About SAFLII
Databases
Search
Terms of Use
RSS Feeds
South Africa: Supreme Court of Appeal
SAFLII
>>
Databases
>>
South Africa: Supreme Court of Appeal
>>
1994
>>
[1994] ZASCA 148
|
|
Commissioner for Inland Revenue v Wandrag Asbestos (Pty) Ltd (571/92) [1994] ZASCA 148; 1995 (2) SA 197 (AD); (3 October 1994)
CASE NO 571/92 /mb
IN THE SUPREME COURT OF SOUTH AFRICA (APPELLATE
DIVISION)
In the matter between:
THE
COMMISSIONER FOR INLAND REVENUE
APPELLANT
and
WANDRAG ASBESTOS (PROPRIETARY) LTD
RESPONDENT
CORAM
CORBETT CJ, BOTHA, KUMLEBEN,
F H GROSSKOPF et HOWIE JJA
HEARD
22 AUGUST 1994
DELIVERED
3 OCTOBER 1994
JUDGMENT
KUMLEBEN, JA/
...
2
KUMLEBEN JA
:
The respondent ("Wandrag") in its tax
returns submitted for the years 1983, 1984 and 1985 deducted from income the
amounts of Rl 048
504,
00, Rl 035
116,00 and R948 157,00 respectively as its
marketing allowance, for which s 11bis(2) of the Income Tax Act, 58 of 1962
makes provision.
The deductions were accepted by the appellant ("the
Commissioner"). He, however, subsequently reversed this decision and issued
amended
assessments. To these Wandrag objected on the grounds that it was
entitled to the deductions claimed. At a later stage as regards
the amended
assessment for the year ended 30 September 1983, Wandrag raised a subsidiary
objection. It was that the proviso to s
3(2) of the Act precluded the
Commissioner from disallowing the deduction for that year. On appeal to the
Transvaal Income Tax Special
Court (Melamet J presiding) the main objection was
rejected but the subsidiary
3
one was upheld. An appeal and cross-appeal to the Transvaal
Provincial
Division followed. The majority judgment of that court
(per Van Dijkhorst
J with Myburgh J concurring) reversed the
decision of the special court
and with a qualification upheld the main objection. The substantive
order
made was that:
"The appeal is upheld and the cross-appeal consequently falls away. The
order of the special court is amended to read:
'The appeal against the additional assessments for the years of
assessment ended 1983, 1984 and 1985 is upheld.'
In view of the fact that a small portion of appellant's produce was
marketed locally the assessments are referred back to the Commissioner
for
Inland Revenue for reconsideration in the light of our decision on this
aspect."
In a dissenting judgment Leveson J agreed with the decision of the
special court, being of the view that the appeal and cross-appeal
should
be
4
dismissed.
At the hearing before the special court Messrs Walwyn, Harris and Howard
gave evidence for Wandrag and Mr Hart for the Commissioner.
The evidence of
these witnesses, which gave rise to no material disputes of fact, may be thus
summarised.
During or about 1960 Wandrag started to mine and produce Cape Blue
Asbestos, technically known as crocidolite, at Kuruman, Northern
Cape. Mr Walwyn
was a director of Wandrag and actively involved in running the affairs of the
mine. Griqualand Exploration and Finance
Company Limited ("GEFCO"), a subsidiary
of General Mining and Finance Corporation Limited ("GENCOR"), and another
company, Cape Asbestos,
were two of the three other companies mining crocidolite
in South Africa. These companies were well-established whereas Wandrag was
a
newcomer in the Geld. For the sale of its products it was wholly
5
reliant upon the export market, a highly competitive one. After
unsuccessful attempts to secure such sales through an independent
marketing
agent, it formed an association with GEFCO and Cape Asbestos in order to control
the price of foreign sales and to appoint
agents jointly to do their marketing
abroad.
Towards the end of 1967 Wandrag realised that the overseas demand for its
asbestos fibre would shortly come to an end as its product
was not of a standard
acceptable to foreign buyers. To overcome these difficulties two courses were
open. It could at considerable
cost erect its own plant to improve the quality
of its asbestos and independently arrange for its off-shore marketing. The other
option - a commercially more attractive one - was for it to make use of GEFCO's
existing facilities both for upgrading its product
and for marketing it
overseas. As a result of discussions with GEFCO, it was agreed that GEFCO would
accept, market
6
and export Wandrag's total output of asbestos. Accordingly from
early
1968 its asbestos fibre was delivered to GEFCO. There it was
subjected
to further fiberisation and blended with GEFCO's fibres. (A
detailed
explanation of this process will follow later.) The mixed product was
then
bagged by GEFCO and exported to buyers pursuant to orders obtained
by
GEFCO through its marketing facilities. Although this
arrangement
envisaged, and was intended for, the export of all the asbestos
Wandrag
supplied, it later emerged that unknown to Wandrag a small amount
was
sold locally by GEFCO.
In January 1969 the terms of the arrangement or
agreement
under which they had in the main been operating were incorporated in
a
written contract (the "agreement"). It read as follows:
"WHEREAS the parties hereto have agreed that GEFCO will on certain terms
and conditions purchase from WANDRAG the whole of its production
of
asbestos;
7
AND WHEREAS it is deemed expedient to record in
writing the terms and conditions upon which the parties hereto are
agreed.
NOW THEREFORE IT IS AGREED AS FOLLOWS -
1. WANDRAG hereby undertakes not to sell any part of its production or
stocks of Blue Asbestos fibre to any purchaser other than GEFCO
who hereby
undertakes to purchase the total production of Blue Asbestos fibre of WANDRAG,
which shall be limited (or held in stocks)
according to the following specific
limitations and
provisions-
(a)
The
total tonnage of fibre to be purchased by GEFCO in any one year shall be limited
to 20% (TWENTY PER CENTUM) of the total sales
of Cape Blue Asbestos fibre in
that year by GEFCO and its subsidiaries, including all sales by subsidiary
selling companies and any
sales by their agents or
sub-agents.
(b)
The fibre so
to be purchased by GEFCO is further limited to 9 000 (NINE THOUSAND) tons per
annum when the total sales do not exceed
50 000 (FIFTY THOUSAND) tons per annum.
Should the annual sales exceed 50 000 (FIFTY THOUSAND) tons GEFCO undertakes to
purchase
additional tonnages of fibre from WANDRAG on the same basis, namely 20%
(TWENTY PER CENTUM) of any sales exceeding 50 000
(FIFTY
8
THOUSAND) tons. These additional
tonnages will be limited to 1000 (ONE THOUSAND) tons which will result in a
total of 10 000 (TEN
THOUSAND) tons of WANDRAG fibre so to be purchased when
GEFCO's sales amount to 55 000 (FIFTY-FIVE THOUSAND) tons in any one
year.
(c) All purchases made by GEFCO shall be distributed evenly over each year
of the contract period at a rate of not less than 400 (FOUR
HUNDRED) tons per
month.
Notwithstanding the above GEFCO agrees to purchase not less than 4 800 (FOUR
THOUSAND EIGHT HUNDRED) tons from WANDRAG in any one
year.
2. If at the end of any calendar year the tonnage sold by WANDRAG to GEFCO
should be less than or should exceed the figure which GEFCO
has agreed to
purchase from WANDRAG, namely 20% (TWENTY PER CENTUM) of the total GEFCO sales
as shown in the Auditors' Certificate,
the deliveries of fibre by WANDRAG in
terms of Clause 7 for the first quarter of the ensuing calendar year shall be
adjusted so as
to take into account the shortfall or excess of fibre sales by
WANDRAG to GEFCO for the preceding calendar year.
3. The grades of fibre to be purchased in terms of this Agreement will be
the normal grades produced by WANDRAG in
the
9
ratio of its normal production and
must at all times be within the range of WANDRAG'S current production and must
not be less than
the minimum specifications of the respective groups of fibre as
determined by the provisions contained in the Agreement between the
members of
the Cape Blue Producers Company, whether this company is still in existence or
defunct. It is recorded that the grades
currently produced by WANDRAG when mixed
together in the normal ratio of production and fiberised to the required degree,
will result
in a grade which is equal to the current GEFCO Grade 35.
4. GEFCO will pay to WANDRAG in respect of all asbestos fibre so purchased a
sum of R124,50 (ONE HUNDRED AND TWENTY-FOUR RAND FIFTY
CENTS) per ton on an
f.o.b. basis, which sum will be reduced or increased by the difference between
this sum and the average price
for GEFCO'S total annual sales of its Grade 35.
Less
-
(a) A selling commission of 15% (FIFTEEN
PER
CENTUM) on the f.o.b. price of the fibre, and
(b)
Charges for
R.M.T., railage, handling, storage, shipping and similar costs based on the
average of these expenses for all fibre despatched
by GEFCO for that year
(which, it is recorded) is at present R12/14 per
ton;
(c)
A figure of R2,00
(TWO RAND) for blending
costs;
10
(d) The cost of bags delivered KURUMAN.
5. The cost of transport of fibre from the WANDRAG depot to the Riries Mine
for the purposes of blending or storage, will be for the
account of
WANDRAG.
6. It is recorded that GEFCO will not be under any obligation to disclose to
WANDRAG the final destination of any WANDRAG fibre sold
by GEFCO.
7. Determination of the quality of the material will be effected by GEFCO at
their laboratory. Any dispute arising from such determinations
will be settled
by the Council for Scientific and Industrial Research, or failing them, General
Superintendence Company (S.A.) (Proprietary)
Limited, as umpires, whose decision
shall be final. All costs incurred in such disputes will be for the account of
the party against
whom the umpires may decide. It is hereby agreed that every 20
(TWENTY) ton batch of fibre will be sampled and tested both by GEFCO
and WANDRAG
in order to limit any disputes which may arise from such determinations to
specific 20 (TWENTY) ton lots.
8. In order to ensure an
approximately even flow of asbestos from WANDRAG to GEFCO'S Riries Mill,
delivery will take place on a daily
basis. To this end GEFCO undertakes to
inform WANDRAG in advance of its anticipated quarterly sales and at the
commencement of each
year its anticipated
11
annual sales. GEFCO also undertakes to submit a Certificate given under
the hand of its auditors, confirming the annual tonnages of
fibre sold for the
account of GEFCO and its subsidiaries and WANDRAG by any of GEFCO'S selling
organisations, agencies or sub-agencies.
9. It is agreed that invoices for fibre delivered will be paid in full,
excluding commission and other deductions as set out in Clause
4 hereof, on or
before the 25th day of the month next following.
10. Notwithstanding the date hereof this Agreement shall be deemed to have
commenced on the first day of DECEMBER, 1968 and shall
continue for a minimum
period of five years, and thereafter subject to the right of either party to
terminate the Agreement on two
years' written notice provided that notice may
not be given during the first three years of the operation of this
Agreement."
One notes the following features of this agreement.
Although
the opening words of clause 1
require Wandrag to deliver all its Blue
Asbestos fibre to GEFCO, the
quantity which GEFCO is obliged to take
and pay for is limited and determined according to the stated
formula.
12
Wandrag had no doubt to adjust its rate of production accordingly and any
surplus would be "held in stocks", as it is said in this
clause. Clause 3
requires Wandrag to deliver fibre of a certain minimum specification and grade.
In terms of clause 4 GEFCO is to
pay Wandrag a basic sum of R124,50 per ton for
the fibre delivered subject to an adjustment based on the average price for
GEFCO's
total annual sales of its Grade 35 fibre and subject to the deductions
itemised in paragraphs (a) to (d) of this clause. The following
are the
provisions of the Act relevant to the questions to be decided as they read at
the material times:
s 11bis(1)
" 'exporter' means-
(a) any person who carries on an export trade of the nature referred to
in paragraph (a) of the definition of 'export trade', and
who is registered as
an exporter by the Director-General;"
" 'export trade' means-
13
(a) any trade carried on by any person in the course of which goods are
exported or are produced or manufactured for export or in
the course of which
orders for goods are actively solicited in any export country;
...
s 11bis(2) and 3(a)
"(2) If any exporter has during any year of assessment incurred marketing
expenditure, determined as provided in subsection (4), there
shall be allowed to
be deducted from his income for that year an allowance (to be known as the
marketing allowance) the amount of
which shall be determined as provided in
subsection (3).
(3) The marketing allowance shall be-
(a) an amount equal to seventy-five per cent of the marketing expenditure
(determined as provided in subsection (4)) incurred by the
exporter during the
year of assessment;"
s 11bis(4)(f)
"(4) For the purposes of subsection (3) the marketing expenditure on
which the marketing allowance is to be calculated shall be so
much of the
expenditure incurred by the exporter during the year of assessment and allowed
to be deducted from his income under
14
sections 11 and 17 as is proved to the satisfaction of the Commissioner to
have been incurred
directly-
(f) in respect of commission or other remuneration for orders for goods
exported to any export country
..."
In terms of
s 82 of the Act Wandrag bore the burden of
proving that it was entitled to the deductions claimed as
marketing
expenditure. It was common cause that the asbestos was
produced in the
Republic; that it falls within the definition of "goods"; that Wandrag
was
a registered exporter; that the expenditure in each case was incurred in
the
respective years of assessment; and that such expenditure was allowed
to
be deducted from income under s 11 and s 17 of the Act: in short, that
all
the requirements for the recognition of a marketing allowance were
proved
save for two, namely,
(i) whether Wandrag was carrying on an "export trade", and
(ii) whether the "selling commission" paid to GEFCO in terms of
15
the agreement was "marketing expenditure" within the meaning of that term in
s llbis(4)(f).
Central to
Mr Levin
's argument, on behalf of
the
Commissioner, on both the above issues
was the submission that on a
proper construction of the agreement it
was one of purchase and sale. To
an extent the manner in which the parties expressed themselves
lends
support to this contention. There is repeated reference in the
agreement
to "purchase", "purchaser" and "sales". On the other hand, there are
terms
which are foreign to such a contract. Ordinarily a purchaser after
delivery
may do as he pleases with the res
vendita
. In the event of a
re-sale he is
not accountable to the seller for any profit made or in any other
respect.
Nor would one expect that after delivery a seller would be responsible
for
the costs reflected in clause 4.
Mr Levin
sought to explain these
deductions
by submitting that they were simply part of a method used by GEFCO
to
16
determine the purchase price. This argument presupposes that we are
dealing with a sale. But in such a case a buyer as a rule takes
these and
suchlike factors into account
before
deciding on the purchase price
simpliciter
which he is prepared to pay. Clause 6 records the fact that
GEFCO is not obliged to disclose to Wandrag the final destination of
"any
WANDRAG fibre sold by GEFCO". This is not a provision parties would need to
include, or would even contemplate inserting, in
a deed of sale. Finally, one
notes that in clause 8 the auditor's annual certificate is to confirm the amount
of fibre "sold
for the account of
GEFCO and its subsidiaries and
WANDRAG
". (My emphasis.) Thus, if one has regard to substance rather than
form, the agreement cannot be said to be one of sale. And with
particular
reference to clause 4(a), it provides for a
payment
in the form of a
deduction and not for a discount on a purchase price.
17
Nor can the agreement as a whole, despite the reference to "selling
commission", be classified as agency in either of its two ordinary
meanings: a
mandate coupled with authority to represent or a mandate without such authority.
GEFCO, in appointing the marketing agents
and in selling and exporting Wandrag's
asbestos in terms of the agreement, did not act on behalf of or in the name of
Wandrag as
principal and no contractual relationship between the latter and the
purchasers resulted. And the agreement encompassed more than
the duties a
mandatory would ordinarily be instructed and obliged to perform though elements
of a mandate
simpliciter
do feature in it.
In the result the agreement is to be regarded as a hybrid or innominate
one. Though sui
generis,
the purpose for which it was concluded admits of
no doubt. Wandrag was, as I have said, wholly dependent upon an export market
but
lacked the marketing and processing
18
facilities to survive in it. In terms of the agreement these difficulties
were overcome. The reciprocal benefit it held for GEFCO
was that a potential
competitor was removed from the export market at the price of taking over and
selling annually a limited quantity
of Wandrag's product.
Reverting to the first of the disputed issues, namely, whether Wandrag
was an "exporter" by virtue of conducting an "export trade",
it appears from
paragraph (a) of the latter definition that three forms of export trade are
recognised: a trade carried on by a person
in the course of which (i) goods are
exported; (ii) goods are produced or manufactured for export; (iii) orders for
goods are actively
solicited in any export country. The special court held
requirement (ii) to have been satisfied saying without furnishing reasons
that:
"It is clear that the asbestos mined and produced by the appellant [Wandrag] was
done for the purposes of export." The majority
judgment endorsed this view but,
as reflected in its order,
19
determined that the proceeds of the small quantity of Wandrag asbestos
sold locally could not be taken into account in calculating
marketing
expenditure. This conclusion points to a consideration not expressly dealt with
by the special court, namely, that it is
implicit in requirement (ii) that the
goods produced or manufactured are in fact those exported. Thus, for instance,
if the Wandrag
asbestos fibre was so processed and transformed by GEFCO that it
could no longer be identified or regarded as the product of Wandrag,
it could
not be said that the goods
actually exported
were produced or
manufactured by
Wandrag
for that purpose. (Similarly, if export trading
in terms of (i) above were to be relied upon, in the example postulated it would
be the goods of GEFCO, not Wandrag, that would be exported.) It was
Mr
Levin
's submission that such a transformation took place.
Details of the mining and processing of the asbestos
emerged
20
from the evidence of Howard, the mine manager during the relevant three
year period, and that of Hart, the executive chairman and
managing director of
GEFCO. After the rock containing the layers of compacted asbestos has been mined
and milled, the asbestos fibre
is extracted from the rock. Fiberisation next, so
to speak, "fluffs out" the fibre. The quality of the fibre depends upon its
length
and the extent to which fiberisation has increased the surface area of
the fibre. The bonding propensity of the asbestos fibre, and
hence its value,
depends upon these two factors. During fiberisation no chemical additives or
other substances are introduced. After
delivery of the Wandrag fibre to GEFCO,
further fiberisation takes place after which the Wandrag product is blended
(mixed) with
Gefco fibre to meet the specifications of the various customers.
Once mixed, the Wandrag component cannot be identified and, it follows,
cannot
be separated from the blend.
21
Whether goods produced for export can be said to be those actually
exported depends upon the facts of each case. The coalescence
(commixtio
)
of goods before exportation resulting in loss of identity is not the sole
determinant. Thus, should two producers of the same goods
combine their products
and their export and marketing operations, each would not be precluded by the
definition of export trade from
deducting his
pro rata
share of marketing
expenditure. On the other hand, should an article, which is in a sense produced
for export, become an integral
and subordinate component of the product actually
exported, it would be the producer or manufacturer of the end-product who would
qualify as the "exporter" carrying on the "export trade". In this case there was
no interaction between the Wandrag fibre and the
other components of the blend.
The fiberisation was a mechanical process that amounted to no more than a
sorting out of Gbre lengths
and a changing of their
22
configuration. The Wandrag fibre thus altered cannot be said to have been
intrinsically transformed. This conclusion accords with
the view taken by the
parties as reflected in their agreement. I again refer to its terms in which
there is reference to "the final
destination of any Wandrag fibre sold by GEFCO"
and to "the tonnages of fibre sold for the account of ... Wandrag."
Accordingly the first issue is to be decided in favour of
Wandrag.
The second question concerns the interpretation of the provisions of s
116bis(4)(f) and its application to the facts of this case.
Concisely posed, the
question is whether the payment in terms of paragraph 4(a) of the agreement was
"expenditure ... incurred directly
... in respect of commission or other
remuneration for [the procurement of] orders for goods exported."
23
In
Secretary for Inland Revenue v Consolidated Citrus
Estates
Ltd
1976(4) SA 500(A)
this court was called upon to consider the
requirement of
"directness" featuring in a similarly worded predecessor of
the present s 11bis(4)(f). In this regard Galgut JA, the author of
the
majority judgment, said at 519 D - F:
"[T]he section is concerned to aid the taxpayer who has incurrred market
development expenditure. If expenditure has not been incurred
by a taxpayer, he
will not normally be given the benefit of a deduction for such expenditure or
part thereof. It would thus seem
that 'directly' refers to and qualifies the act
of incurring the expenditure. Obviously the expenditure must have been incurred
by
the taxpayer, i.e. he must have incurred the liability or made the payment.
'Directly' appears to have been deliberately added in
order to serve some
purpose that the Legislature had in mind. That purpose, I think, was to
postulate that the connection between
the taxpayer's incurring the expenditure
and the object for which it was incurred (being one of those specified in paras.
(a) to
(f) in the sub-section) should be direct, i.e., straight, and close, not
devious and remote (cf. Concise Oxford English Dictionary
s.v.
'direct')."
(I shall return to this decision and refer to its facts in due
course.)
24
Thus in this case it is the connection between payment in terms of clause
4(a) and the procurement of the export orders that must
be direct. It is not
necessary that there should be a direct connection between the payment and the
orders themselves.
It cannot be gainsaid that this payment was, and was intended to be,
remuneration for GEFCO for such procurement through its (GEFCO's)
appointed
agents and perhaps employees. It was conceded that had Wandrag appointed and
paid its own foreign agents for this purpose,
the expenditure would have been
directly incurred by Wandrag whether or not they in turn appointed sub-agents
who actually secured
the orders. I can see no distinction in principle between
that situation and the present in which GEFCO was commissioned and paid
to
undertake this task and it in turn appointed agents who obtained the orders. It
is true that the agreement as a whole cannot be
classified as one of agency.
But, on the
25
assumption that the selling commission in clause 4(a) was the
quid pro
quo
for marketing Wandrag's asbestos and for nothing else, one
may validly
regard this term of the agreement as one of agency in the sense of
a
mandate given by Wandrag (the mandator) to GEFCO (the mandatory)
in
terms of which the latter undertook to perform the task of procuring
orders
for export for the former.
After the quoted passage from the judgment of Galgut JA,
the
judgment continues at 519 F - G:
"The reason [for the requirement that there should be a connection
between the expenditure and the object for which it was incurred]
was probably
to stimulate the personal efforts of the individual exporter to develop an
export market for his products; and therefore
to ensure that, for the
expenditure to qualify for the additional and special allowance, it had to be
incurred by the exporter himself
...."
The aim of encouraging exports would be unnecessarily, and
unduly,
restricted if too narrow a view is taken of this requirement and if
the
26
presence of an intermediary in the form of a mandatory is to be regarded
as a bar to claiming a deduction.
It is at this point that one must distinguish between two arguments
relied upon in support of the submission that the requirements
of s 11bis(4)(f)
have not been met. The first, now being considered, is that the payment under
clause 4(a) was not direct - irrespective
of whether the whole or only part of
such payment was for marketing the asbestos. The second argument, still to be
considered, is
that because only part of such payment was for that purpose and
such amount has not been quantified the claim for a deduction must
fail.
The special court relied on both arguments in deciding that the
expenditure was indirect. At this stage I restrict my comments on
the reasoning
in that judgment to that which pertains to the first argument. The learned judge
considered that this payment was indirect
because it was a
27
fixed percentage and did not represent the actual amount expended by
GEFCO in securing agents and obtaining orders and because Wandrag
did not know
how the expenditure by GEFCO in obtaining orders was made up. But these are
features which might well be present in
any appointment of a marketing agent to
carry out such a commission. The fact that Wandrag incurred no personal
liability under the
sales agreements concluded between GEFCO and the foreign
buyers was also relied upon: that Wandrag "did not, either in terms of the
agreement with GEFCO or in point of fact, incur any personal liability to third
parties for orders for goods exported to any export
country." It is true that
Wandrag incurred no personal liability since by agreement the asbestos was sold
in GEFCO's name and no
question of representation arose. But this does not
detract from the fact that GEFCO was paid by Wandrag to do the marketing of its
product. Finally, the special court was of the view that the
Consolidated
Citrus
28
Estates case
and a further decision, Income Tax Case No
1337 43
SATC 164
, supported its conclusion.
The circumstances giving rise to the dispute in the Consolidated Citrus
Estates decision are thus summarised in the headnote:
"Respondent, which conducted business as a citrus farmer, was in terms of
Proclamation R.121 of 1964, issued in terms of the Marketing
Act, 26 of 1937,
obliged to deliver its citrus fruit to the Citrus Board for export. Fruit so
delivered to the Board vested in the
Board in terms of section 20 of the
Marketing Act. In terms of the Proclamation the Board had to pay to the
exporter, i.e. the respondent,
the proceeds of the citrus fruit sold by it
through the Board less any expenses incurred by the Board in the disposal of the
fruit.
In its returns of income to the appellant for the years 1964, 1965 and
1966, respondent claimed as deductions from its income the
amounts deducted by
the Board for advertising, selling agents' commission, etc. from the proceeds of
the fruit delivered to the Board
by the respondent for export. Respondent
contended that these amounts were deductible as exporters' allowances in terms
of section
11 bis of the Income Tax Act, 58 of 1962, as amended. Appellant
disallowed these claims. In an appeal to the Special Court for the
hearing of
income tax appeals, the appellant's decision was overruled and the claims
allowed. In a further appeal by the appellant,
the
29
respondent contended that the expenditure for advertising, commission, etc.
was directly incurred by the respondent as the Citrus
Board was the agent of the
producer or acted as a 'conduit pipe' and that the expenditure had been
'directly incurred' within the
meaning of section 11 bis
(4)."
Though the facts do bear some resemblance to those
with which we are concerned, they differ in a critical respect. Because the
expenses
incurred by the Citrus Board were in the execution of its
statutory
duties
and not as a result of an
agreement
between the taxpayer and
the Board, the taxpayer was obliged to base its unsuccessful claim to a
deduction on "an estimate of its
pro rata
share of such expenditure"
(510A). That being so, as Galgut JA points out: "The Board incurred the
expenditure. It cannot be said
that the Company [taxpayer] or any producer was
in any way party to the expenditure or brought it upon itself or rendered itself
liable for the expenditure. The market development expenditure was, therefore,
not
30
incurred by the Company directly or at all." This important distinction
is
well illustrated by Mr Bloomberg, counsel for Wandrag, in
cautioning that
"care must be taken not to confuse the 'commission' paid by the
Board
(party B) in the
Consolidated Citrus Estates case
to the agents
(party C)
appointed by the Board, with the commission paid by WANDRAG
(party
A) in this case to GEFCO (party B)."
In Income Tax Case No 1337
(supra
) the Cape Special
Court
was concerned with a deduction claimed by the taxpayer in respect of
the
tax year ending 30 June 1975 and described by him as "contributions
to
sales promotion and marketing expenses." The relevant provisions of
s
11bis(4) applicable to this assessment read at the time as
follows:
"For the purposes of subsection (3) the marketing expenditure on which
the exporter's allowance is to be calculated shall be ... so
much of the
expenditure incurred by the exporter ... as is proved to the Secretary to have
been incurred directly -
(a)
31
(b) in advertising or otherwise securing publicity in an export country,
soliciting orders therein ..."
In January 1974 the taxpayer entered into an agreement with B,
an
international manufacturing and selling organisation, with its
headquarters
in country. The appendix to the agreement read as follows:
"B (C country) shall be entitled to and appellant shall pay the following
quantity discounts either in cash or by free delivery of
products:
1. On all X products exported on behalf of B
(C country)
(a)
(b) an additional discount of 12% to be a contribution to the Sales
Promotion and Marketing Expenses in the country of retail sales.
The discounts
are payable to B every six months." (See judgment page 167.)
In deciding that the objection could not be sustained and that the
appeal
should be dismissed the president of the special court (Friedman
J)
observed at 170 that:
"In the
Consolidated Citrus Estates
case (
supra)
Galgut JA
(who
32
delivered the majority judgment) in dealing with the purpose for which
the word 'directly' was used in s llbis(4) said, at 519:
'That purpose, I think, was to postulate that the
connection
between the taxpayers incurring the expenditure and the
object
for which it was incurred (being one of those specified
in
paras (a) to (f) in the sub-section) should be direct,
i.e.
straight, and close, not devious and remote (cf
Concise
Oxford
English Dictionary
s.v.
'direct').'
If B acted as appellant's agent or even as the
'conduit pipe' of
appellant in incurring expenditure for the
purpose envisaged in para
(b) of s 116M(4), such expenditure
would be regarded as direct and
would be deductible
. (See
the
Consolidated Citrus Estates
case
(supra
) at 520 E
- F.) However, on the facts of this case there is no
basis on which
B can be said to have acted as appellant's agent when
it incurred
sales promotion or marketing expenses; nor can it be said
to have
acted as a 'conduit pipe' for appellant in incurring
such
expenditure." (My emphasis.)
The "additional discount" the taxpayer was obliged to pay
in
that case arose from an agreement materially different from the one
with
which we are concerned. And the applicability of paragraph (b)
of
sllbis(4), no (f), was in issue. However, assuming that the
postulate I
have emphasised was intended to apply generally to s 116bis(4), in
the
33
absence of any indication that "agent" was intended to be restricted to
a
mandatory acting in a representative capacity, this statement is not
at
variance with the reasoning in this judgment.
It remains to consider the second argument relating to this
question. The acceptance of the proposition that the payment under
clause
4(a) of the agreement was for more than GEFCO's marketing
undertaking
was the
ratio decidendi
of the dissenting judgment. After
referring to letters
written prior to the signing of the agreement and to certain evidence
of
Walwyn, Leveson J said:
"The result is that while it is clear that a substantial portion of the
15 per cent paid by the appellant was commission within the
meaning of the
section the exact amount has not been quantified. For the purpose of making an
assessment the respondent has therefore
not been furnished with sufficient
information to determine what proportion of the 15 per cent was to be allocated
to commission
properly so called and what proportion to compensation to Gefco
for loss of a portion of its market. That being so, in my opinion,
the appeal
must fail."
34
The enquiry must start with the manner in which the parties expressed
themselves in clause 4(a) itself. In it the parties state explicitly
that the
payment of 15% is to be for "selling commission". Details of other charges and
costs are then set out in the paragraphs
that follow. There is no reason why
compensation for loss of portion of GEFCO's market or any other charge could not
have been in
like manner separately stated and a deduction included either as a
percentage of sales or in a fixed amount. The fact that other
considerations may
have influenced GEFCO in deciding on the rate of selling commission it was
prepared to agree upon is - one need
hardly add - not something to be taken into
account:
voluntas
in
animo nihil operatur
. At a later stage after
the signing of the agreement, the parties sought to renegotiate the rate of
selling commission. GEFCO wished
to increase the amount paid and this Wandrag
resisted. It was common cause, however, that the ensuing correspondence included
in
the
35
record, which it would seem reflects only part of these discussions,
takes
the matter no further in support of the proposition that the
payment was not
exclusively for marketing Wandrag's fibre. As Mr Levin correctly
observed
in the course of his cross-examination of Walwyn: "the one said what
suited
it and the other said what suited it". But counsel did rely on two
letters
written
before
the agreement by GENCOR, on behalf of GEFCO,
to
Wandrag. In the first, dated 15 August 1968, it was said that:
"The selling commission of fifteen per cent is to cover Gefco's own
agents' commissions and to compensate in a small way for loss
of profits due to
increased unit costs as a result of lower production as well as loss of profits
on reduced sales of its own production."
The second written some eight days later states that:
"The sales commission of 15% is the absolute minimum which we can accept.
It is pointed out that, at the very least, one third of
this is a direct selling
cost and with the additional marketing effort which will have to be made in
these circumstances the incremental
cost to ourselves will very likely exceed
this figure substantially."
36
It is somewhat strange that if both these grounds were being relied upon
as part of the
quid pro quo
for the payment, only one features in each
letter. That aside, the correctness of these assertions was not accepted by
Wandrag and
no evidence was tendered by the Commissioner to prove the truth of
the statements relied upon. There was no other evidence forthcoming
from a GEFCO
official to say that it viewed the payment in some other light. As to the
evidence of Walwyn, Leveson J attached particular
importance to an answer given
by him. This appears from the following extract from his judgment:
"The question was then put to Mr Walwyn:
'It was giving you a guaranteed share of the market, 20% of
the
market?' And the answer was:
'It was the price we had to pay.' It was argued that those words show
that the appellant had no alternative but to pay the commission
claimed in order
to export its product and therefore that the only meaning that can be given to
the word 'commission' as used in
the letter [of 15 August 1969] is as
37
remuneration for the work to be done. I do not agree. In my opinion Mr
Walwyn's evidence is at best ambiguous and equally conveys
that both
commission
and
compensation
(in the sense above set out) had to be
paid to secure entry into the export market."
The
context in which this answer was given during Walwyn's evidence-in-chief was the
following:
"Would you like to comment at all, Mr Walwyn, on that 15% commission? Is it
high or low in your view? — I think it was high,
but on the other hand we
did know that various commissions had to be paid to get entry into markets and -
put it this way - we did
not greet that with a sense of
shock.
Yes. It was giving you a guaranteed share of the
market, 20% of their market? — It was the price we had to pay.
To sell your ...? - Our fibre."
Thus read in context there appears to be little or no ambiguity in
this
evidence. In the absence of further enquiry by way of
cross-examination
it must be taken to refer to selling commission. In any event, it is to
be
considered in conjunction with the following evidence of Walwyn on
which
38
he was also not cross-examined:
"It was put to you, Mr Walwyn, that the 15% described in the agreement as a
'commission' and in the correspondence as an 'agency commission'
or a 'selling
commission'. As I understand it was ... The gist of the question was that this
was treated as a, really a discount.
They were buying from you, they were paying
you a price at a discount. Is that how you understand the basis of the
agreement? —
No.
Then what was this 15%? —
The word used was 'commission' and we always understood it as a
commission."
In my view the evidence satisfactorily proves that the designation of the
payment in paragraph 4(a) accurately reflects its true nature
and the intention
of the parties.
The second question must therefore also be decided in favour of
Wandrag.
In the result I conclude that Wandrag has proved its entitlement to the
deductions and it is therefore unnecessary to decide whether
the
39
subsidiary objection is well-founded.
The appeal is dismissed with costs, which are to include those consequent
upon the employment of two counsel.
ME KUMLEBEN
JUDGE OF APPEAL
BOTHA JA)
F H GROSSKOPF JA) - CONCUR
HOWIE JA)
CORBETT CJ
:
I have had the benefit of reading the judgment of my Brother Kumleben in
this matter. Unfortunately I am not able to concur in his
conclusion that the
respondent ("Wandrag") was entitled, in the years of assessment in question, to
the marketing allowance provided
for by sec 11 bis of the Income Tax Act 63 of
1962, as amended ("the Act"). Accordingly I would allow the appeal of appellant
("the
Commissioner") in respect of the 1984 and 1985 tax years. In regard to the
1983 tax year, however, I am of the view that the provisions
of sec 3(2) of the
Act now preclude a reopening of the assessment. My reasons for reaching the
conclusion that Wandrag was not entitled
to the marketing allowance are as
follows:
The basic facts of the matter and the terms of the agreement of January
1969 are set forth in my Brother's judgment and it is not
necessary for me to
repeat them. I wish merely to emphasize certain features of the facts and the
agreement and to place my interpretations
on them. Before I do so it is
necessary to give some attention to sec 11 bis of the Act.
3 The marketing allowance to which Wandrag lays claim
is
calculated according to a percentage of
the taxpayer's "marketíng
expenditure" (see sec 11 bis (3)).
Marketing expenditure is defïned
in sec 11 bis (4). The portion
of this subsection relevant for present
purposes provides that the
marketing expenditure on which the
marketing allowance is to be calculated shall be -
".... so much of the expenditure incurred by the exporter during the year of
assessment and allowed to be deducted from his income
under sections 11 and 17
as is proved to the satisfaction of the Commissioner to have been incurred
directly -
(f) in respect of
commission or other remuneration for orders for goods exported to any export
country. .
...."
In order to qualify for the allowance the taxpayer must, inter alia, be
an "exporter". Exporter is defined in sec 11 bis (1) -I quote
only the relevant
portion of the definition - as:
" any person who carries on an export trade of the nature referred to in
paragraph (a) of the definition of 'export trade' and who
is registered as an
exporter by the Director-General."
4 Paragraph (a) of the deGnition
of "export trade" reads:
" any trade carried on by any person in the course of which goods are
exported or are produced or manufactured for export or in the
course of which
orders for goods are actively solicited in any export
country."
Tuming to para (f) of sec 11 bis
(4), I would point out that the word "commission" is not a term of legal art.
The relevant meaning
in the Oxford English Dictionary reads -
"A remuneratíon for services or work done as agent, in the form of a
percentage on the amount involved in the transactions;
a pro rata remuneration
to an agent or factor."
In Drielsma v
Manifold
[1894] 3 Ch 100
, at 107, Davey LJ said:
"Commission is prima facie the payment made to an agent for agency work,
usually according to a scale - it may be an ad valorem scale,
but not
necessarily an ad valorem scale. It is in my opinion the most general word that
can be used to describe the remuneration
paid to an agent for an agency work
other than a salary. . . "
The words "other remuneration" clearly spread the net wider, but it
is
5 not necessary in this case to determine exactly how
wide.
The words "commission or other remuneration for
orders
for goods exported to any export country" are cryptic, but I think
that
their meaning is reasonably clear. What the Legislature had in
mind,
in my view, was expenditure incurred in the payment of, or an
obligation to pay, commission or other remuneration to a person
for
services rendered in obtaining orders for goods which in terms of
the
order are exported to any export country. The word "export" means
-
"to send out (commodities of any kind) from one country to another" (Oxford
English Dictionary),
and in this context
"exported" has a cognate meaning. "Export country" is defined in sec 11 bis (1)
to mean any country other than
the Republic and certain other Southem African
countries. The order which the person obtains thus causes, or is part of the
process
of, the export of the goods from South Africa to an export
country.
A simple, but typical, case satisfying the requirements of sec 11 bis
(4)(f) would be where A, an exporter, has paid Rl 000 to
6
agent B for obtaining an order in terms of which a quantity of A's goods
are sold to a purchaser in an export country. In such a case
it would be of no
moment where B carried on business, whether in this country or
elsewhere.
I revert to the facts and the agreement. The true categorization of the
agreement was a matter upon which opposing submissions were
made by counsel.
Appellant's counsel argued that the agreement was essentially a contract of
purchase and sale and that the provisions
of clause 4 were merely a mechanism
created for the ascertainment of the price. Counsel for Wandrag, on the other
hand, while submitting
that it was not necessary to "pigeon-hole" the agreement,
contended that, if it were, it was rather one of principal and agent or,
alternatively, a type of joint venture.
I think that there is much to be said for the view that the agreement is
a contract of purchase and sale. That is how the transaction
is specifically
described in the preamble and in clauses 1, 2, 3 and 4 of the agreement itself.
The essentials of a contract of sale
are agreement upon the merx, the price and
the obligation of the seller
7 to deliver the merx to the purchaser.
The seller does not undertake
to pass ownership in the merx, but delivery thereof in pursuance of
the
contract is, in the case of an unconditional credit sale, taken
to be
accompanied by an intention to pass ownership; and where the
seller
is the owner as having that effect (see generally Lendalease
Finance
(Pty) Ltd v Corporacion De Mercadeo Agricola and Others 1976
(4) SA 464 (A), at 489 G - 490 G; also Commissioner of Customs
and Excise v Randles, Brothers & Hudson, Ltd
1941 AD 369
, at
398; Concor Construction (Cape) (Pty) Ltd v Santambank 1993
(3) SA 930 (A), at 933 B-E).
In the present case there are strong indications
that
ownership in the raw asbestos was intended to pass, once it was
delivered to Gefco. It is clear from the evidence that after the
asbestos deïivered by Wandrag to Gefco had been fully processed (i
e
fïberised and blended) by the latter and bagged for export
it
completely lost its separate identity. It became merged with the
greater quantity of Gefco's own asbestos. What was exported by
Gefco was, according to Mr Walwyn, "a different product". Gefco,
8
moreover, had a completely free hand in the marketing of this
new
product. Mr Walwyn's own evidence was to the effect that the
asbestos sold by Wandrag to Gefco became the property of the latter.
It is true
that the agreement places certain obligations on the purchaser, Gefco, with
reference to the res vendita, but I do not
regard this feature as necessarily
being inimical to the concept of a purchase and sale. In this connection
reference may be made
to Seggfe v Philip Bros
1915 CPD 292
where defendants were
appointed "agents" to sell in South Africa tractors made by an English
manufacturer. It was held that despite
the use of the words "agents" in the
defendants' appointment the relationship between them and the manufacturer was
one of purchaser
and seller. The Court (Gardiner J) did not regard the fact that
the defendants agreed not to charge more than certain prices for
the tractors
when re-selling them as posing a difficulty. He said (at p 298) -
". . . . there is nothing inherent in the contract of sale to preclude a
vendor from making such a condition as to re-sale".
9 Admittedly the concluding words of clause 8 of
the
agreement speak of -
"... the annual tonnages of Gbre sold for the account of GEFCO and its
subsidiaries and WANDRAG by any of GEFCO's selling organizations,
agencies or
sub-agencies".
This refers to what the
auditors' certificate must conGrm in order to determine, I would suggest, the
total tonnage of fibre to be
purchased by Gefco from Wandrag in any particular
ycar, as provided in clause l(a) of the agreement. And here it is interesting to
note that in referring to the total annual sales of fïbre cïause I(a)
speaks of -
"... the total sales of Cape Blue Asbestos fibre. . . by GEFCO and its
subsidiaries, including all sales by subsidiary selling companies
and any sales
by their agents or sub-agents."
Here there is no reference to such sales being "for the account of"
Wandrag. In a loose sense the asbestos was being sold by Gefco
"for the account"
of Wandrag in that the more of its product that Gefco sold the more Wandrag's 20
per cent would amount to. But
I do not
10
think that it can be inferred from the use of these words that
the
parties intended Gefco to act as Wandrag's agent in the
marketing of the asbestos. To the extent that the words so suggest this, they
must be regarded as a lapsus linguae.
Nor do I think that much can be inferred from clause 6 of the agreement.
It must be conceded that normally such a provision would
be alien to a contract
of purchase and sale, but in this case, owing to the particular way in which the
annual sales to Gefco were
to be determined and the price calculated, it may
have been thought necessary to include a statement such as that contained in
clause
6, even if only ex abundanti cautela.
Certain other features of the agreement should be emphasized. Firstly, as
regards the selling commission of 15 per cent referred to
in clause 4(a), Mr
Walwyn stated in evidence that the best guidance as to what this represented was
to be obtained from "the original
letters", seemingly the letters of 15 August
1968 and 23 August 1968 referred to in my Brother's judgment. His evidence,
under cross-examination,
proceeded:
11
"Yes. But there was a percentage of that 15% which was a direct
disbursement by Gefco to its agents to sell the product overseas.
But that
percentage was never fixed, but it was a part of the 15%, not so?--
Correct.
And those were expenses - as I understand it - Mr Walwyn,
of Gefco. They were not the expenses directly, of Wandrag. Wandrag didn't
pay
those agents?-- Well, we didn't pay the person overseas. We paid Gefco by way of
reimbursement.
Yes. And it didn't know, and it had no control over the amount of the
expenses or commission that Gefco paid to its overseas agents,
did it? It was
entirely within the control of Gefco?-- Correct.
And it had no idea what the balance of the 15% was for, it may not have
been an expense at all. It may just have been an arbitrary
Ggure?-- Well, the
expressíon I used, it was the price we had to pay.
Yes, it was a price you had to pay and it was what Gefco was getting for
buying your production, bïending it and selling the
final product overseas.
That was going to be its profit on the transaction. It was going to buy raw
materials from Wandrag; it was
going to expend money in mixing that product, in
fiberising the product, in packing it, sending it overseas. The príce
that
it paid Wandrag would be based on the final sales price of the end product,
less its expenses. And whatever its going to get, would
be the difference
between its expenses, including the commission and that 15%?--
Correct."
12 This evidence, read with the passages from the two
above-mentioned
letters quoted in my Brother's judgment and with the provisions
of
clauses l(a), 6 and 8 of the agreement, indicates:
(a) That some, at least, of the asbestos exported by Gefco was sold through
the medium of agents appointed by Gefco. There was, in
fact, a dearth of
evidence as to how Gefco marketed the asbestos fibre exported by it and to the
extent that such evidence is important
in deciding the issues in this case such
dearth must redound to the detriment of Wandrag upon whom the onus lay.
(b) That Wandrag had nothing to do with the agents employed by Gefco, and
more particularly did not pay them.
(c) That the 15 per cent commission provided for by the agreement bore no
direct relationship to the expenditure incurred by Gefco
in employing overseas
agents to market the asbestos fibre. The indications are that a substantial, but
inderterminate, portion of
the 15 per cent had nothing to do with the
remuneration paid by
13 Gefco to its agents.
I agree with Kumleben JA
that the agreement as a whoïe cannot be classified as one of agency in
either of its two forms. I incline
to the view that if the contract has to be
pigeon-holed it fulfils the requirements of a contract of purchase and sale, but
I am
prepared to accept, in Wandrag's favour, that it is a contract sui generis.
(Cf Raad van Toesig op die Suiwelnywerheid v Ladysmith
Towerkop
Koöperatiewe Kaasfabriek Bpk
1971 (3) SA 511
(C), at 518 H to 519 H and the
authorities there cited.) I shall also assume, in favour of Wandrag, that in the
tax years in question
it was to be classified as an "exporter" of asbestos
fibre.
Where Wandrag's case falls down, in my opinion, is in its failure to
establish that Wandrag incurred expenditure "
directly
in respect of
commission or other remuneration for orders for goods exported to any export
country". Even if the so-called "commission"
paid to Gefco may be regarded as
constituting, say "other remuneration", I do not think that the requirement of
directness is satisfied
in thís case.
14 The meaning of "directly" in this context was
considered
by this Court in the case of
Secretary fór Inland Revenue v
Consolidated Citrus Estates
Ltd
1976 (4) SA 500
(A). Here the
taxpayer, a company carrying on
business as a citrus farmer, was
obliged (together with other citrus producers), in terms of a
proclamation issued under the Marketing Act 26 of 1937, to deliver
its
citrus fruit to the Citrus Board for export. Fruit so delivered to
the
Board became the property of the Board, which marketed it
overseas
by the creation of export "pools". ïn so disposing of the fruit
the
Board, acting through an organization called the South African
Co-
operative Citrus Exchange, incurred expenditure in respect of
advertising and commissions paid to agents overseas. The
producers
(including the taxpayer) who delivered fruit to the Board for
export
received their pro rata shares of the net proceeds, i e the proceeds
of
the sale of the fruit overseas less the marketing expenditure,
including
that incurred in regard to advertising and the payment of
commission.
The taxpayer claimed allowances in the tax years then under
review
in terms of sec 11 bis (4) of the Act in respect of the
amounts
15 deducted by the Board, in respect of advertising and
commission, from
the proceeds of the fruit delivered by the taxpayer to the Board
for
export.
The wording of sec 11 bis (4) was slightly different
when
the Consolidated Citrus case was decided, but in my view nothing
turns on this. When the matter came before this Court, a
difference
of opinion arose as to the meaning of the word "directly" in sec 11
bis
(4). In this regard Galgut JA (Wessels, Trollip and Rabie JJA
concurring and Rumpf CJ dissenting) held as follows (at 519 E -
G):
"'Directly' appears to have been deliberately added in order to serve some
purpose that the Legislature had in mind. That purpose,
I think, was to
postulate that the connection between the taxpayer's incurring the expenditure
and the object for which it was incurred
(being one of those specified in paras.
(a) to (f) in the sub-section) should be direct, i.e., straight, and close, not
devious and
remote (cf. Concise Oxford English Dictionary s.v. 'direct'). The
reason was probably to stimulate the personal efforts of the individual
exporter
to develop an export market for his products; and therefore to ensure that, for
the expenditure to qualify for the additional
and special allowance, it had to
be incurred by
16
the exporter himself and also had to be easily identiHable and thus readily
provable to the Secretary's satisfaction as being clearly
expenditure for one or
other of the speciHed objects."
In applying
this meaning of the word to the facts of the case Galgut JA stated at 520 B-H
(the taxpayer being referred to as "the
Company"):
"It becomes necessary to decide whether, on the facts of this case, the
expenditure was incurred directly by the Company. It was argued
that if the
Board was the agent of the producer or acted as a 'conduit pipe', the
expenditure was incurred by the producer. That
expenditure, by an agent, in the
ordinary sense of that word, could constitute expenditure by the principal, goes
without saying.
Thus, if a producer employs an agent, for his export trade, who
does the research, advertising, etc, or causes it to be done on his
behalf and
he (the producer) in consequence incurs the liability or makes the payment
therefor, the expenditure is nevertheless directlv
incurred by the producer; the
connection between the expenditure and its object is then still direct, i.e.,
straight and close and
not devious or remote. This can be illustrated by using
sec. 17. It provides that any expenditure incurred by a taxpayer in connection
with the appointment of an agent for the sale outside the
Republic
17
is deductible from his income. According to sec 11 bis (4) if any such
expenditure was 'incurred directly' for research, advertising,
etc, it would
also qualify for the exporters' allowance. That indicates that, even though the
taxpayer incurred the expenditure through
an agent, it can still be regarded in
the appropriate circumstances as having been directly incurred by the taxpayer.
The same could
apply if the Board, for the purposes of incurring the
expenditure, was merely, as it were, the tool and so the 'conduit pipe' of
the
producer. In the light of the background sketched above, it is difficult to see
how for the advertising or in respect of the
commission, the Board was the agent
of the producer or the tool of, or 'conduit pipe' for the producer. In creating
the pool or pools,
in conducting the advertising each year, in employing the
salesmen, it was carrying out an activity which it was enjoined to do by
the
Marketing Act and the scheme. It was carrying out an activity of its own. It
incurred and paid the liability for the advertising
and commissions itself. The
producer could not at any stage before, during or after the pool activities had
commenced, have vetoed
any act of the Board. In all these circumstances it seems
somewhat doubtful whether the Company can be said to have incurred any
expendimre itself for the advertising or commissions; but assuming, without
deciding, that it did, the connection between such expenditure
supposedly
incurred by it and the services arranged by the Board for the advertising and
commissions was not direct, close and clearly
18
identifiable; on the contrary it was devious and remote. Viewed in this
light the expenditure was not directly incurred by the Company.
It follows that
I am of the view that the Company was not entitled to the benefit of the
exporters' allowance."
The ratio in the
Consolidated Citrus case was applied by the Special Court in the case of Income
Tax Case No
1337,43 SATC
164.
In that case the taxpayer, a company
which manufactured and sold goods in the Republic, entered into an agreement
with company
A, a South African corporation having an association
with company
B, an international manufacturing and selling
organization with its
headquarters in a foreign country. In terms of
this agreement the
taxpayer undertook to manufacture goods under the
B franchise for
sale in the Republic. Some years later the taxpayer
concluded a
further agreement with company B whereunder it undertook
to
manufacture a certain product in excess of company A's
requirements
and it was agreed that the excess production be
purchased by B and
exported. The taxpayer was supplied with delivery
schedules to
customers overseas. Payment for products exported under
the
19 agreement was to be effected by drawings against letters of
credit
established by company B. On all products so exported the
taxpayer
was obliged to pay to company B, inter alia, a discount of
12 per
cent, every six months, as -
". . . . contribution to the Sales Promotion and Marketing Expenses in the
country of retail sales".
In the
implementation of this agreement company B paid the taxpayer's accounts for the
supply of the goods exported and the taxpayer,
in turn, every six months paid to
company B 12 per cent on the value of these sales. The issue in the case was
whether the taxpayer
was entitled to claim these 12 per cent payments as
marketing expenditure in terms of sec 11 bis (4)(b), i e expenditure incurred
directly -
"in advertising or otherwise securing publicity in an export country,
soliciting orders therein or participating in trade fairs in
export
countries."
The Special Court held that this expenditure in question did not qualify
under sec 11 bis (4)(b). In delivering the judgment of
20 the Court,
the President (Friedman J) pointed out that the evidence in
that case showed that the taxpayer did not incur any personal
liability
to third parties in respect of the sales promotion or
marketing activities
undertaken by company B; that the taxpayer did not know how such
expenditure was made up, nor did he have any control over
company
B's activities in this connection. Such expenditure was entirely
B's
concern. Having referred to the Consolidated Citrus case (supra)
and the dictum of Galgut JA at 519 E included in the passage
quoted
above, Friedman J continued (at 170) -
"If B acted as appellant's agent or even as the 'conduit pipe' of
appellant in incurring expenditure for the purpose envisaged in
para (b) of s 11
bis (4), such expenditure would be regarded as direct and would be deductible.
(See the Consolidated Citrus Estates
case (supra) at 520 E - F.) However, on the
facts of this case there is no basis on which B can be said to have acted as
appellant's
agent when it incurred sales promotion or marketing expenses; nor
can it be said to have acted as a 'conduit pipe' for appellant
in incurring such
expenditure. The plain fact is that B was completely at large to determine how
expenditure was to be incurred,
both on sales promotion and marketing. The
agreement did not
21
envisage that appellant would have any control over these activities of
B, nor did appellant in practice exercise any such controí.
The facts of the Consolidated Citrus Estates case
differ from
those of the present case maínly in that the relationship between the
Citrus Board on the one hand and the citrus
producers on the other was regulated
by statute, whereas in the present case the relationship between the parties is
govemed by the
agreement between them. The expenditure in the instant case is,
however, to my mind no more direct than that in the Consolidated
Citrus Estates
case. ïn fact, in one respect the expenditure is less direct in the instant
case. In the Consolidated Citrus
Estates case the amount which the producer
ultimately received for his goods was a nett amount determined inter alia by
reference
to the aggregate amount expended by the Citrus Board on advertising
and on commissions. In the present case the price which appellant
receives for
its product is fixed in the agreement and is in no way dependent on the amount
actually expended by B in selling those
products. Appellant receives the same
amount irrespective of the expenditure incurred by B on sales and marketing, and
B receives
the same Gxed contribution in terms of clause l(b) of the appendix to
the agreement, irrespective of the actual amount expended by
it. The fact that B
paid the purchase price of the products in full and that appellant, in tum, paid
B the 12 per cent to which it
was entitled every six months does not, in my
view, advance
22 appellant's case."
This seems to me,
with respect, to be a correct application of the ratio in the Consolidated
Citrus Estates case
As I have said before, there is a dearth of evidence in this case as to
how Gefco marketed the asbestos 6bre which it exported. Nevertheless,
from the
provisions of the agreement (see particularly clauses l(a) and 8 thereof) and
the evidence of Mr Walwyn (see particularly
the passage therefrom quoted above)
it would seem that at least a substantial part of the exported Gbre was sold
through the medium
of agents appointed by Gefco. In employing such agents and in
concluding such sales Gefco cannot be regarded as having acted as Wandrag's
agent or conduit pipe. As has already been emphasized, Wandrag had no knowledge
of who Gefco's agents were; had no direct dealings
with them; was not even
entitled to know who they were; and had no say whatever in what they were paid.
Gefco handled all this on
its own and on its own authority.
Furthermore, as appears from the evidence (and here
again
23 I would draw particular attention to the passage from the evidence
of
Mr Walwyn quoted above) there was no correlation between
the
disbursements incurred by Gefco in remunerating agents employed
by
it and the 15 per cent "commission" paid by Wandrag in terms
of
clause 4(a) of the agreement. The indications are that a
substantial,
but indeterminate, portion of this 15 per cent had
nothing to do with
Gefco's disbursements; and it was entitled to its
15 per cent
irrespective of the quantum of such disbursements. As Mr
Walwyn
put it -
". . . . it was the price we had to pay".
It is possible that some of the asbestos fibre marketed overseas by Gefco
was sold by it without the intervention of an agent. I doubt
whether in such a
case the necessary directness between Gefco's efforts in this regard and the 15
per cent payments can be said to
have existed, but in any event it is impossible
to quantify the expenditure incurred in this connection and the point cannot
assist
Wandrag, upon whom the onus lay.
24 For these reasons I am of the view that, even if
Wandrag's
15 per cent payments can be regarded as expenditure in respect
of
commission or other remuneration, it was not direct expenditure
in the
sense of being -
". . . . straight and close, not devious and
remote".
Indeed if this is not a case of
indirectness
. I have difficulty in visualizing one. Accordingly I am of
the view that the Special Court arrived at the correct conclusion in regard
to
the 1984 and 1985 years of assessment.
In regard to the 1983 tax year, I am of the view that, as held by the
Special Court and by Leveson J in the Court below, the Commissioner
was
precluded by sec 3(2) of the Act from re-opening the relevant assessment when he
did. Since this is a minority judgment I do
not propose to enlarge on my reasons
for reaching this conclusion.
I would allow the appeal with costs, including the costs of two counsel,
and alter the order of the Court a quo to read:
25
"Appeal and cross-appeal dismissed with costs, including in each
case
the costs of two counsel".
M M CORBETT