Brief Summary

Customs duty — Refund of customs duty — Whether engineering, styling and tooling charges constitute dutiable price — Respondent, a motor vehicle manufacturer, sought a refund of customs duty, arguing that certain charges included in the invoiced price of imported kits were non-dutiable royalties. The High Court ruled in favor of the respondent, declaring that the charges were not part of the value for customs duty purposes. The appellant appealed, challenging the classification of the charges. The Supreme Court of Appeal upheld the High Court's decision, finding that the charges were correctly identified as royalties and thus not dutiable under the Customs and Excise Act.

Comprehensive Summary

Summary of Judgment

1. Introduction

This matter concerned an appeal to the Supreme Court of Appeal arising from a dispute about the customs duty valuation of imported motor vehicle parts. The central question was whether certain amounts described as charges for engineering, styling and tooling (referred to as “EST charges”) formed part of the price actually paid or payable for imported goods (and thus part of their customs value), or whether they were instead royalties or similar charges that were not dutiable on the facts and under the statutory scheme.

The appellant was The Commissioner for the South African Revenue Service. The respondent was Delta Motor Corporation (Proprietary) Limited, a manufacturer and distributor of motor vehicles in South Africa that imported “completely knocked down” (CKD) kits from Adam Opel Aktiengesellschaft, Germany (“Opel”).

The respondent sought a refund of customs duty after being advised that the invoiced amount historically used for duty calculations included an EST component that was allegedly not dutiable. The Commissioner refused the refund. The respondent then approached the High Court at Pretoria, where Botha J granted a declaratory order holding that the EST charges were not part of the value of the kits for customs duty purposes. With leave to appeal, the Commissioner appealed to the Supreme Court of Appeal.

The dispute therefore concerned the proper classification and treatment (for customs duty valuation) of payments made in the context of a broader commercial relationship that included not only supply of goods but also licensing rights for assembly, distribution, and use of intellectual property and technical know-how.

2. Material Facts

The respondent had, since 1987, imported CKD kits from Opel on an ongoing basis. For years it paid customs duty calculated on the invoiced amount per kit. Around 1997, the respondent was advised that the invoiced amount had included not only the purchase price of the kit but also an unspecified charge by Opel for engineering, styling and tooling (EST). The respondent then requested a refund on the basis that the EST portion was a non-dutiable royalty rather than part of the price of the imported kits.

The Commissioner’s opposition was influenced by features that, in his view, raised doubts about the respondent’s version. In particular, the EST charges were never separately invoiced, the kit invoices did not specify that such charges were included or what their amounts were, and for many years the written agreements governing the relationship did not expressly refer to EST charges. A written amendment was signed only in 1998, purportedly recording the existence, nature, and purpose of the EST charges.

Despite the scepticism expressed in the opposing affidavits, the Supreme Court of Appeal considered it unnecessary to undertake a detailed credibility analysis. The Court held that the Commissioner ultimately lacked evidence to counter the respondent’s factual assertions, and that the respondent’s allegations were further supported in reply by additional evidence. The Court placed significance on the Commissioner’s election not to seek an oral hearing to enable cross-examination, notwithstanding that SARS officials had visited the respondent’s premises and had access to records, including contemporary documentation referring to EST charges. The Court considered that, at most, SARS’s deponents went no further than stating that records justified an “impression” that the charges formed part of the purchase price; on the papers, the existence and nature of the charges, and their payment from the outset, were not treated as genuinely controverted.

On the facts accepted by the Court, the contractual relationship between the respondent and Opel was governed by three agreements (materially unchanged since 1987, save for the 1998 amendment). The first was an assembly and distribution (A and D) agreement, which licensed the respondent to procure or effect local manufacture of parts, use those parts (with or without imported kits) to assemble complete vehicles, sell and service the vehicles, sell spare parts and accessories (including those imported separately), and use Opel’s technical information and technology for these activities. Under this agreement, a royalty was payable for the right to conduct these activities, and that royalty was to be determined “by reference to” paragraph 4(c) of the supply agreement.

The second agreement was a trademark licence agreement, granting the respondent and its dealers the use of Opel trademarks in the marketing of vehicles and spares.

The third agreement was a supply agreement, governing the purchase of CKD kits and separately imported parts and accessories. Paragraph 4(c) provided that if no kits were imported, a royalty would nevertheless be payable in respect of each vehicle sold; the royalty was for the licence to conduct the activities referred to in the A and D agreement and was set at “not less than 3% of the price of a CKD set representing the total vehicle”. Read together, the arrangements meant that royalty liability was triggered by the sale of each assembled Opel vehicle, rather than by the importation of kits as such.

The respondent’s case was that the royalty concept had always existed in the contractual scheme, but that the EST charges were not positively identifiable as the subject-matter of the royalty provisions until the 1998 amendment. That amendment described the EST charge as consisting of an engineering and styling portion and a tooling portion. It recorded that the engineering and styling portion represented the royalty payable under the A and D agreement (and, where applicable, under paragraph 4(c) of the supply agreement). The tooling portion was described as covering rebilling of part of Opel’s component tooling investment for a defined range of vehicles. The amendment also recorded that both portions were payable whether or not the respondent ordered kits, provided assembled Opel vehicles were sold.

Further accepted facts included that a CKD kit did not contain all parts necessary to assemble a complete vehicle, and that in most cases a majority of components were locally manufactured. Opel recovered expenses for design, construction, development, and tooling of a new vehicle line through a worldwide royalty in the form of the EST charge, levied and paid by the respondent since 1987. The EST charge was relatively constant and not related to the cost, weight, number, or value of components in a kit. It was payable in respect of each assembled vehicle actually sold, and payable even if the assembled vehicle contained no components from an imported kit. As a matter of practical convenience, because it was anticipated that each kit would be used in a sold vehicle, the EST charge had been included in the invoiced amount pertaining to imported kits. If an assembled vehicle was not sold, Opel would be obliged to refund EST included in such invoicing, because it would have been paid without being due.

The EST charge was not payable for components imported separately from the kits, nor for the right to sell such components. The record did not suggest that the royalty under the A and D agreement had not been paid or that it was accounted for independently of the EST charges; there was no basis on the papers to treat the royalty as distinct from, and additional to, the EST charge.

3. Legal Issues

The principal legal questions were:

Whether, under the Customs and Excise Act 91 of 1964, the EST charges formed part of the “price actually paid or payable” for the imported CKD kits and thus part of the transaction value for customs duty purposes.

If the EST charges were not part of the price, whether they were nonetheless dutiable additions to transaction value as “royalties and licence fees” under section 67(1)(c), namely royalties or licence fees in respect of the imported goods that were due as a condition of sale for export to the Republic.

The dispute primarily concerned the application of law to facts within a statutory valuation framework. While there was an initial factual contest in the affidavits about the character of the payments and the reliability of the respondent’s account, the Supreme Court of Appeal approached the matter on the basis that the relevant facts stood substantially established on the papers as presented by the respondent, given the Commissioner’s lack of countervailing evidence and the decision not to pursue cross-examination.

4. Court’s Reasoning

The Court began by addressing the factual posture in which the matter had to be decided. Although the Commissioner had challenged the respondent’s version and pointed to the absence of separate invoicing and the late contractual amendment, the Court held that the Commissioner ultimately had no evidence to counter the respondent’s account. The Court emphasised that an oral hearing and cross-examination could have been sought, especially after SARS officials had examined relevant records, but this was not pursued. In that setting, the Court accepted the High Court’s conclusion that the matter had to be determined on the respondent’s evidence.

Turning to the statutory framework, the Court identified the relevant provisions of the Customs and Excise Act 91 of 1964, including section 41(4)(a) and sections 65, 66 and 67. In broad terms, those provisions establish that the customs value is the transaction value, being the price actually paid or payable for the goods, with certain additions where applicable, including certain royalties or licence fees.

The Court considered section 41(4)(a), which requires an exporter to declare in a prescribed invoice particulars relating to the transaction value or royalty and information bearing upon transaction value, with the particulars generally relating to the final amount of the transaction value or royalty. The Court reasoned that because Opel’s invoices did not separate kit prices from EST charges, the Commissioner had been entitled, prior to the refund request, to assess duty on the invoiced amounts. However, the Court held that section 41(4)(a) did not prevent the respondent from later establishing what the correct position was, and thus did not preclude a refund claim if the invoiced amount overstated the dutiable value.

The Court then analysed whether the EST charges formed part of the price actually paid or payable. It noted the definition in section 65(9): the price actually paid or payable is the total payment made or to be made, directly or indirectly, by the buyer to or for the benefit of the seller for the goods, but it excludes payments passing from the buyer to the seller that do not directly relate to the goods.

In applying that definition, the Court accepted that it might be commercially logical for a manufacturer to recover design and development costs through the selling price of its goods. However, the Court held that the facts here contained an “additional feature”: Opel granted the respondent licensed rights under the A and D agreement to assemble, sell, and service vehicles and to use Opel’s technology, even if the respondent used few Opel components or none at all, and even if it sourced parts elsewhere. On those facts, the Court treated it as commercially realistic and common practice that a manufacturer be paid a royalty over and above the price of the goods for such rights.

Crucially, the Court reasoned that under paragraph 4(c) of the supply agreement, the royalty was stipulated to be in addition to, and therefore not part of, the kit price. The Court concluded that the engineering and styling components of the EST charge (identified as the royalty) were therefore clearly excluded from the kit price. It further held that although the tooling component was not expressly described as a royalty, it was equally separate from the kit price in the way it functioned: it was payable per vehicle sold and was payable regardless of whether kits were ordered.

On the accepted facts, the Court concluded that the EST charges did not directly relate to the kits, and therefore were not part of the price actually paid or payable for the imported goods.

The Court then addressed the alternative basis on which the Commissioner sought to treat the EST charges as dutiable: section 67(1)(c), which includes in transaction value certain “royalties and licence fees in respect of the imported goods” that are due by the buyer, directly or indirectly, as a condition of sale of the goods for export to the Republic, to the extent they are not included in the price actually paid or payable. The Court emphasised that for section 67(1)(c) to apply, all constituent elements of the provision must be present; if any element is absent, the provision does not operate.

The Commissioner relied on a first-instance judgment in Samcor Manufacturing (Pty) Ltd v The Commissioner for the South African Revenue Service (unreported, Transvaal Provincial Division, case 22655/98), but the Court held that the case was distinguishable. It noted that the appeal in that matter was ultimately reported as Samcor Manufacturing (Pty) Ltd v Commissioner, South African Revenue Service 2002 (4) SA 823 (SCA), and that the point relied upon by the Commissioner was not decided on appeal. The distinguishing feature identified by the Court was that in Samcor the contractual provisions required payment of a royalty “for each set of [imported] CKD parts”, whereas in the present matter the payment was required “in respect of each vehicle sold”. The Court therefore treated Samcor as providing no assistance on the facts of this case.

Applying section 67(1)(c) to the present agreements, the Court held that the sale of kits was regulated by the supply agreement, and that nothing in that agreement made the disputed charges payable as a condition of sale of the kits. The engineering and styling charges were payable as a royalty under the A and D agreement, not under the supply agreement. The tooling charges, even if assumed to be royalties or licence fees, were likewise not payable under the supply agreement. On the contrary, insofar as the supply agreement related to such charges, it contemplated that they would be payable even if no kits were sold, provided that assembled vehicles were sold. The Court therefore concluded that the EST charges were not payable as a condition of sale of the imported goods.

The Court also held that the EST charges were paid “in respect of” assembled vehicles sold and not “in respect of” the imported kits. Because these elements of section 67(1)(c) were absent, the Court concluded that section 67(1)(c) was inapplicable, and that the EST charges were not dutiable.

5. Outcome and Relief

The Supreme Court of Appeal dismissed the appeal. The effect was that the declaratory order granted by the High Court (that the EST charges were not part of the customs value of the kits for duty purposes) stood.

The Court ordered the appellant to pay the respondent’s costs, including the costs of two counsel.

Cases Cited

Samcor Manufacturing (Pty) Ltd v The Commissioner for the South African Revenue Service (Transvaal Provincial Division) case 22655/98 (unreported).

Samcor Manufacturing (Pty) Ltd v Commissioner, South African Revenue Service 2002 (4) SA 823 (SCA).

Legislation Cited

Customs and Excise Act 91 of 1964, sections 41(4)(a), 65, 65(9), 66, 67(1)(c).

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The Court held that, on the facts established on the papers, the EST charges levied by Opel were not part of the price actually paid or payable for the imported CKD kits because they did not directly relate to the imported goods and were instead paid for licensed rights associated with the assembly and sale of vehicles and related activities.

The Court further held that the EST charges were not dutiable under section 67(1)(c) because they were not shown to be royalties or licence fees in respect of the imported goods that were payable as a condition of sale of the goods for export to South Africa. The payments were instead payable in respect of assembled vehicles sold, and were payable even where no kits were imported, which was inconsistent with being a condition of the sale of the kits.

LEGAL PRINCIPLES

The customs value of imported goods under the Customs and Excise Act 91 of 1964 is the transaction value, being the price actually paid or payable for the goods, as statutorily defined, and excluding payments that do not directly relate to the goods.

A customs authority may, where invoices do not separate price components, assess duty on the invoiced amount, but the importer is not precluded from subsequently establishing the correct position and seeking appropriate relief if the invoiced amount includes non-dutiable components.

Royalties and licence fees are added to transaction value under section 67(1)(c) only where all statutory elements are satisfied, including that the royalty or fee is in respect of the imported goods and is payable as a condition of sale of those goods for export to the Republic, and to the extent not already included in the price actually paid or payable.

Contractual and factual indicators that a payment is payable by reference to vehicles sold (and even where no goods are imported) may support the conclusion that the payment is not “in respect of” the imported goods and not payable as a condition of their sale, rendering section 67(1)(c) inapplicable on the established facts.

Commissioner For The South African Revenue Service v Delta Motor Corporation (Pty) Ltd. (279/2001) [2002] ZASCA 114 (23 September 2002)