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[1987] ZASCA 23
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Commissioner for Inland Revenue v Dunlop South Africa Ltd. (24/87) [1987] ZASCA 23 (26 March 1987)
IN THE SUPREME COURT OF SOUTH AFRICA
(APPELLATE DIVISION)
In the appeal of:
COMMISSIONER FOR INLAND REVENUE
appellant
versus
DUNLOP SOUTH AFRICA LIMITED
respondent
Coram: CORBETT, HOEXTER, BOTHA, CROSSKOPF, JJA, et
Date heard
: 20 March 1987
Judgment delivered
:
JUDGMENT
CORBETT
JA:
The respondent in this matter, Dunlop South Africa
/ Limited . .
2
Limited, which has its registered office in Durban, carries on business
within the Republic of South Africa as a manufacturer and
wholesale seller of
pneumatic tyres, inner tubes and other rubber products. Since 11 July 1978
respondent has been re-gistered as
a vendor, in terms of sec. 12 of the Sales
Tax Act 103 of 1978 ("the Act"), in respect of the enterprises of manufacturing
and wholesale
trading. In terms of the Act, which was promulgated on 28 June
1978, liability for sales tax commenced on 3 July 1978 (see definition
of
"commencement date" in sec. 1).
On 18 February 1983 appellant, the Commissioner for Inland Revenue, issued
respondent with an additional assessment to sales tax in
regard to the
importation by respondent of what are termed "bladders" during the period 3 July
1978 to 4 May 1962. The taxable amount
of these bladders was assessed in the sum
of Rl 898 622 and the amount of sales tax payable in the sum of R107 469,16.
Originally
/ penalties
3.
penalties were also claimed, but these were later waived by the
appellant. Respondent objected to this assess-ment, generally on the
ground that
the bladders in ques-tion were not subject to sales tax. Its objection having
been disallowed by appellant, respondent,
in terms of sec. 22 of the Act,
appealed to the Special Court constituted for the hearing of income tax appeals.
The appeal came.
before the Natal Income Tax Special Court, which allowed the
appeal and set aside the assessment. Appellant now appeals to this Court
against
the whole of the judgment and order of the Special Court, the President of the
Special Court having granted the necessary
leave in terms of sec. 86 A(5) of the
Income Tax Act 58 of 1962, as amended.
Before dealing with the merits of the appeal, I must make brief mention of
two matters. The first, an application by appellant for
the amendment of the
grounds of appeal, was not opposed by respondent and was granted at the
beginning of the hearing before us.
/The
4
The second was an application for condonation of the fact that, for reasons
which I need not detail, the notice of appeal was lodged
with respondent's
attorney one day late. This application was also not opposed by respondent and
in my view condonation should be
granted. I turn now to the merits.
The essential facts of the matter are not in dispute. The bladders in
question were imported by the respondent and used by it in the
course of
manufacturlng
tyres during the period for which the tax was levied; and indeed at the time
of the trial the same type of bladder was currently in
use. In the process of
manufac-ture respondent uses fairly complex machines, which take in what is
termed the "raw tyre", shape and
cure (or vulcanize) it and produce the finished
product. There are two types of such a curing (or vulcanizing) machine, the
Bag-o-matic
Press, which is only semi-automatic
/ and
5
and requires several manual operations in its normal
functioning, and the Autoform Press, which is completely automatic. Basically,
however, these machines employ the same process. There are different machines
for the manufacture of different sizes of tyre. They
vary in cost from R733 000
for the machine used to make tyres for very large earth-moving machines to R41
500 for the machine used
to make tyres for ordinary motor cars.
It is not necessary to describe the curing process in more than broad
outline. The essential parts of the machine consist of a press
and a mould. The
mould is circular in form, is made of metal and comes in two halves. It is so
shaped as to give the tyre its outward
form, with its patterned tread, etc. At
the commencement of the process the two halves of the mould are separated from
one another,
the lower section
/ lying
6
lying horizontal. In the centre of the lower section
of the mould is
placed the bladder. The bladder consists
of a rubber cylinder which in its
uninflated state appears
to have a diameter approximately the same as the
circular opening in the finished tyre into which the wheel will fit. The bladder
is open at both ends. When the cylin-drical bladder is placed upright in the
mould a steel plate is affixed to the opening at each
end. The lower plate is
screwed into the base of the machine and lies at the same level as the bottom of
the lower section of the
mould. The raw tyre, which consists of a cylinder about
the same height as the bladder, but of wider diameter, is then fitted over
the
bladder. Thereafter the upper plate affixed to the bladder is clamped to a
central ram which can move vertically. By means of
the ram the raw tyre is
compressed from above until eventually the two halves of the metal mould are
brought together.
/ At
7
During the process of compression first steam and later hot water are
introduced under pressure into the bladder, and also externally.
The heat of the
steam initially causes the rubber of the raw tyre to become sufficiently molten
to flow and be moulded. And the hot
water supplies the pressure and temperature
required to cause the tyre, through the medium of the bladder, to assume the
shape dictated
by the mould. In this process the bladder inflates and expands
and is contorted in such a way as to form a shape which applies the
requisite
pressure on the inside of the tyre. In that way it forces the tyre into and
against the mould. Later when the curing process
is complete cold water is
introduced to cool everything down and the finished tyre is removed.
The curing time varies with different tyres, depending upon size. Thus, for
example, with a very large tyre it could take 10½
hours, compared with
about
/27
8
27 to 30 minutes for a small tyre. The bladder undergoes considerable stress
during the curing process. It is subjected to stretching,
contortion and
contraction, and to high and low temperatures. After a time this stress tends to
cause the bladder to crack round
the periphery and to split longitudinally. Once
this happens the bladder has to be replaced by a new one. The usable life of a
bladder
again depends upon size.
In the case of the bladder used for making the small type of tyre, its life
is normally about 300 to 310 curing cycles (ie, on the
basis of 27 minutes per
curing cycle, about 135 to 140 hours). On the other hand, the bladder used for
making the very large type
of tyre usually lasts for about 8 cures (ie, a total
of about 84 hours). Some bladders might last for a longer time; others for a
shorter time. The span of time over which a bladder would remain in a machine
would depend upon
9
how continuously the machine was operated. Thus working 8 hours a day and 5
days a week (which would not normally be done) the bladder
used on the small
machine would normally be replaced after 3½ weeks. The cost of a bladder
again varies, depending on size.
In the case of the large machine earlier
referred to, a bladder costs R9 800, ie. about 1,3% of the total cost of the
machine; and
in the case of the small one, the cost is RlóO, ie 0,4% of
the total cost.
The only evidence led in the Court a
quo
was that of Mr L Rust,
respondent's equipment engineer, who was called as a witness by respondent. The
aforegoing facts are gleaned
mainly from his evidence. In addition, it would
seem from what Rust stated that, when purchased, a curing machine does not come
with
a bladder attached. The bladder must be separately purchased. Whether the
bladder, which is obviously designed to fit into the
/ machine,
10
machine, is produced by the manufacturer of the machine or by some
other party is not clear. It also appears from Rust's evidence
that a single
machine may be designed to produce a range of different sizes of tyre, using
different moulds. Some bladders will accommodate
different sizes of tyre; in
other instances the bladder has to be changed to fit a specific size of mould.
Normally, however, the
production programme would be so planned as to obviate as
far as possible changes of the bladder oh a particular machine. The operation
of
changing the bladder is entrusted to semi-skilled operators.
It is common cause that the importation of such a bladder by the respondent
constitutes a transaction which would attract sales tax
in terms of sec. 5 of
the Act, unless it fell within one of the exemptions provided for by sec. 6(1)
of the Act. In this connection
paras. (c) and (t)(iii) of sec. 6(1) appear to be
applicable.
/ In
11
In each of these paragraphs an exemption is provided as regards goods (i)
where the vendor is registered under sec, 12 in respect
of an enterprise falling
within a category of the enterprises mentioned in Schedule 2 to the Act, (ii)
where the goods are goods
described in that Schedule in relation to such
category and (iii) where the goods are intended for use or utilization in such
enterprise.
To see whether either of these exemp-tions applies one must refer to
Schedule 2 of the Act.
At this point it is relevant to note that the Act has been amended every year
since its enactment. Some of the amendments have been
given retrospective
effect. Since the period over which sales tax was asses-sed in this case spans
about 4 years it is necessary
to consider what effect these amendments may have
had from time to time on respondent's liability for sales tax.
/ Respondent
12
Respondent is registered under sec. 12 in respect
of,
inter alia
, a manufacturing enterprise. Division
1 of Schedule
2 deals with manufacturing enterprises
and sets forth the goods to which the
exemption contained
in sec. 6 applies. The relevant paragraph of Division
1 is para. 3. In its original form para. 3 consisted
of a single sentence. In terms of sec. 20(1)(b) of
the Sales Tax Amendment
Act 111 of 1979, however, para.
3 was amended by the introduction of a new subpara. (b),
the existing paragraph becoming subpara. (a), and by
sec. 20(1)(c) of the same amending Act a proviso to par.
3 was added. Act 111 of 1979 waa promulgated on 18
July 1979, but it was provided in sec. 20(2) that sec.
20(1)(b) should be deemed to have come into operation
on 3 July 1978 - the commencement date for the payment
of sales tax. There was no similar provision in
regard to the proviso. The upshot is that
for the period 3 July 1978 to 17 July 1979 para.
/ 3(a)
13
3(a) and (b), as amended, but without the proviso, applies;
whereas as
from 18 July 1979 para. 3(a) and (b) must be read with the proviso.
I now quote para. 3, as amended by sec. 20(1)
of Act 111 of 1979:
"3. (a) Any repair or maintenance service in respect of machinery or plant used
directly in the manufacture, assembly or processing
of goods for sale, and parts
purchased for incorporation in or attachment to such machinery or plant in order
to effect such service.
(b) Parts purchased for incorporation in or attachment to such machinery or
plant for the purpose of the repair or maintenance thereof
by the vendor
carrying on the enterprise concerned.
Provided that
for the purposes of this paragraph, parts purchased shall not include any goods
described in this Division under the
heading of non-qualifying goods."
/ In
14
In addition to the amendments already referred to, sec. 20(1) of Act
111 of 1979 also added at the end of Division I of Schedule 2
a list of the
"non-qualifying goods" referred to in the proviso to para. 3. Two items in this
list are relevant:
"Detachable machine tools,
Cutting, forming, honing and moulding tools."
The Sales Tax Amendment Act 105 of 1980 (promul-gated on 1 August 1980)
effected some minor amendments to para. 3. Two need be noted.
Firstly the
paragraph
was altered to include "materials" as well as "parts";
and, secondly, the concluding words of subpara (a) were
altered to read —
" in order to have such service
effected."
Finally, by sec. 9(1)(b) of the Second Sales Tax Amendment Act, 90 of 1982
(promulgated on 16 June
/ 1982)
15
1982) the list of non-qualifying goods was amended by the addition of the
following new item:
"(19) Curing bags, bladders and airbags." It is common
cause that the bladders in issue fall under this item, with the result that
as
from 16 June 1982 respondent was unquestionably obliged to pay sales tax on all
bladders imported by it. The dispute between the
parties is thus confined to the
position prior to 16 June 1982.
It was agreed by counsel that subpara. 3(b), rather than subpara. 3(a), was
the relevant statutory provision in this matter, since
3(a) relates to a repair
or maintenance service provided by some third party, as opposed to 3(b), which
relates to repair or maintenance
executed by the vendor himself. This is
certainly clear from para. 3(a), as amended in 1980, whatever the position may
have been
before then; and I shall proceed on the
/ basis
16
basis that 3(b) is the relevant subparagraph. And, reverting for a moment
tó the requireménts of sec. 6(1)(c) and sec.
6(l)(t)(iii), it is
further common cause that the bladders were intended to be used or utilized in
respondent's enterprise.
Accordingly, the issues may be summed up as follows:
(1) Did the bladders in question constitute parts purchased for incorporation
in or attachment to the curing machines for "the repair
or maintenance thereof"
by respondent, the vendor carrying on the enterprise in question? ïf the
answer be in the negative,
then clearly the bladders were not exempt from sales
tax and the appeal to this Court must succeed, irrespective of what answer might
be given to the question posed under (2) below.
/ If
17
If the answer be in the affirmative, then clearly for the period 3 July 1978 to
17 July 1979 the bladders were exempt from sales
tax and to that extent the
appeal must fail; and, in addition, the further issue under (2) below must be
addres-sed.
(2) Did the bladders in question constitute either
(a)
detachable machine tools,
or
(b)
cutting, forming, honing or moulding
tools?
If the answer be in the affirmative, then for
the period 18 July 1979 to 15 June 1982 the blad-
ders were not exempt from sales tax and the ap-
peal succeeds in respect of bladders imported
during this period.
If the answer be in the negative, then the appeal
must fail in its entirety.
/ As
18
As to the first of these issues, I have no doubt that the bladders
constituted parts purchased for "attachment to" and possibly also
"incorporation
in", the curing machines by respondent. It is clear from the evidence that the
bladder plays an essential role in
the functioning of the curing machine and in
the production of the finished tyre. Indeed, without the bladder the machine
cannot
function at all. The bladder itself is specially designed and
manufactured to fit into the machine and apart from the role which
it piays in
the functioning of the machine it has no other purpose or function whatever.
When in use, the bladder is firmly affixed
to portions of the machine and
connected up with those parts which fill it with steam and hot water. It is
unquestionably a part
of the machine.
I am also of the view that the purpose of such attachment (and possibly
incorporation) is the "repair"
/ or . . .
19
or "maintenance" of the machine by respondent. There were quoted to us a
number of decisions, of both South African and English courts,
dealing, in
various contexts, with the meaning of the words "repair" and "maintenance"; and
my own researches have revealed a few
more. I do not propose to review these
decisions. "Repair" and "maintenance" are not words bearing precise meanings and
much depends
upon the context in which they are used (see eg. the discussion in
the House of Lords deci-sion of
London and North Eastern Railway Company v
Berriman
1946 AC 278
at pp. 291-2, 294-5,299-301; 307-8, 314-15).
English The Oxford/Dictionary defines "repair", as a noun and
in the sense presently relevant, as —
"Restoration of some material thing or structure by the renewal of decayed or
worn out parts, by refixing what has become loose or
detached, etc; the result
of this."
/ Webster's
20
Webster's Third New International Dictionary gives the following relevant
meanings for "repair" as verb and
noun:
"To restore by replacing a part or putting together what is torn or broken:
FIX, MEND"
and
"the act or process of repairing: restora-tion to a state of soundness,
efficiency or health".
The relevant meaning given for "maintenance" in the Oxford English
Dictionary is —
"The action of keeping in effective con-
dition, in working order, in repair, etc.; And the corresponding definition
in Webster's work is —
"The labor of keeping something (as buildings or equipment) in a state of
repair or efficiency".
Generally speaking, "maintenance" would cover
acts of keeping in effective condition, etc. which fall
/ short
21
short of actual repair; but in certain areas the two concepts may well
overlap and maintenance could include particular acts of repair;
and
vice
versa
. Since both words are used in the alternative in para. 3(b) it is not
necessary to attempt to draw a dividing line between "repair"
and "maintenance".
Nor is it necessary to delimit their outer reaches for, in my view, the act of
replacing a worn or damaged bladder
in one of respondent's curing machines
clearly amounts to repair or maintenance of the machine in question, probably
both repair
and maintenance. It involves the renewal of a worn out part and may
also be described as the action of keeping the machine in effective
condition
and working order.
In argument appellant's counsel laid stress on the following facts: (i) that
the curing machine is purchased without a bladder and
the bladder is
purchased
separately; (ii) that, when necessary in order to accom-
/ modate
22
modate different sizes of tyre, the bladder is removed from the machine and a
different—sized bladder substitu-ted; and (iii)
that the bladder is
designed to be at-tached and detached by a semi-skilled operator. From this
counsel argued that the bladders
were separate and replaceable parts analogous
to the replaceable bit of a power drill; and that the attachment of a bladder to
the
machine did not amount to the repair or maintenance of the machine.
It is true that the bladder is purchased separately from the machine, but, as
I have indicated, it is never-theless from the functional
point of view an
integral part of the machine. And I do not think that the fact that it can be
attached or removed by a semi-skilled
operator detracts from this. One can
visualize many parts of different kinds of machine, eg. a spark-plug in a
petrol-driven lawnmower,
which are as readily replaceable
/ and
23
and yet unquestionably form integral parts of the machines in question. And
here it may be noted that para. 3(b) itself speaks of
"incorporation in or
attachment to". It is true that on occasion the bladder may be removed before it
is worn out in order to adjust
the machine to a different size of tyre, but this
is apparently not the norm and I cannot see why it should make any difference.
The analogy of the bit and the power tool is, to my mind, not a valid one. As
one well knows, the power tool is an integral whole
in itself. It supplies a
source of motor power in the form of a shaft revolving at high speed, to which
various tools, such as, for
example, a drilling bit, may be attached to perform
different types of function. This is a far cry from the curing press, which
performs
only one function, that of shaping and vulcanizing tyres, and of which
the bladder is a
vital and integral part. Without the bladder the machine,
/ will
24
will not work. The power tool will revolve quite happily without any
attachment.
Appellant's counsel also emphasized the relatively short life of a bladder
and described it as "expendable or consumable". The former
epithet seems to be
more appropriate than the latter, but, in any event, I am not sure that such a
description takes the matter any
further. In the course of argument the
hypothetical case
was postulated of a bladder which was designed to last
for only one curing cycle and which then had to be re-
placed. In such a case there might be problems in assert- ing that the
bladder was a part of the machine or that the replacement thereof
constituted
repair or maintenance, but those are not the facts in this case. The biadders in
question are not so short-lived and,
although they do for good reason wear out
relatively quickly, I do not think that this takes them out of the category
of
/ parts
25
parts which are incorporated in or attached to the machine for the purpose of
repair or maintenance.
For these reasons the appellant, in my view, fails on the first issue.
As to the second issue, I shall consider first the question as to whether the
bladders constitute "detach-
able machine tools". A "machine tool" is defined in
English the Oxford/Dictionary as —
"a machine for cutting or shaping wood,
metals, etc. by means of a tool, esp. one designed for use in a machine
shop"
and the same dictionary defines a "machine shop" as —
"a workshop for making or repairing machines or parts of machines."
Webster's Third New Tnternational Dictionary states the
meaning of "machine tool" to be —
"a usu. power-driven machine designed for shaping solid work by tooling
either by removing material (as in a
/ lathe
26
lathe or milling machine) or by subject-ing to deformation (as in a punch
press)".
The word "tool" itself is defined by the Oxford English Dictionary as
follows:
"a mechanical implement for working upon something, as by cutting, striking,
rubbing or other process in any manual art or industry;
usually one held and
operated directly by the hand (or fixed in a position, as in a lathe), but also
including certain simple machines,
as the lathe; sometimes extended to simple
instruments of other kinds".
Among the illustrative examples given is a quotation
from a dictionary of mechanical terms (published l877)
reading —
"Of late it has become usual to embrace in the general term
machine
tools
such machines as the lathe, plane, slotting machine, and others
employed in the manufacture of machinery".
Turning again to Webster's Third New International Dictionary,
one finds the following relevant meanings given for the
/ word
27
word "tool" —
"la: an instrument (as a hammer or saw) used or worked by hand: an instrument
used by a handicraftsman or laborer in his work: IMPLEMENT
b(l) the cutting or
shaping part in a machine or machine tool (2) a machine for shaping metal:
MACHINE TOOL".
And Webster's New 20th Century Dictionary 2nd ed. gives
the following relevant meanings of "tool"—
"1. any implement, instrument, or utensil held in the hand and used for
cutting, hitting, digging, rubbing, etc: knives, saws, hammers,
shovels, rakes,
etc. are tools.
2. (a) any similar instrument that
is the working part of a power-driven machine, as a drill, band-saw blade,
etc;
(b) the whole machine; a machine tool."
It is not necessary or advisable to attempt to define the term "detachable
machine tools" with any precision. These dictionary definitions
do, however,
give a broad indication of the general characteristics
/ of '
28
of a machine tool. Bearing in mind that Division I of Schedule 2 is concerned
generally with the manufac-turing industry, it seems
to me that broadly speaking
a machine tool in this context refers to a tool, ie. an instrument or implement
used for working on objects
consisting of metal or wood or other similar
material, eg. by cutting, drilling, striking or rubbing, which is connected to a
machine
which supplies the mechanical power required to operate the tool. The
precise signifi-cance in this context of the word "detachable"
is not clear.
Possibly what the Legislature had in mind was that portion of the machine tool
constituting the tool (as opposed to
the source of power), where such tool was
detachable from the machine itself. It is not neces-sary, however, to decide
this point,
since in my opinion the bladder in question, by its very nature,
cannot be regarded as an implement or instrument in the nature of
a tool; nor
would one regard the curing press as
/ a
29
a machine providing mechanical power. Moreover, as was rightly stressed by
counsel for respondent, a tool has a certain integrity
as a functional unit. Its
com-ponent parts combine to perform its intended functions. None of those parts
would by itself constitute
the tool; nor would one say that an object which by
itself did not, and could not, perform the function was a tool. By itself the
bladder cannot perform any function; and even when attached to the curing press
it performs its function (which includes both heating
the raw tyre and helping
to mould it) not as a mechanically driven tool, but as a component part
operating in conjunction with other
parts in a fairly complex machine.
Accordingly, in my opinion, respondent's bladders do not fall under that
category of nón-qualifying
goods defined as "detach-able machine
tools".
/ In
30
In argument before the Court a
quo
it was conceded on behalf of the
appellant that the bladders did not fall under the other suggested category of
non-qualifying goods,
viz. "cutting, forming, honing and moulding tools". Before
us appellant's counsel (who did not appear in the Court below) withdrew
this
concession and argued that the bladders constituted either forming or moulding
tools. It may be that forming tools and moulding
tools are terms of art in the
manufacturing trade and that expert evídence would have been admissible
to establish this meaning
(see
Central Press Photos Ltd v Department of
Employment and Productivity
[1970] 3 All ER 775
(CA), at pp 781-2, 783, 784;
R v Lipschitz
1945 CPD 278
, at pp 279-80;
R v Eastern Transvaal
Industries Ltd
1955 (1) SA 122
(T), at pp 124-5). No such evidence was,
'however, led. In view of appellant's concession respon-dent can hardly be
blamed for this.
At all events,
/ for
31
for the reasons already elaborated I do not think that the bladders in
question can be regarded as falling within the ordinary meaning
of the word
"tool" and, therefore, a
fortiori
, they cannot fall under the
descriptions "forming tools" and "moulding tools". Moreover, it seems most
unlikely that expert evidence
from the trade would lead one to any different a
conclusion.
Consequently the appellant fails on the second
issue as well.
The appeal is dismissed with costs, including the costs of two counsel.
M M CORBETT
HOEXTER JA)
BOTHA JA) CONCUR
GROSSKOPF JA)
NICHOLAS AJA)