat of
the PwC opinion and fell woefully short
of providing an explanation
for the commercial justification of SISL. In the absence of such
commercial justification, what would
have been a tax avoidance
scheme, as PwC cautioned, resulted in it being a tax evasion scheme.
[133]
The evidence of Mr Harvey Foster, an expert witness, who testified
for Sasol, focused on the international practice in the
shipping
trade to utilise different companies in line with their expertise. He
further testified that it would be normal ‘for
international
crude oil trading companies to buy crude oil on an FOB [Free On
Board] basis and supply it on a delivered outturn
basis’ or
‘conclude contracts on a back-to-back basis’. Such
practice he opines, would be aimed at minimising
the losses, regard
being had in particular to the risk inherent in the transportation of
oil. In general, it seems there would
be nothing untoward with such
arranged structures. As counsel for Sasol Oil correctly submitted, it
is a choice that companies
are free to make.
[134]
Turning to this case, Mr Foster’s evidence could not assist in
explaining the role of SISL. During cross-examination,
Mr Foster was
confronted with evidence of a study conducted by KPMG, an audit firm,
undertaken for the Sasol Group. The study found
that in this
particular case, the risk of losses during transit were minimal
because SISL was insured. The shipping fees earned
by SISL were
justifiably low, less than 0.5 per cent of the volume of oil
transported. Whatever risk there was, was covered by
insurance. The
question thus still remained: What was the commercial justification
for the interposing of SISL, a shipping service
company, as a trading
company with powers to procure and sell crude oil as provided for in
the supply agreements?
[135]
From the record it is evident that Messrs Gird and Loubser as
witnesses repeatedly asserted that their original proposal of

restructuring never changed but was the same and consistent with the
one adopted in July 2001. This is not borne out by the common
cause
facts. It is undisputed that the original proposal entailed the
collapse of STI in the Isle of Man and transfer of both staff
and
operations to the UK based SISL, so as to bring an end to
duplication, all of which made commercial sense. At the risk of
repetition, the PwC structure perpetuated duplication, with the
identified inherent risk of absence of a commercial justification.
[136]
It is trite that an appeal court is bound by the trial court’s
findings of credibility, unless they were found to be
affected by a
material misdirection or to be clearly wrong. The appeal court will
only reverse these findings where it is convinced
that the findings
are wrong. I am unable to find any misdirection by the Tax Court in
regard to the finding of credibility and
contradictions on the part
of Sasol’s witnesses, in particular Messrs Gird and Loubser.
[137]
On the conspectus of the evidence I would find that Sasol Oil failed
to demonstrate to the Tax Court the commercial justification
for
interposing SISL in the supply chain. The role of SISL as stated in
the supply agreements was a simulation. The continued reference
to
SISL, well beyond the adoption of the supply agreements, as a company
with shipping functions and providing a service instead
of trade
functions, exposes its real role in the supply chain. No explanation
could be provided to the Tax Court by Sasol Oil as
to why it now had
to take two companies to conduct a trade function that was initially
handled by one company. I would therefore
agree with the finding by
the Tax Court that the interposing of SISL was not with the intention
to avoid duplication and reduce
costs, it was initially set out to
achieve, but resulted in an entrenched duplication of trade functions
by two subsidiary companies,
clearly to evade the clutches of s 9D of
the Act. The failure to provide commercial justification for SISL,
revealed the absence
of
bona
fides
behind the transactions and as such the additional assessments were
justified.
[138]
In light of the conclusions I have reached, in line with that of the
Tax Court, I deem it unnecessary to deal with SARS’
alternative
ground of attack based on s 103 of the Act. In this regard, I agree
with the view expressed in the first judgment concerning
s 103 debate
and conclusion.
[139]
I also agree with the Tax Court’s decision on the interest and
penalties payable to SARS on the additional assessments.
[140] In the
circumstances I would dismiss the appeal with costs.
_____________________
S P Mothle
Acting Judge of Appeal
Ponnan JA (Lewis and
Cachalia JJA concurring)
[141] On whether or not
the transactions in question were simulated, my colleagues, Lewis JA
and Mothle AJA, disagree. Lewis JA
concludes (a conclusion with which
I align myself) that they are not. Mothle AJA takes the view that
‘the supply agreements
defining the supply chain for crude oil
to Sasol Oil in South Africa are a simulation.’ In arriving at
that conclusion, he
states: ‘
I
am unable to find any misdirection by the Tax Court in regard to the
finding of credibility and contradictions on the part of
Sasol’s
witnesses, in particular Messrs Gird and Loubser’.
[142]
We
are not concerned here with a dispute between the parties to the
agreements. It is a third party – the Commissioner –
who
contends that the parties did not really intend the agreements to
have,
inter
partes
,
the legal effect which its terms convey to the outside world. As
Lewis JA points out,
no
evidence was led for the Commissioner.  She adds ‘but that
is hardly surprising as it would not have had access to
the internal
workings of the Sasol Group’. Whilst that may be so, the fact
that no evidence was led for the Commissioner
is not without its
consequence. It means that there was nothing to gainsay the evidence
of Sasol Oil’s five factual witnesses
and one expert witness.
It is unclear to me why the Tax Court took the view that the evidence
of Sasol Oil’s witnesses fell
to be rejected. The criticism of
their evidence was not only unduly generalized, but also rather
severe. The rejection of the evidence
of senior employees, two of
whom were retired, absent any countervailing evidence, is
disquieting. They had no motive to lie in
order to save tax for Sasol
Oil. No ready answer presents itself as to why these professional
persons would perjure themselves.
There thus appears to be no reason
to question the reliability of their evidence (either individually or
collectively), much less
their integrity or to brand them untruthful
or evasive witnesses.
[143]
However, a finding that the evidence of those witnesses did not
survive scrutiny, is hardly the end of the enquiry. One would
have to
go much further. For the written agreements to have been a sham would
have required the most extensive and elaborate fraud,
stretching over
a period of many years. It would have required the involvement of the
persons participating directly, as well as
the boards of directors of
not just Sasol Oil, but also their related companies. The conduct of
the parties and the documents generated
before, at the time of and
subsequent to the conclusion of the agreements belies that. There is
not the slightest hint or suggestion
in the wide array of documents
introduced into evidence, such as letters of credit, bills of lading,
invoices and certificates
of quantity and quality, that the
transactions were a sham or disguise. What is more, the financial
statements of the relevant
companies were entirely consonant with the
supply agreements. The conclusion that such a sham was intended would
mean that the
production of these documents would have involved an
elaborate fraud on the part of the authors of the documents and the
members
of the boards of directors of the relevant companies, as also
their auditors. When one has regard to the history and background,

the genesis and conclusion of the agreements in accordance with their
terms, makes perfect sense.
[144]
It goes without saying that the evidence must be looked at
holistically. The Tax Court approached the evidence piecemeal.
It
appears to have focused rather too intently upon selected pieces of
evidence to support its conclusion that the transactions
were
simulated. As it was put
in
S v
Hadebe & Others
1998 (1) SACR 422
(SCA) at 426 f-h (citing with approval from
Moshephi
and Others v R
(1980-1984)
LAC 57
at 59F-H):
‘
The breaking down of a body of
evidence into its component parts is obviously a useful aid to a
proper understanding and evaluation
of it. But, in doing so, one must
guard against a tendency to focus too intently upon the separate and
individual part of what
is, after all, a mosaic of proof. Doubts
about one aspect of the evidence led in a trial may arise when that
aspect is viewed in
isolation. Those doubts may be set at rest when
it is evaluated again together with all the other available evidence.
That is not
to say that a broad and indulgent approach is appropriate
when evaluating evidence. Far from it. There is no substitute for a
detailed
and critical examination of each and every component in a
body of evidence. But, once that has been done, it is necessary to
step
back a pace and consider the mosaic as a whole. If that is not
done, one may fail to see the wood for the trees.’
Here, a proper
consideration of the entire evidential mosaic, leads me to the
conclusion that the alternative hypothesis sought
to be advanced by
the Commissioner, namely that the agreements are simulated, is
without a proper factual foundation and remains
but a speculative and
conjectural one.
[145] In my view, it is
clear that the relevant agreements were genuine agreements and truly
intended by the parties in accordance
with their terms. There was no
simulation or, more particularly, dishonest intention by the parties
to deceive by concealing the
real agreements. There is accordingly no
basis for finding that the ostensible agreements were a pretense or
that there was any
secret or unexpressed agreement, at odds with the
apparent agreements. I am accordingly in respectful disagreement with
Mothle
AJA. For the rest, I agree with Lewis JA.
____________________
V M Ponnan
Judge of Appeal
APPEARANCES
For Appellant: P A
Solomon SC (with him N K Nxumalo)
(Heads also prepared by J
M A Cane SC)
Instructed by:
Webber Wentzel, Sandton
Honey Incorporated,
Bloemfontein
For Respondent: D M Fine
SC (with him A Pantazis and S L Mohapi)
(Heads also prepared by
J Boltar)
Instructed by:
Hogan Lovells (South
Africa), Sandton
Lovius Block Attorneys,
Bloemfontein
[1]
Helvering v Gregory
69F.2d 809,810 (2d Cir 1934) affd
293 US 465
(1935).
[2]
Commissioner v Newman
F.2d
848.841(2d Cir 1947).
[3]
Some of which would include
Mackay
v Fey NO & another
2006 (3) SA 182
(SCA) and
CSARS
v Bosch & another
[2014] ZASCA 171; 2015 (2) SA 174 (SCA).
[4]
Commissioner of Customs and Excise
v Randles Brothers and Hudson Ltd
1941 AD 369
at 395-396.