Brief Summary

Income Tax — Exemption from tax — Section 10(1)(zA) of the Income Tax Act — Manufacturer claiming exemption for amounts received under an export promotion scheme — Commissioner for the South African Revenue Service disallowing claim — Applicant's appeal to the Transvaal Income Tax Special Court dismissed — Application for leave to appeal to the Supreme Court of Appeal filed late — Condonation sought for non-compliance with statutory time limits — Court holding that the legislature intended to allow for condonation and that the High Court has the inherent jurisdiction to govern its own procedures — Appeal dismissed on grounds of lack of merit regarding the exemption claim.

Comprehensive Summary

Summary of Judgment

Introduction

The proceedings were an application for condonation and an application for leave to appeal heard in the Supreme Court of Appeal. The matter reached the court after the applicant sought to challenge a refusal of tax exemption in respect of benefits obtained under an export-related incentive scheme in the motor industry.

The appellant/applicant was Toyota South Africa Motors (Pty) Ltd, a manufacturer, distributor, and exporter of motor vehicles. The respondent was the Commissioner for the South African Revenue Service.

The procedural history began with Toyota’s claim, for the 1991 and 1992 tax years, that certain amounts (treated by Toyota as export-related benefits) were exempt from income tax under section 10(1)(zA) of the Income Tax Act 58 of 1962. The Commissioner rejected the claim and disallowed Toyota’s objection. Toyota then appealed to the Transvaal Income Tax Special Court, where it was unsuccessful on the exemption issue. Toyota sought leave to appeal directly to the Supreme Court of Appeal in terms of section 86A(5) of the Income Tax Act, but this was refused by the President of the Special Court. Toyota was then entitled to appeal as of right to the High Court, but it failed to note that appeal within the statutory time-limit, necessitating a condonation application.

The High Court (Full Bench, Transvaal Provincial Division) dismissed the condonation application with costs, holding that it was unnecessary to decide condonation because the proposed appeal lacked merit on the exemption issue. The High Court later refused leave to appeal to the Supreme Court of Appeal. Toyota then brought the present application for leave to appeal to the Supreme Court of Appeal, which was itself eight days late, resulting in a further request for condonation.

The general subject-matter of the dispute concerned whether amounts treated as rebates or incentives under an export promotion scheme were exempt from income tax because they were allegedly “paid by the State” under section 10(1)(zA).

Material Facts

Toyota manufactured motor vehicles in a customs and excise warehouse, producing vehicles for both home consumption (local sale) and export. During the relevant tax years, Toyota received the benefit of amounts arising from Phase VI of the local content programme administered through the Department of Trade and Industry, which operated as a scheme intended to reduce foreign currency usage and encourage exports.

In its tax returns for 1991 and 1992, Toyota described the relevant benefit as a “subsidy” and split it into a larger component associated with import replacement (foreign exchange savings) and a smaller component associated with exports (foreign exchange earnings). Toyota sought exemption only for the smaller component amounts, being approximately R26 million (1991) and R50 million (1992).

The Commissioner initially issued assessments that treated the overall benefit as part of gross income but allowed the two smaller export-related amounts as exempt under section 10(1)(zA). The Commissioner later issued additional assessments that subjected those previously exempted amounts to tax, which triggered the dispute leading to the Special Court appeal.

Certain facts were common cause in the Supreme Court of Appeal. It was not disputed that Phase VI was a “scheme” of the kind contemplated in section 10(1)(zA). It was also common cause that the amounts now in issue did not involve money actually paid out by the State to Toyota.

The statutory context of the benefit was treated as decisive. The evidence accepted by the Special Court (including reports of the Board of Trade and Industry) showed that the Phase VI benefit was implemented through amendments to the Customs and Excise Act 91 of 1964, specifically by structuring rebates of excise duty through Part 2 of Schedule 1 (excise duty rates) and Schedule 6 (rebates), including item 603.01 (rebate on exported excisable goods) and item 609.17 (rebate on locally manufactured new motor vehicles calculated by reference to “local content value” and net foreign currency usage). The court treated it as established that the rebates relied upon by Toyota were rebates under the Customs and Excise Act, not refunds.

A further agreed fact before the Special Court, emphasised in the judgment, was that the rebates in issue were not refunds of excise duty but were “a mechanism for the administration of Phase VI.”

On the procedural side, Toyota’s appeal to the High Court against the Special Court’s decision had to be noted within 21 business days under section 86A(12) of the Income Tax Act, which (on the facts) expired on 28 August 1996. Toyota only lodged a notice of appeal in the High Court on 14 January 2000, more than three years late. Toyota’s explanation relied primarily on an alleged arrangement to hold the matter in abeyance pending the outcome of Nissan SA (Pty) Ltd v Commissioner for Inland Revenue, followed by subsequent industry discussions and a failed request to SARS to agree to an extension. The record contained no explanation for the omission to lodge the notice of appeal between April 1999 and February 2000, a gap conceded by Toyota’s counsel.

Legal Issues

The central substantive question was whether the amounts Toyota sought to exempt fell within section 10(1)(zA) of the Income Tax Act, specifically whether they were amounts “paid by the State” under an approved export promotion scheme (or, following authority, under a scheme of the relevant kind) so as to qualify for exemption from income tax.

That substantive question required the court to determine the proper legal characterisation of the Phase VI benefit as implemented through the Customs and Excise framework, and whether its operation could amount, in law, to “payment” by the State. The dispute therefore principally concerned law (interpretation and application of statutory concepts such as “rebate,” “payment,” and “set-off”), together with the application of law to largely common-cause operational facts about how excise duty and rebates functioned.

A procedural question also arose as to whether the High Court had the power to condone non-compliance with the statutory appeal time-limit in section 86A(12) of the Income Tax Act. That issue was a question of statutory interpretation and the scope of the High Court’s inherent jurisdiction over its own procedures.

A further procedural-discretionary issue concerned whether Toyota had shown good cause for condonation given the prolonged delay. However, the Supreme Court of Appeal treated the decisive enquiry as whether the intended appeal had reasonable prospects of success, and concluded that it did not.

Court’s Reasoning

The Supreme Court of Appeal first addressed whether it was open to the High Court to grant condonation for Toyota’s failure to comply with the statutory time-limit in section 86A(12). The court held that classifying the provision as “peremptory” or “directory” was not practically helpful; the correct enquiry was what the legislature intended. The text of section 86A(12) contemplated that the notice of appeal had to be lodged within 21 business days “or within such longer period as may be allowed under the rules of the appeal court.” The court reasoned that the phrase “may be allowed” covered not only a longer period expressly provided by rules, but also an extension granted by the courts on good cause shown.

The court considered it significant that the legislature contemplated the possibility of a longer period under court rules, and that rule-based periods may themselves be extended or non-observance condoned. This supported the conclusion that non-compliance with the 21-day statutory period was not intended automatically to be fatal, and that appellate courts should have the final say on whether an appeal may proceed. The fact that the Uniform Rules did not provide a specific period for appeals from the Special Court to the High Court was treated as an oversight that could not negate the legislative intention.

In addition, the court relied on the High Court’s inherent jurisdiction to regulate its own procedures, including access by litigants exercising rights of appeal. It accepted authority that this inherent jurisdiction can extend to condonation of non-compliance not only with a rule-based time-limit but also with a statutory time-limit. On these bases, the Supreme Court of Appeal held that the High Court did have the power to condone non-compliance with section 86A(12).

Turning to whether good cause had been shown, the court noted the delay exceeded three years and emphasised that an applicant for condonation must provide a full and satisfactory explanation for delays. It observed that Toyota left important factual matters to inference despite having the relevant information, and that the respondent challenged the major factual allegations and the sufficiency of the explanations. Nonetheless, the Supreme Court of Appeal found it unnecessary to decide the good-cause question because it considered the crucial determinant to be whether the proposed appeal had reasonable prospects of success.

On the substantive tax issue, the court focused on the statutory phrase “paid by the State” in section 10(1)(zA) and the common-cause fact that there was no actual cash payment by the State. Toyota’s argument depended on the contention that “payment” occurred by set-off.

Toyota’s primary submission was that the amounts were rebates of excise duty, that excise duty was a debt Toyota owed the State under the Customs and Excise Act, and that the rebate created a reciprocal debt owed by the State to Toyota under Phase VI. When the rebate reduced Toyota’s excise duty liability, Toyota contended, set-off occurred; because set-off is legally equivalent to payment, the amounts were said to have been “paid by the State.”

The court examined the operation of excise duty and rebates under the Customs and Excise Act. It noted that excise duty on locally manufactured vehicles becomes payable when goods are entered for home consumption, subject to section 75, which provides for specific rebates of duty. The court distinguished rebates from refunds and drawbacks: rebates are, in the ordinary sense used by the Act, a discount or reduction of duty rather than a repayment by the revenue authority. The evidence showed that the Phase VI benefit was implemented through amendments to the duty and rebate structures in the Act’s schedules, and that the rebates Toyota enjoyed were rebates under the Act.

The court reasoned that set-off could not occur because set-off requires two reciprocally owed debts that are due and payable. On the court’s analysis, when the rebate operated it did so as part of the determination of the duty payable upon entry for home consumption: the rebate was applied to the duty such that Toyota’s liability to pay duty arose only in the reduced amount after the rebate had taken effect. The court therefore held that there was not, at the relevant time, a debt owed by the State to Toyota that could be set off against a debt owed by Toyota to the State. In this way, the court endorsed the High Court’s point that Toyota’s indebtedness arose only after the rebate had already reduced the duty.

The court added an evaluative interpretive consideration: the rebate was a privilege that reduced duty otherwise payable by manufacturers. Provisions conferring such privileges should be strictly construed, and the concept of “rebate” in section 75 ordinarily does not imply any obligation on the Commissioner to pay money to the taxpayer. Interpreting the rebate as creating an indebtedness on the State to make a payment would extend the privilege beyond clear language.

Toyota’s alternative argument, advanced for the first time in reply, was that excise duty was in reality paid by the purchaser and that manufacturers collected it as a service to the State, retaining the amounts in issue as a form of State payment or commission under a separate arrangement. The court rejected this argument on multiple grounds reflected in the judgment. It was not part of Toyota’s case in earlier proceedings and was not investigated or proved; there was no evidence linking such an arrangement to Phase VI; and even assuming in Toyota’s favour that such payments could be “by the State,” the court found it difficult to see how they could be “under an export promotion scheme” as section 10(1)(zA) requires.

Having rejected both routes by which Toyota sought to show “payment by the State,” the court concluded that the amounts in issue were not “paid by the State” within the meaning of section 10(1)(zA). Consequently, the proposed appeal to the High Court had no prospects of success, and for the same reasons Toyota’s applications before the Supreme Court of Appeal lacked prospects.

Outcome and Relief

The Supreme Court of Appeal held that the High Court had the power to condone Toyota’s non-compliance with the statutory time-limit in section 86A(12) of the Income Tax Act, but concluded that it was unnecessary to decide whether Toyota had shown good cause because the intended appeal had no reasonable prospects of success on the merits.

The court dismissed both the application for condonation and the application for leave to appeal.

The court ordered Toyota to pay the respondent’s costs, including the costs of two counsel.

Cases Cited

Weenen Transitional Local Council v SJ Van Dyk, Supreme Court of Appeal Case 399/2000 (judgment delivered 14 March 2002)

Phillips v Direkteur van Statistiek 1959 (3) SA 370 (A)

Beira v Raphaely-Weiner and Others [1997] ZASCA 59; 1997 (4) SA 332 (SCA)

Nissan SA (Pty) Ltd v Commissioner for Inland Revenue [1998] ZASCA 59; 1998 (4) SA 860 (SCA)

BP Southern Africa Pty Ltd v Secretary for Customs and Excise 1984 (3) SA 367 (C)

Ernst v Commissioner for Inland Revenue 1954 (1) SA 318 (A)

Legislation Cited

Supreme Court Act 59 of 1959, section 21(3)(c)(ii)

Income Tax Act 58 of 1962, section 10(1)(zA)

Income Tax Act 58 of 1962, section 11bis(1)

Income Tax Act 58 of 1962, section 86A(5)

Income Tax Act 58 of 1962, section 86A(10)

Income Tax Act 58 of 1962, section 86A(12)

Customs and Excise Act 91 of 1964, section 2(1)

Customs and Excise Act 91 of 1964, section 37(1)

Customs and Excise Act 91 of 1964, section 44(2)

Customs and Excise Act 91 of 1964, section 44(8)

Customs and Excise Act 91 of 1964, section 48(2)

Customs and Excise Act 91 of 1964, section 75(1)(d)

Customs and Excise Act 91 of 1964, section 75(15)

Customs and Excise Act 91 of 1964, section 76

Customs and Excise Act 91 of 1964, section 77

Customs and Excise Act 91 of 1964, section 114

Customs and Excise Act 91 of 1964, Part 2 of Schedule 1

Customs and Excise Act 91 of 1964, Schedule 6 (including items 603.01 and 609.17)

Rules of Court Cited

Uniform Rules of Court (referenced in relation to the absence of a prescribed appeal period for appeals from the Income Tax Special Court to the High Court)

Held

The court held that the High Court had the power to condone non-compliance with the statutory time-limit in section 86A(12) of the Income Tax Act, both on a purposive interpretation of the section and by virtue of the High Court’s inherent jurisdiction to regulate its own procedures.

The court held further that the substantive tax exemption claim had no reasonable prospects of success because the Phase VI benefits relied upon were rebates of excise duty operating as reductions of duty liability under the Customs and Excise Act, and were not amounts “paid by the State” as required by section 10(1)(zA) of the Income Tax Act. The requirements for set-off were not met because there were no reciprocal debts due and payable; the rebate reduced duty before the taxpayer’s debt arose in the reduced amount.

The court dismissed the applications for condonation and leave to appeal with costs, including the costs of two counsel.

LEGAL PRINCIPLES

A statutory time-limit for noting an appeal should be interpreted by determining the legislative intention rather than by rigid classification as peremptory or directory, and where the statute contemplates that a longer period “may be allowed” under court rules, that language may encompass the possibility of court-granted extensions or condonation on good cause shown.

The High Court’s inherent jurisdiction to regulate its own procedures may extend to condoning non-compliance with a statutory time-limit, not only a time-limit contained in the rules of court.

An applicant for condonation must provide a full and satisfactory explanation for the delay; inadequate explanation may justify refusal of condonation. The court may treat the absence of reasonable prospects of success on the merits as decisive when considering condonation and leave to appeal.

For purposes of section 10(1)(zA) of the Income Tax Act, the phrase “paid by the State” requires that the amount be paid in a manner recognised as payment in law; a mere reduction or discount of a liability does not necessarily constitute payment.

Set-off requires reciprocal debts that are due and payable; where a statutory rebate operates as a discount applied in the determination of the payable duty such that the taxpayer’s debt arises only in the reduced amount, set-off does not occur.

A statutory provision conferring a privilege (such as a rebate reducing duty) is subject to strict construction, and should not be interpreted to create obligations (such as a State indebtedness to pay money) absent clear language.

Toyota South Africa Motors (Pty) Ltd v Commissioner for the South African Revenue Service (495/2000) [2002] ZASCA 27 (28 March 2002)