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[2006] ZASCA 156
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Commissioner, South African Revenue Service v Komatsu Southern Africa (Pty) Ltd (448/05) [2006] ZASCA 156; [2007] 4 All SA 1094 (SCA); 2007 (2) SA 157 (SCA); 69 SATC 9 (26 September 2006)
Links to summary
THE
SUPREME COURT OF APPEAL
OF
SOUTH AFRICA
CASE NO: 448/05
Reportable
In
the matter between
COMMISSIONER,
SOUTH AFRICAN REVENUE
SERVICE
Appellant
and
KOMATSU
SOUTHERN AFRICA (PTY) LTD Respondent
Coram
: HARMS,
BRAND, CLOETE JJA, THERON and CACHALIA AJJA
Heard:
4
SEPTEMBER 2006
Delivered:
26 SEPTEMBER 2006
Summary:
Revenue – Customs and Excise Act 91 of 1964 –
Classification of goods for the purposes of customs duty ─
whether
a machine imported by the respondent should be classified as
a front-end shovel loader.
Neutral citation: This case
may be cited as Commissioner, SA Revenue Service v Komatsu SA (Pty)
Ltd [2006] SCA 118 (RSA)
JUDGMENT
THERON
AJA
[1] This appeal
concerns the classification of goods in terms of Schedule 1 to the
Customs and Excise Act 91 of 1964 for purposes
of customs duty.
[2] The respondent,
Komatsu Southern Africa (Pty) Ltd, is a manufacturer of heavy
equipment and the importer of the machine at the
centre of this
dispute, namely, a Komatsu W120-3A wheel loader. The appellant is the
Commissioner for the South African Revenue Service.
I shall refer to
the appellant as ‘the Commissioner’ and the respondent as
‘Komatsu’.
[3] On 13 August
1999 Komatsu applied to the Commissioner for a tariff determination
in respect of the machine. On 27 September 1999
the Commissioner,
acting in terms of s 47(9)(a)(i) of the Act,
1
determined that the machine is classifiable as a front-end shovel
loader under tariff subheading 8429.51 of Schedule 1. Komatsu,
in
terms of s 47(9)(e),
2
appealed to the High Court (Durban) against that determination.
[4] Oral evidence
was heard by Jappie J in the court
a quo
relating, inter alia,
to the principal function of the machine and whether the machine, as
presented on importation, had the essential
characteristics of a
front-end shovel loader. Jappie J found that the machine on
importation lacked an essential characteristic,
viz
a shovel
or bucket, which would enable it to be categorised as a front-end
shovel loader. He set aside the Commissioner’s determination
and substituted it with a determination that the machine is to be
classified under tariff subheading 8430.50. It is against this
decision that the Commissioner appeals, with the leave of the court
below.
[5] The issue in
this appeal is therefore whether the machine falls to be classified
under subheading 8429.51 as a front-end shovel
loader as determined
by the Commissioner or under subheading 8430.50 as ‘other
machinery, self-propelled’ as contended
for by Komatsu.
3
The latter classification attracts no customs duty while the
Commissioner’s determination attracts customs duty at the rate
of 10 per cent of the value of the machine on importation.
[6] The machine
consists of a tractor-like self-propelling base with two lifting arms
(H-frame) extending towards the front of the
machine. In the centre
of the lifting arms is a bell crank (Z-frame) that is driven by a
hydraulic cylinder. Both the H-frame and
bell crank have provision
for integration points. These integration points make it possible for
various implements like buckets,
shovels, forks, rakes and brooms to
be fitted to the machine.
[7] It was contended
on behalf of the Commissioner that even though the machine was
incomplete because it was not fitted with a bucket,
it was by virtue
of its inherent nature and characteristics in fact a front-end shovel
loader. Put differently, it was specifically
designed for that
principal function. Komatsu’s response was that the definition
of a shovel loader
4
emphasises the key characteristic of such a machine, namely that it
must be fitted with a bucket without which it cannot be classified
as
a shovel loader.
[8] The legal
principles applicable to tariff classification and the manner in
which they should be interpreted and applied have been
expounded in a
number of cases.
5
Nicholas AJA, in
International
Business Machines,
set out the principles governing the process of classification as
follows:
‘
Classification as between
headings is a three-stage process: first, interpretation – the
ascertainment of the meaning of the
words used in the headings (and
relative section and chapter notes) which may be relevant to the
classification of the goods concerned;
second, consideration of the
nature and characteristics of those goods; and third, the selection
of the heading which is most appropriate
to such goods.’
6
It is clear from the
authorities that the decisive criterion for the customs
classification of goods is the objective characteristics
and
properties of the goods as determined at the time of their
presentation for customs clearance. This is an internationally
recognised
principle of tariff classification.
7
The subjective intention of the designer
8
or what the importer does with the goods after importation are,
generally, irrelevant considerations.
9
But they need not be because they may, in a given situation be
relevant in determining the nature, characteristics and properties
of
the goods.
[9] Heading 84.29
self-evidently relates to self-propelled
10
machines of the type specified in the heading ie bulldozers,
angledozers and the like. Front-end shovel loaders fall within the
sub-category
of mechanical shovels, excavators and shovel loaders.
Heading 84.30 relates to ‘other machinery’ of the type
referred
to in the heading. The adjective ‘other’ serves
to qualify the type of machinery referred to in this heading, by
distinguishing
them from types of machinery referred to in the
preceding heading 84.29. This appears from the Explanatory Notes to
heading 84.30.
11
[10] It is necessary
at this stage to consider briefly the expert evidence led by the
parties on the nature, form, character and functions
of the machine.
See
Secretary
for Customs and Excise v Thomas Barlow & Sons Ltd
1970 (2) SA 660
(A) at 677B-E and
Autoware
(Pty) Ltd v Secretary for Customs and Excise
1975
(4) SA 318
(W) at 321H-322A.
[11] Mr K A Hoffman,
a designer of wheel loader machines (such as the one at the centre of
the dispute), gave expert evidence on behalf
of the Commissioner.
Hoffman’s evidence was that the principal function of the
machine is that of a wheel loader fitted with
a shovel. Hoffman
explained that the starting point for the design of the machine is
the break out force.
12
According to Hoffman the entire design of the machine is directed at
pushing, breaking out and lifting material, invariably with
a shovel
or bucket attached and the transportation thereof over short
distances.
[12] Messrs N D L
Burger and A J Von Wielligh testified as experts on behalf of
Komatsu. Burger conceded that the ultimate design
criterion for the
machine is ascertained in relation to a bucket. The high water mark
of Burger and Von Wielligh’s evidence
is that it is not
possible, on importation, to ascribe a principal function to the
machine. According to them, the propelling base
is multifunctional in
that it can perform a number of different functions depending upon
the implement attached thereto after importation.
On importation the
machine is not capable of performing any function, nor does it, in
its incomplete state, have the essential characteristics
of any
complete machine. Only once an attachment has been fitted to the
machine, can the primary function of the machine be determined.
On
this basis it was contended by both Burger and Von Wielligh that on
importation it is an incomplete multipurpose machine.
[13] It is common
cause that the machine on importation is incomplete. General
Interpretative Rule 2(a)
13
is thus relevant. According to this Rule, if the machine has the
essential character of the complete machine, then it must be
classified
as the complete machine. The essential character of the
machine is determined by having regard to the purpose for which the
machine
was designed; linked to this is the ascertainment of the
principal function of the machine. That, incidentally, is the
difference
between this case and
Autoware
(Pty) Ltd v Secretary for Customs and Excise,
14
where the definition concerned made no reference to the purpose for
which the article had been designed.
[14] The court below
in arriving at its conclusion referred to in para [4] appears to have
been persuaded by the evidence of Burger
and Von Wielligh. Their
opinion is not convincing because they sought to downplay the
importance of the principal design parameters
of the machine. They
also failed to recognise the fact that the attachments are ancillary
to the machine in that they are designed
to fit the machine. In my
view, the court below erred in not accepting Hoffman’s evidence
and concluding that the machine as
presented on importation lacked
the essential characteristics of a front-end shovel loader.
[15] In the result
the following order is made:
The appeal is upheld
with costs, such costs to include those occasioned by the employment
of two counsel. The order of the court
a quo
is set aside and
the following is substituted:
‘
The
application is dismissed with costs, such costs to include those
occasioned by the employment of two counsel.’
____________________
L V THERON
ACTING JUDGE OF APPEAL
CONCUR:
HARMS
JA
BRAND
JA
CLOETE
JA
CACHALIA
AJA
1
Section 47(9)(a)(i)
provides, to the extent relevant for present purposes: ‘The
Commissioner may in writing determine-
(aa)
the tariff headings, tariff subheadings or tariff items or other
items of any Schedule under which any imported goods, goods
manufactured in the Republic or goods exported shall be classified’.
2
Section 47(9)(e) reads:
‘
An
appeal against any such determination shall lie to the division of
the High Court of South Africa having jurisdiction to hear
appeals
in the area wherein the determination was made, or the goods in
question were entered for home consumption.’
3
These subheadings reside under headings 84.29 and 84.30, the
relevant parts of which read as follows:
‘
84.29 Self-propelled
bulldozers, angledozers, graders, levellers, scrapers, mechanical
shovels, excavators, shovel loaders, tamping
machines and road
rollers:
8429.1 – . .
.
8429.20- . . .
8429.30– . .
.
8429.40 – . .
.
8429.5 –
Mechanical shovels, excavators and shovel loaders
8429.51 =
Front-end shovel loaders
84.30
Other
moving, grading, levelling, scraping, excavating, tamping,
compacting, extracting or boring machinery, for earth, minerals or
ores; piledrivers and pile-extractors; snow-ploughs and
snow-blowers:
8430.10 – . .
.
8430.20 – . .
.
8430.3 – . .
.
8430.4 – . .
.
8430.50 –
Other machinery, self-propelled’
(emphasis
added).
4
In Explanatory Note
[F] self-propelled shovel loaders are defined as:
‘…
wheeled
or crawler machines with a front-mounted bucket which pick up
material through motion of the machine transport and discharge
it.
Some “shovel loaders” are able to dig into the soil.
This is achieved as the bucket, when in the horizontal position,
is
capable of being lowered below the level of the wheels or tracks’.
5
African Oxygen Ltd v Secretary for Customs & Excise
1969
(3) SA 391
(T);
Secretary for Customs & Excise v Thomas
Barlow & Sons Ltd
1970 (2) SA 660
(A);
Autoware (Pty) Ltd
v Secretary for Customs & Excise
1975 (4) SA 318
(W);
National Screenprint (Pty) Ltd v Minister of Finance
1978 (3) SA
501
(C)
; International Business Machines SA (Pty) Ltd v
Commissioner for Customs & Excise
1985 (4) SA 852
(A);
Commissioner for Customs & Excise v Capital Meats CC (in
Liquidation)
[1998] ZASCA 80
;
1999 (1) SA 570
(SCA);
The Heritage Collection
(Pty) Ltd v Commissioner, South African Revenue Service
2002 (6)
SA 15 (SCA).
6
A
t 863G-H.
7
See Halsbury’s
Laws
of England
(4
ed) (1999 reissue) Vol 12(2) para
13, n 4.
8
Autoware
at
32lE-F.
9
African Oxygen
at 394C-D.
10
The fact that the machines in this heading are
self-propelled is a common feature to all of them since the
adjective ‘self-propelled’
qualifies all the types of
machinery referred to in the heading. This view is supported by the
following extract of the Explanatory
Notes to heading 84.29:
‘
The
heading covers a number of earth digging, excavating or compacting
machines which are explicitly cited in the heading and which
have in
common the fact that they are all self-propelled.’
11
T
he
Explanatory Notes to heading 84.30 reads:
‘
This
heading covers machinery, other than self-propelled machines of
heading 84.29 and agricultural, horticultural or forestry machinery
(heading 84.32), for “attacking” the earth’s crust
(e.g. for cutting and breaking down rock, earth, coal etc.;
earth
excavation, digging, drilling, etc.) or for preparing or compacting
the terrain (e.g., scraping, levelling, grading, tamping
or
rolling). It also includes pile-drivers, pile-extractors,
snow-ploughs and snow-blowers
.’
12
This is the force that is exerted upwards, 100mm
from the lip of a bucket fitted to a wheel loader. It is the force
that is generated
by the bucket cylinder on the bell (Z) crank –
the force with which the bucket can swivel.
13
General Interpretative Rule 2(a) provides:
‘
Any
reference in a heading to an article shall be taken to include a
reference to that article incomplete or unfinished, provided
that,
as presented, the incomplete or unfinished article has the essential
character of the complete or finished article. It shall
also be
taken to include a reference to that article complete or finished
(or falling to be classified as complete or finished
by virtue of
this rule), presented unassembled or disassembled.’
14
1975 (4) SA 318
(W).