BP Southern Africa (Pty) Ltd v Commissioner for South African Revenue Services (60/06) [2007] ZASCA 7; [2007] SCA 7 (RSA) (13 March 2007)

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[2007] ZASCA 7
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BP Southern Africa (Pty) Ltd v Commissioner for South African Revenue Services (60/06) [2007] ZASCA 7; 69 SATC 79; 2007 BIP 364 (SCA) (13 March 2007)

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REPUBLIC
OF SOUTH AFRICA
THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA
Reportable
Case Number :
60 / 06
In the matter between
BP SOUTHERN AFRICA (PTY) LTD
......................................... APPELLANT
and
THE COMMISSIONER FOR THE SOUTH AFRICAN
REVENUE SERVICES .........................................
RESPONDENT
Coram
: HOWIE P, BRAND, NUGENT, PONNAN et CACHALIA
JJA
Date of hearing
: 22 FEBRUARY 2007
Date of delivery
: 13 MARCH 2007
SUMMARY
Income Tax Act 58 of 1962 – section 11(a) – recurrent annual
royalty payments – expenditure incurred in the production of
income.
Neutral citation: This
judgment may be referred to as :
BPSA (Pty) Ltd v The
Commissioner for SARS
[2007]
SCA 7 (RSA)
___________________________________________________________________
J U D G M E N T
___________________________________________________________________
PONNAN JA
[1] The appellant was incorporated on 9 May 1924 under the name
Atlantic Refining Company of Africa Limited. On 2 July 1959, 35 years
after commencing business, the appellant changed its name to BP
Southern Africa (Pty) Ltd ('BPSA'). BPSA was until October 2001 a
wholly owned subsidiary of BP Plc ('BP'), a UK-based company.
Thereafter BP divested itself, pursuant to a Black Economic
Empowerment
deal, of a portion of its interest in BPSA. Since then BP
has effectively held 75% of BPSA's shares.
[2] The petroleum market in South Africa is tightly regulated as to
price and product. BPSA operates as a refiner, manufacturer,
supplier
and marketer of petroleum products. It purchases crude oil from
abroad and manufactures or refines petroleum products in
this
country. It sells and distributes both nationally and elsewhere in
Africa petroleum products that have either been refined or
manufactured by it or purchased by it from one of its competitors in
the industry. It likewise supplies other oil companies in South
Africa with its products in terms of certain swap agreements.
[3] The BP trademarks (‘the licensed marks’) and the trade dress,
colour schemes, designs and symbols (‘the licensed marketing
indicia
’) which BPSA commenced using during about 1959 are
owned by BP worldwide. BPSA initially used the licensed marks and the
licensed
marketing indicia in terms of an informal oral arrangement
with BP, and thereafter, in terms of a written agreement with BP free
of any payment of royalties. During 1997 BPSA concluded a written
trade mark licence agreement ('the agreement') with BP, in terms
whereof it was granted authorisation to use and display the licensed
marks and licensed marketing
indicia
against payment of
royalties.
[4] In terms of the agreement the royalty fee payable to BP was
expressed as a rate per litre of product sold. It thus obviously
varied from year to year. For the tax years 1997, 1998 and 1999 the
royalty fee payments were respectively R40 190 000, R45 150 000
and
R42 519 000.
[5] BPSA subsequently claimed those payments as deductions in terms
of s 11(
a
) of the Income Tax Act 58 of 1962 ('the Act') in the
determination of its taxable income. The respondent, the Commissioner
of the
South African Revenue Services ('SARS') disallowed those
deductions. BPSA’s objection to the disallowance was overruled and
its
subsequent appeal to the Cape Town Income Tax Special Court
(Waglay J, sitting with assessors), was dismissed. Against that
decision
BPSA now appeals with leave of the Special Court.
[6] Section 11(
a
) provides
'
11 General deductions allowed in
determination of taxable income
—
For the
purpose of determining the taxable income derived by any person from
carrying on any trade, there shall be allowed as deductions
from the
income of such person so derived —
(
a
)
expenditure and losses actually incurred in the production of the
income, provided such expenditure and losses are not of a capital
nature;'
(See
Commissioner, SARS v BP South Africa (Pty) Ltd
2006 (5)
SA 559
(SCA) para 6.)
[7] As has occurred many times in the past, this court is required
yet again to determine whether expenditure incurred by a taxpayer
is
either capital or revenue expenditure. By now the distinction is
hopefully clear enough conceptually (see
Rand Mines (Mining &
Services) Ltd v Commissioner for Inland Revenue
[1996] ZASCA 118
;
[1997] 1 All SA
279
(A) at 285 and the cases there cited). The purpose of expenditure
is important and often decisive in assessing whether it is of a
capital or revenue nature. Expenditure incurred for purposes of
acquiring a capital asset of the business is capital expenditure
whereas expenditure which is part of the cost incidental to the
performance of the income-producing operations as distinct from the
equipment of the income-producing machinery is revenue in nature (
New
State Areas Ltd v Commissioner for Inland Revenue
1946 AD 610
at
627). A distinction is thus drawn between expenditure made to acquire
an income-producing concern (in respect of which the outlay
is
usually non-recurrent) and money spent '. . . . in working the
concern for the present production of profit' (
Commissioner for
Inland Revenue v George Forest Timber Co Ltd
1924 AD 516
at
526-527).
[8] The conclusion to be drawn from all of the cases seems to be that
the true nature of each transaction must be examined in order
to
determine whether the expenditure in question is capital or revenue
expenditure. (
New State Areas Ltd v Commissioner for Inland
Revenue
1946 AD 610
at 627.) In deciding that question each case
must be decided on its own facts and circumstances. (
Commissioner
for Inland Revenue v African Oxygen Ltd
1963 (1) SA 681
(A) at
691 A-B.)
[9] In this case, the agreement commenced on 1 January 1997 and was
initially to endure for a period of two years whereafter it would
be
renewed automatically for succeeding periods of 12 months unless
terminated by either party upon the giving of six months notice.
For
the purposes of this judgment, the further material terms of the
agreement, in summary, were:
'(a) BPSA was granted a personal non-exclusive and
non-assignable authorisation to use the licensed marks and the
licensed marketing
indicia
;
(b) BP remained the sole rightful owner of the licensed
marks and licensed marketing
indicia
,
and all rights and goodwill attaching or arising out of the use by
BPSA thereof accrued to the benefit of BP; and
(d) Upon termination of the 1997 agreement, BPSA would
no longer be entitled to use the name BP Southern Africa or the
licensed marks
and the licensed marketing
indicia.
'
[10] The further facts giving rise to the dispute between the parties
fall within a very small compass and were set out in a Statement
of
Agreed Facts which served before the court below. Nothing turns on
those further facts. It is nonetheless perhaps important for
the sake
of completeness to record how royalties came to be paid by BPSA at
the behest of its parent company BP for the use of the
intellectual
property in the first place. That, as also why the payment of
royalties was first mooted after a protracted period of
use free of
payment, is explained thus in the stated case:
'(a) During the period from 1993 to 1996, BP sold a
number of its divisions in various parts of the world and it became
apparent during
these sales that the licensed marks and the licensed
marketing
indicia
carried
a considerable commercial value.
(b) Consequently, during 1996 BP decided that users of
the licensed marks and the licensed marketing
indicia
should be required to pay a royalty. Accordingly, it
commissioned an independent company, Interbrand UK Limited
("Interbrand")
to determine the value of its licensed marks
and licensed marketing
indicia
.
Interbrand was also commissioned to assess the fair market value of
any royalty payments to be made to BP for usage of such licensed
marks and licensed marketing
indicia
by all users thereof, including the Appellant.'
It was thus only after Interbrand had concluded its investigation
that the agreement was concluded in accordance with recommendations
made by it.
[11] It was contended for the respondent that the ostensibly brief
initial duration of the agreement and the relatively short period
required for termination after that initial period should not be
accorded significant weight as the umbilical cord that ties BPSA
to
its UK parent is unlikely, after the initial term of the agreement or
at any later time, to be severed. Accordingly, so it was
argued, BPSA
will effectively garner a benefit of far greater magnitude than, at
first blush, the agreement confers upon it. That
may well be so. But,
to engage in such speculation would in my view be an act of grave
folly. For it is to the agreement itself that
one must look, which as
ought to be apparent, provides the ready counter that the agreement
might well not endure beyond its initial
term of two years. There is
nothing to suggest that the parties have concealed the true character
of their agreement (see
Zandberg v Van Zyl
1910 AD 302
at 309)
or that they did not intend it to have effect according to its tenor;
it must accordingly be interpreted by a court according
to its tenor
(see
Commissioner of Customs and Excise v Randles, Brothers &
Hudson Ltd
1941 AD 369
at 395-6). It bears noting that it was not
contended by counsel for SARS that the transaction was simulated.
Nor, given the agreement
that had been reached to proceed by way of a
stated case in the court below, could it be so contended.
[12] For the reasons that follow, the conclusion reached by the court
below that the expenditure in issue is of a capital nature,
does not,
in my opinion have due regard to the essential features of the
agreement and is therefore unsustainable.
[13] In order to determine whether expenditure has been incurred in
the production of income
'important, sometimes
overriding, factors are the purpose of the expenditure and what the
expenditure actually effects'
. (
Per
Corbett JA in
Commissioner for Inland Revenue v Nemojim (Pty) Ltd
1983 (4)
SA 935
(A) at 947F-H.) The annual royalty payment, as the Statement
of Agreed facts makes plain, was ‘in consideration for the use of
the licensed marks and the licensed marketing
indicia
’
.
Its purpose was to procure for BPSA the use – not ownership - of
the intellectual property of another from its sole and rightful
owner
for the duration of the agreement. Thus the ownership of the
intellectual property remained with BP throughout and, upon
termination
of the agreement, whether by virtue of non-renewal after
the initial two-year period or the giving of six months notice by
either
party thereafter, BPSA would automatically cease to have the
right to use the intellectual property in question.
[14] The anticipated and actual recurrent nature of the disputed
payments is a strong indicator that they related to revenue rather
than capital. The recurrent cost of procuring the use of something
which belongs to another is usually recognised as being of a revenue
nature. The most obvious example is the recurrent rent paid by a
taxpayer for the use of premises from which he/she trades. As
Centlivres
CJ stated: ‘[r]ent is an expenditure incurred in the
production of income and is of a non-capital nature and is therefore
deductible
… for the purpose of determining taxable income’
(
Turnbull v Commissioner for Inland Revenue
1953 (2) SA 573
(A) at 579 A-B.) The annual royalty fee in the present case is to all
intents and purposes indistinguishable from recurrent rent
paid for
the use of another's property.
[15] A cardinal feature of the present case is that the expenditure
in issue neither created nor preserved any capital asset in the
hands
of the taxpayer. Whilst not in itself conclusive that is indeed a
consideration of considerable importance. (
Warner Lambert SA (Pty)
Ltd v Commissioner, SARS
2003 (5) SA 344
(SCA) at para 17.)
Where no new asset for the enduring benefit of the taxpayer (enduring
in the way that fixed capital endures (
New State Areas Ltd
at
625A)) has been created, any questioned expenditure naturally tends
to assume more of a revenue character (
Warner Lambert SA (Pty) Ltd
par 17).
[16] Having regard to all of the circumstances, the expenditure in
issue was, in my judgment, so closely linked with the appellant's
income-earning operations during the tax years in question, as to
constitute revenue expenditure in respect of each of those tax
years.
It follows that those sums were deductible under the provisions of
section 11(
a
) of the Act. This conclusion renders it
unnecessary to consider the further submissions advanced on behalf of
BPSA which called in
aid section 11(f) of the Act.
[17] In the result:
(1) The appeal is allowed with costs, such costs to include those
consequent upon the employment of two counsel.
(2) The judgment of the Special Court is altered to read:
(a) The appeal is allowed with costs, such costs to include those
consequent upon the employment of two counsel;
(b) For the tax years 1997, 1998 and 1999, respectively, the sums of
R40 190 000, R45 150 000 and R42 519 000 are declared to be
deductible under s 11 (
a
) of the Act;
(c) It is directed that the assessments be altered accordingly.
V M PONNAN
JUDGE OF APPEAL
CONCUR:
HOWIE
P
BRAND
JA
NUGENT
JA
CACHALIA
JA