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[2018] ZASCA 101
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Commissioner for the South African Revenue Service v South African Breweries (Pty) Ltd (442/2017) [2018] ZASCA 101; 81 SATC 44 (27 June 2018)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Not reportable
Case No: 442/2017
In
the matter between:
THE COMMISSIONER FOR
THE
SOUTH AFRICAN REVENUE
SERVICE
APPELLANT
and
THE
SOUTH AFRICAN BREWERIES (PTY)
LTD
RESPONDENT
Neutral
citation:
The
Commissioner for the South African Revenue Service v The South
African Breweries (Pty) Ltd
(442/2017)
[2018] ZASCA 101
(27 June 2018)
Coram:
Ponnan,
Wallis and Dambuza JJA and Davis and Rogers AJJA
Heard:
7
May 2018
Delivered:
27
June 2018
Summary:
Revenue
– Section 47 of the Customs and Excise Act 91 of 1964 –
Classification of products for determination of excise
duty rate –
General Rules of Interpretation restated – classification of
goods primarily on explanatory notes incorrect
– appeal
dismissed.
ORDER
On
appeal from:
Gauteng
Division, Pretoria (Hughes J).
1
Save as set out in para 2,
the
appeal is dismissed with costs such costs to include the costs of two
counsel.
2
Paragraph 3 of the order of the high court is set aside and
substituted by the following:
‘
The
said tariff determinations are replaced with tariff determinations in
terms of Tariff Heading 2206.00.90 in Part 1 Schedule
1 to the Act
and the Tariff Item 104.17.90 in Part 2A of Schedule 1 to the Act,
from the date of the respondent’s determination’.
JUDGMENT
Dambuza
JA (Ponnan and Wallis JJA and Davis and Rogers AJJA concurring)
[1]
This appeal concerns the correct classification of certain products
for purposes of excise duty payable under the Customs and
Excise Act
91 of 1964 (the Act). The products, known as ‘flavoured
alcoholic beverages or FABs’, are manufactured by
the
respondent, the South African Breweries (Pty) Ltd (SAB), a
manufacturer and distributor of alcoholic beverages.
[2]
On 30 October 2013 the appellant, the Commissioner for the South
African Revenue Service (the Commissioner), in the course of
discharging his duties as the administrator of the Act, made a
written determination in terms of s 47(9
)(a)(i)
[1]
of the Act for purposes of assessment of excise duty payable in
respect of the FAB’s. In the determination, which was effective
from 30 October 2011, the FAB’s were classified under tariff
heading TH2208.90.22 and were therefore taxable under tariff
item
104.23.26 in Part 2A of Schedule 1 to the Act. An appeal by SAB, in
terms of s 47(9)(e) of the Act, against the determination,
was upheld
by the Gauteng Division of the High Court, Pretoria (Hughes J) (the
high court). In effect the high court found that,
as had been
contended by SAB, the FAB’s were classifiable under
TH2206.00.85. That court then issued the following order:
‘
1
The
appeal is upheld with costs such costs to include the employment of
three counsel, two being senior counsel;
2 The respondent’s
tariff determinations of 30 October 2013, in terms of which the
products referred to hereunder, were determined
to fall within Tariff
Heading 2208.90.22 in Part 1 of Schedule 1 to the Customs and Excise
Act 91 of 1964 (the Act) and also under
Tariff Item 104.23.26 of Part
2A of Schedule 1 to the Act is set aside:
2.1 Brutal Fruit Mango
2.2 Brutal Fruit Litchi
2.3 Brutal Fruit
Strawberry
2.4 Brutal Fruit Peach
2.5 Brutal Fruit Lemon
2.6 Sarita Dry
2.7 Sarita Ruby Dry
2.8 Redds Original
2.9 Redds Dry
2.10 Blake & Doyle
Premium and
2.11 Skelter’s
Straight
3. That the said tariff
determinations be replaced with tariff determinations in terms of
Tariff Heading 2206.00.85 in Part 1 of
Schedule 1 to the Act and the
Tariff Item 104.17.22 in Part 2A of Schedule 1 to the Act, from date
of determination until 27 February
2013 and from there under
TH22.06.90.
4 The products Blake &
Doyle Premium and Skelter’s Straight are not subject to the
tariff determination of 30 October
2013
5 The
respondent is ordered to pay the qualifying fees of the expert
witnesses William John Simpson and the costs of Reading Scientific
Services Ltd Laboratory, Qualtech (IFBM) Laboratory, AromaLAB AG
Laboratory, Cara Technology Laboratory, Lorraine Geel and Christina
Stephanie Leighton inclusive of expert’s fees of the experts
employed by the applicant locally and abroad.’
[3]
The Commissioner appeals against the judgment of the high court,
leave having been granted by that court. Having found that
the FABs
fell to be classified under TH2206.00.85 the high court granted leave
to the Commissioner to appeal to this Court because
of what it
considered to be a conflict between the judgments of Miller AJA and
Trollip JA in
Secretary
for Customs and Excise v Thomas Barlow and Sons Ltd
.
[2]
[4]
From 2001 the FABs had been the subject of various determinations by
the Commissioner. By September 2006 all of them were classified
under
TH2206.00.90, tariff item 104.17.22. On 30 October 2013 that
classification was revised to TH2208.90.22 and therefore taxable
under TH104.23.26. It is this last determination that is contested.
SAB insists that the FABs should be classified under TH2206.
The
legal framework
[5]
The applicable legal framework is the following: Section 47(1) of the
Act regulates, amongst other things, the levying of various
taxes,
including customs and excise duty, on all imported and excisable
goods, in accordance with the provisions of schedule 1
thereto.
[3]
That schedule is divided into four parts corresponding to the four
categories of goods mentioned in the charging provision. Part
1
imposes customs duty. Part 2 imposes, amongst others, specific and
ad
valorem
excise
duties. The FABs under consideration in this appeal are not imported
and therefore do not attract customs duty. However,
under s 37(1) of
the Act excise duty is payable in respect thereof. Their
classification in Part 1 of Schedule 1 is relevant, as
the tariff
items appearing in Part 2A of that Schedule (which stipulates excise
payment rates for goods manufactured locally) refer
back to the
tariff headings and classification in Part 1.
[4]
[6]
Part 1 of Schedule 1 is divided into 21 sections and 97 chapters.
This is intended to provide a comprehensive system of classification
for all possible categories of goods and goods within each category.
Classification of goods within the chapters is determined
by ‘the
objective characteristics and properties of the goods’.
[5]
Within the chapters, classification of goods is further refined
according to specified headings (the Tariff Headings (TH)) and
sub-headings. As happened in this case, at times the Commissioner and
taxpayers are not in agreement as to the applicable tariff
heading in
respect of specific goods. Section 47(8)
(a)
regulates
the relevant interpretative regime as follows:
‘
47 Payment of
duty and rate of duty applicable
(8)
(a)
The
interpretation of─
(i)
any tariff heading or tariff subheading in Part 1 of Schedule 1;
(ii)
(aa)
any tariff item or fuel levy item or item specified in
Part 2, 5 or 6 of the said Schedule; and
(bb)
any item specified in
Schedule 2, 3, 4, 5 or 6;
(iii)
the general rules for the interpretation of Schedule No 1; and
(iv)
every section note and chapter note in Part 1 of Schedule 1,
shall be subject to the
International Convention on the Harmonized Commodity Description and
Coding System done in Brussels on 14
June 1983 and to the Explanatory
Notes to the Harmonised System issued by the Customs Co-operation
Council, Brussels (now known
as the World Customs Organisation) from
time to time: Provided that where the application of any part of such
Notes or any addendum
thereto or any explanation thereof is optional
the application of such part, addendum or explanation shall be in the
discretion
of the Commissioner.’
[7]
Classification of goods between the headings in Part 1 of Schedule 1
is determined according to the prescripts of the general
interpretative rules applicable to the whole of Part 1. Goods are
classified according to the terms of the headings and the relevant
section and chapter notes. The tariff headings within the chapters
mirror the nomenclature of the Harmonized System established
by an
international convention to which South Africa is a signatory. The
operation of the Harmonized System falls under the purview
of the
World Customs Organisation
.
In that system each heading is identified by a four digit code, of
which the first two represent the chapter number and the last
two the
position of the heading in the chapter. The Harmonized System also
prescribes general rules to ensure uniform interpretation.
These
rules establish step by step classification principles and are
applied in hierarchical fashion.
[8]
The Harmonized System plays a secondary role in the process of
interpretation. The basic principles of statutory interpretation
are
to be invoked as a primary tool for determining the meaning
applicable in the identification of taxable dutiable FABs. The
starting point is that the language of the Schedule must be
considered in context and given a sensible meaning.
[6]
The following useful approach articulated by Trollip JA in
Thomas
Barlow
was affirmed by this court in
Distell
Ltd and Another v Commissioner of South African Revenue Service
as follows:
‘
In
Secretary
for Customs and Excise v Thomas Barlow and Sons Ltd
Trollip
JA referred to Rule 1 of the Inerpretative Rules which states that
the titles of sections, chapters and sub-chapters are
provided for
ease of reference only and that, for legal purpose, classification as
between headings shall be determined according
to the terms of the
headings and any relative section or chapter notes and (unless such
headings or notes otherwise indicate) according
to paragraphs 2 to 5
of the Interpretative Rules. He pointed out that this rendered the
relevant headings and section and chapter
notes not only the first
but also the paramount consideration in determining which
classification should apply in any particular
case. The Explanatory
Notes, he said, merely explain or perhaps supplement the
headings and section and chapter notes and
do not override or
contradict them’.
[9]
In
International
Business Machines SA (Pty) Ltd v Commissioner for Customs and
Excise
[7]
this Court identified the following three stages in the
classification process:
‘
first,
interpretation – the ascertainment of the meaning of the words
used in the headings (and relative section and chapter
notes) which
may be relevant to the classification of the goods concerned; second,
consideration of the nature and characteristics
of those goods; and
third, the selection of the heading which is most appropriate to such
goods’.
[10]
It is not in dispute that the FABs in question in this case are
classifiable under Chapter 22 in Part 1 of Schedule 1. That
chapter
bears the heading ‘Beverages, spirits and vinegar’. A
chapter explanatory note clarifies that the goods in
that chapter
fall into four main groups: water and non-alcoholic beverages and
tea, fermented alcoholic beverages (beer, wine,
cider, etc);
distilled alcoholic liquids and beverages (liquors, spirits, etc) and
ethyl alcohol, and vinegar and substitutes for
vinegar.
[11]
Within Chapter 22, FABs are classified under tariff headings TH22.03
to TH22.06 and in TH22.08. Tariff heading TH22.03 bears
the heading
‘Beer made from malt’, TH22.04 relates to ‘wine of
fresh grapes, including fortified wines, grape
must other than that
of heading TH22.09’, and TH22.05 relates to ‘Vermouth and
other wine of fresh grapes flavoured
with plants and aromatic
substances’. As already stated the dispute in this appeal is
whether the SAB FABs are classifiable
within TH22.06 or TH22.08.
[12]
In relevant part the headings read as follows until 27 February 2013.
TH22.06:
‘
Other fermented
beverages (for example, cider, perry, mead, sake); mixtures of
fermented beverages and mixtures of fermented beverages
and
non-alcoholic beverages, not elsewhere specified or included
.
2206.00.05 - Sparkling
fruit or mead beverages; mixtures of sparkling fermented beverages
derived from the
fermentation of fruit or honey ; mixtures of sparkling fermented
fruit or mead beverages and non-alcoholic beverages
2206.00.15 - …
2206.00.85 - Other,
mixtures of fermented beverages and mixtures of fermented beverages
and non-alcoholic beverages, unfortified,
with an alcoholic strength
not exceeding 9 per cent by volume.
2206.00.90 - Other’
With effect from 27
February 2013 item 2206.00.85 was amended to read: ‘Other
mixtures of fermented fruit beverages or mead
beverages and
non-alcoholic beverages, unfortified, with an alcoholic strength of
at least 2,5 per cent by volume but not exceeding
15 per cent by
volume’.
[13]
Tariff heading TH22.08 reads:
‘
Undenatured
ethyl alcohol of an alcoholic strength by volume of less than 80%
vol; spirits, liqueurs and other spirituous beverages:
2208.20 -
Spirits obtained by distilling grape wine or grape marc
2208.30 -
Whiskies
2208.40 - Rum
and other spirits obtained by distilling fermented sugar-cane
products obtained by distilling fermented
sugar cane products
2208.50 - Gin
and Geneva
2208.60 -
Vodka
2208.70 -
Liqueurs and cordials
2208.90 -
Other’.
[14]
The definitions of ‘fermentation’ and ‘distillation’
processes as set out in SAB’s founding affidavit
are not in
dispute. Therein ‘fermentation’ is described as ‘the
transformation of carbohydrates, particularly
sugars, into other
compounds by microorganisms (without involvement of oxygen). An
example of fermentation is the formation of
ethanol and carbon
dioxide by yeast, together with lesser amounts of glycerol and other
by-products of fermentation as a result
of their degradation of
sugars. Alcoholic fermentation is usually effected by yeast belonging
to the genus Saccharomyces’.
[15]
Distillation is the ‘process by which the components of a
liquid mixture are separated from one another on the basis
of a
difference in their boiling point. This is achieved by heating the
mixture to selectively vaporise the components, followed
by
re-condensing the resulting vapours. In production of distilled
spirits, it is the primary method of separating ethanol from
the
aqueous solutions of alcohol derived from fermentation of sugars by
yeast’. So in the production of alcoholic beverages,
distillation is a further process – after fermentation –
in order to achieve a higher alcohol concentration.
The
opposing contentions
[16]
In classifying the FAB’s under TH22.08, the Commissioner relied
on explanatory note 14 in that heading which provides
for the
inclusion of ‘alcoholic lemonade’ thereunder. The expert
evidence established that the FABs would qualify as
‘alcoholic
lemonade’ as that term is understood in the trade. It was
argued that because alcoholic lemonade (which
is mentioned in
TH22.08) can be produced by either fermentation or distillation, the
absence of distillation in the production
of the FABs could not be
the basis for exclusion from TH22.08. Further, for the FABs to
qualify for classification under TH2206.00.85
(as contended for by
SAB) each of the components (alcoholic and non-alcoholic) had to be
beverages in their own right. In this
case the FABs were not a
mixture of two main components; they were merely flavoured alcohol
produced by adding ingredients (eg
flavourants, colourants,
sweeteners) to the base alcohol. Instead of a true non-alcoholic
component as contemplated in TH22.02,
the non-alcoholic components
were only a preparation as contemplated in TH21.06 (read with
explanatory note 7 in the relevant sub-heading).
For these
submissions the Commissioner relied on General Rule of Interpretation
1 (GRI 1), alternatively GRI 4.
[17]
SAB on the other hand contended that the FABs were fermented
alcoholic beverages which could only be properly classified under
TH22.06 (with the corresponding tariff item 104.77). That tariff
heading provides for all fermented beverages other than those
not
resorting under TH22.03, TH22.04 and TH 22.05. The argument was that
the FABs were mixtures of a fermented beverage and a non-alcoholic
beverage and should thus be classified under TH2206.00.85 until 27
February 2013 and under TH2206.00.90 thereafter, and had not
been
specified or included elsewhere (in the chapter). They contained no
distilled alcohol and could not be classified under TH22.08.
(The
reason for SAB’s acceptance of the change in classification as
from 27 February 2013 is that, with effect from that
date,
classification under TH2206.00.85 required the fermented beverage to
be the product of fermented fruit whereas the FABs are
made from
fermented maize.)
[18]
In support of this argument SAB referred to the uncontested evidence
concerning the the production process of the FABs. (1)
The first
stage, which is outsourced to Tongaat Hulett due to economic and
efficacy considerations, entails the production of dextrose
syrup
from maize. Maize is soaked and heated to allow starch, protein and
oil portions to be separated. The starch portion, now
a wet ‘slurry’,
is heated to ‘gelatinise’ it, and then treated with
enzymes derived from microorganisms.
The sugars are concentrated by
evaporation and thereafter delivered to SAB’s breweries as
unfermented dextrose syrup. (2)
The next production stage takes place
at the SAB breweries’ ‘Brewhouse’ and ‘Cellars’
areas at Chamdor,
Newlands and Prospecton. There the dextrose syrup
is diluted with water. The sugars released at this stage are
fermented by yeast
to produce ethanol, carbon dioxide, glycerol and
flavour compounds. The carbon dioxiode formed during fermentation is
retained,
resulting in a mildly carbonated alcoholic base. The
alcoholic base is produced at ‘high gravity’ (either
12.3% or
7.6% alcohol by volume (ABV). (3) The third phase involves
the addition of various non-alcoholic components by an in-line
process
in which the components are added to the alcohol base in a
particular sequence as the liquid flows through the pipeline. These
additions include water (to standardise the base at 7% alcohol
content), carbon dioxide (to supplement the carbonation from the
fermentation process), flavourants, stabilisers, acidity regulators,
colourants and so forth. Some of these additives are in liquid
form,
so that the end-product has an alcohol content ranging from 4.5% to
5.5% depending on the particular FAB.
[19]
At no stage is there distillation. Hence glycerol, which is not found
in distilled FABs, remains present in the fermented alcohol
base.
Further, unlike distilled products in which almost all flavour is
stripped from the base component (save those associated
with
ethanol), SAB’s fermented beverage base has a ‘huge’
variety of flavour compounds and these contribute significantly
to
the flavours of the final FABs. Although there is a factual dispute
on the papers as to whether and to what extent the alcohol
base and
the FABs retain any flavour peculiar to maize (as distinct from other
plant sources of sugar), it is common cause that
they have flavour
characteristics distinctly attributable to the fermentation by yeast
of the dextrose syrup. The evidence is further
that the alcohol base
and the FABs are markedly different from solutions of distilled
spirit of equivalent alcohol strength.
[20]
It followed therefore, contended SAB, that, by their nature, the
beverage mixtures fell within TH22.06 (more particularly sub-heading
2206.00.85) as mixtures of ‘fermented alcoholic beverages and
non-alcoholic beverages’. And, by virtue of GRI 1 , they
should
be classified under that tariff heading.
Correct
classification
[21]
In para 52 of
Distell
this Court held that:
‘
In the specific
context of TH22.06, the second half of the heading is directed at
combinations of fermented beverages and non-alcoholic
beverages which
together result in a product which possesses a commercial or trade
potential (as with all products in the tariff
schedules)’.
[22]
In this case it is significant that the Commissioner does not contend
that the FABs are spirituous beverages. Nor is the ‘fermented
character’ of the FAB in dispute. The Commissioner’s
argument rests not only on impermissibly subverting the heading
to
explanatory note 14 but also on misconstruing evidence. On the
record, the evidence in this regard was that FABs can be produced
in
different ways; they can be made either from a non-distilled
fermented base or from distilled spirit. Only where a FAB is made
from distilled spirits can it be contemplated or included in TH22.08
as provided under explanatory note 14. Put differently, although
‘alcoholic lemonade’ in trade parlance may be capable of
including FABs made from either fermented alcohol or distilled
alcohol, in the context of TH22.08 an ‘alcoholic lemonade’
is a flavoured beverage conforming with the properties of
beverages
covered by TH22.08, ie made from distilled spirit or from ethanol
which has otherwise lost the characteristics of fermented
alcohol
(this could occur by stripping processes not involving distillation).
[23]
As stated above this court held in
Distell
that the headings are the first and paramount consideration in
determining classification between headings. Where, as in this case,
the distinctive feature (fermented beverage) of an FAB is clearly
provided for in the tariff, it is impermissible to ignore the
appropriate heading. While in this case the FABs may be capable of
being classified under two headings, that would only serve to
make
Rule 3(a) of application and that rule would direct us to TH22.06. So
whether classification is under GRI 1, on the footing
that the FABs
do not resort under TH22.08, or under Rule 3(a) on the basis that
they may possibly fall under both 22.06 and 22.08,
the outcome is the
same.
[8]
[24]
General Rule of Interpretation 4, on which the Commissioner also
relies, finds no application in this case. That Rule provides
that:
‘
Goods which cannot
be classified in accordance with the above Rules shall be classified
under the heading appropriate to the goods
to which they are most
akin’.
It
is clear that this Rule becomes relevant only when application of the
preceding Rules (1, 2, and 3) does not yield any classification
results. That is not the case here. The Commissioner has not alleged
or shown that the goods cannot be classified by application
of
the preceding Rules.
[25]
The main basis on which the Commissioner seeks to classify the FABs
under TH22.08 (that is, the inclusion, under this heading,
of
‘alcoholic lemonade’) creates a false conflict between
heading TH22.08 and note 14 thereto. In
Thomas
Barlow
,
Miller AJA and Trollip JA
[9]
postulated instances of direct and irreconcilable conflict between an
Explanatory Note and the terms of a relevant heading. But,
it must be
stressed that even in
Thomas
Barlow
the
conflict was hypothetical. In the end, the following principles
enunciated by Trollip JA in that case have prevailed for almost
five
decades:
[10]
‘…
[T]he
primary task in classifying particular goods is to ascertain the
meaning of the relevant headings and section and chapter
notes, but,
in performing that task, one should also use the Brussels Notes for
guidance especially in difficult and doubtful cases.
But in using
them one must bear in mind that they are merely intended to explain
or perhaps supplement those headings and notes
and not to override or
contradict them. They are manifestly not designed for the latter
purpose, for they are not worded with the
linguistic precision
usually characteristic of statutory precepts; on the contrary they
consist mainly of discursive comment and
illustrations. And, in any
event, it is hardly likely that the Brussels Council intended that
its Explanatory Notes should override
or contradict its own
Nomenclature. Consequently, I think that in using the Brussels Notes
one must construe them so as to conform
with and not to override or
contradict the plain meaning of the headings and notes. If an
irreconcilable conflict between the two
should arise, which in my
view is not the case here, then possibly the meaning of the headings
and notes should prevail, because,
although sec 47)(8)
(a)
of the Act says that the
interpretation of the Schedule shall be subject to’ the
Brussels Notes, the latter themselves say
in effect that the headings
and notes are paramount, that is, they must prevail’.
[26]
The Commissioner’s further complaint that TH22.06 does not
contemplate alcohol produced only by fermentation of sugar
must also
fail. To recap, an example was made that a cider is expressly
included in TH22.06 because it is ‘an alcoholic beverage
obtained by fermenting the juice of apples’, and not by
fermenting sugar extracted from apples or apple juice. The argument
was that on a correct interpretation of TH22.06,
only
a cider produced by fermenting apple juice resorts under TH22.06. On
SAB’s argument, both sugar-based and juice-based fermented
beverages would be classifiable under TH22.06. Such interpretation
cannot be countenanced, so it was submitted. Further, so the
argument
went, the FABs contemplated in the second part to TH22.06 are those
with unique organoleptic characteristics deriving
from both
components (ie from the fruit or vegetable and from the fermentation
of the plant’s sugar), whereas the FABs in
question, or some of
them, only result in fake ciders (with no unique organoleptic sense).
[27]
However, it seems to me that what is of relevance in heading TH22.06
are the properties of the end-product which would derive
their
qualities from the fermentation process. It matters not whether the
organoleptic properties of the beverage are referable
only to the
fermentation of sugar or to such fermentation as well as to the
flavours of the base fruit or vegetable. TH22.06 does
not justify
SARS’ contention that the beverage must retain flavours which
are distinctive of the plant. It is common cause
that the
fermentation of dextrose syrup can and does result in distinct
organoleptic qualities of fermentation which are desirable
characteristics of the end-product.
[28]
Tariff heading 22.08 for which the Commissioner contends, provides
for
spirits,
liqueurs and other spirituous beverages.
Spirits
are by their nature, a concentrate and are made by a process of
distillation. The FABs in question bear neither of these
qualities.
They do not have the qualities of or essence of distilled FABs.
[11]
And they are clearly not liqueurs. Neither the ascertainment of the
meaning of the words used in TH22.08, nor the characteristics
of the
FABs, result in classification under that tariff heading.
[29]
The Commissioner’s reliance on
Distell 2
for its
submission that beverages produced from fermented alcohol can be
included in TH22.08 is misplaced. The nature of the FABs
that were
under consideration in
Distell 2
are distinguishable from
those which form the subject in this appeal. Their production
involved use of wine which had been stripped
to neutralise its taste
and then fortified with (distilled) cane spirits. The Court in that
case held that:
‘
It is clear, when
one has regard to the TH, that the beverages do not resort under
tariff sub-heading 2208.20, in that they are
not spirits obtained
from distilling grape wine or grape marc. It is common cause that
they do not fall under any of the other
tariff sub-headings between
2208.30 and 2208.70. It is equally clear that they cannot be
classified under tariff notes (A) or (B).
As set out above the cane
spirits was added to the stripped wine to boost alcohol content
significantly. According to Taylor, he
had tested all 15 beverages
organoleptically and concluded that they all have a distinct
spirituous character. Considering our
line of reasoning set out
above, in relation to the beverages in question, and in particular
paragraph 47, the compelling conclusion
is that the ultimate
distinctive nature of the beverages is spirituous, that they rightly
resort under TH22.08, and are covered
by tariff note (C)’.
In
our case, by contrast, and on a proper application of the approach to
interpretation developed by this Court, and as I have set
it out
above, the goods can only be classified under TH22.06.
[30]
That then leaves the question as to where, in TH22.06, do the FABs
stand to be classified. The parties are agreed that if TH22.06
is the
correct heading, the correct sub-heading as from 27 February 2013 is
TH2206.00.90. The question is whether, prior to that
date, the FABs
qualified as mixtures contemplated in TH2206.00.85 as then worded,
namely ‘[o]ther, mixtures of fermented
beverages and mixtures
of fermented beverages and non-alcoholic beverages, with an alcoholic
strength not exceeding 9 per cent
by volume’.
[31]
SAB’s response in this regard is that when the FABs were first
developed in 2002 the non-alcoholic beverage component
(soft drink)
was based on existing commercial products at the time, such as
Appletiser and flavours of Just Juice. The non-alcoholic
elements
were brought together in a so-called ‘lemonade tank’
where they existed as a beverage before being added,
as such, to the
alcohol base. In actual production, however, and, to promote
efficiency and for economical reasons, the lemonade
tank method was
replaced with the on-line blending process previously described
earlier.
[32]
Dr Dehrman’s evidence is instructive in this regard. She
explains that, after the alcoholic product has been filtered
and
transferred to a final product tank, the brand specific flavours,
fruit juices, acidity regulators and stabilizers are added.
Carbon
dioxide is also added. This evidence does not seem to bear out the
existence of a complete non-alcoholic beverage at any
stage of
production. The described method of production does not result in the
coming into existence, at any stage, of a non-alcoholic
beverage
which is then mixed with the alcoholic base. What TH22.06 and
TH2206.00.85 require is the mixing of two beverages. The
plain and
ordinary meaning of the words require the beverages to exist prior to
mixing. SAB’s counsel was constrained to
argue that the
non-alcoholic component was a beverage even though it is not produced
as a separate beverage and had never been
introduced into the market
as a separate beverage. Whilst the efficacy of the in-line process
may render it a superior method of
production for the purposes of the
beverage which is sold by SAB on the market, it has not been shown
that the ultimate FABs which
are the subject of this appeal are
mixtures of two distinct beverages within the meaning of TH
2206.00.85. Even if the alcohol
base qualifies as a ‘fermented
beverage’ (a hotly contested question which we need not
resolve), such a beverage is
at no stage mixed with a non-alcoholic
beverage. Instead, the fermented base is simply modified sequentially
by addition of various
ingredients. For this reason the FABs can only
be correctly classified under ‘other’ (2206.00.90) in
both Part 1 and
Part 2A of the Schedule.
Costs
[33]
Accordingly, although the court a quo was correct to set aside the
Commissioner’s determination, its substituted determination
requires modification. This modification does not justify granting
the Commissioner the costs of the appeal. The Commissioner’s
primary stance has throughout been that the FABs should be classified
under TH22.08, a position correctly rejected by the court
a quo and
again rejected by us on appeal. All indications are that, from a
financial perspective, the distinction between classification
under
TH2206.00.85 and TH2206.00.90 is likely to be insignificant, having
regard to the alcoholic content of the FABs. SAB, it
may be added,
accepted that as from 27 February 2013 the FABs fell under
TH2206.00.90.
[34]
Consequently, the following order is made:
1 Save as set out in para
2, t
he
appeal is dismissed with costs such costs to include the costs of two
counsel.
2 Paragraph 3 of the
order of the high court is set aside and substituted by the
following:
‘
The
said tariff determinations are replaced with tariff determinations in
terms of Tariff Heading 2206.00.90 in Part 1 Schedule
1 to the Act
and the Tariff Item 104.17.90 in Part 2A of Schedule 1 to the Act,
from the date of the respondent’s determination.’
___________________
N
Dambuza
Judge
of Appeal
For
the Appellant: J A Meyer SC (with him K Kollapen)
Instructed
by: RW Attorneys, Pretoria
Phatshoane
Henney Attorneys, Bloemfontein
For
the Respondent: C E Puckrin SC (with him A P Joubert SC and C Louw
SC)
Instructed
by: Bowman Gilfillan Inc, Johannesburg
McIntyre
Van der Post, Bloemfontein
[1]
In
terms of s 47(9)
(a)
the
Commissioner may determine in writing the tariff headings, tariff
subheadings or tariff items of any Schedule under which any
goods
manufactured in the Republic shall be classified.
[2]
Secretary
for Customs and Excise v Thomas Barlow and Sons Ltd
1970
(2) SA 660
(SCA).
[3]
See
the preamble to the Act.
[4]
In terms of s
37(1) of the Act excise duty is payable in respect of goods
manufactured in a customs and excise warehouse. It is
not in dispute
that the FABs in question are such goods.
[5]
Commissioner,
South African revenue Services v Komatsu Southern Africa (Pty) Ltd
2007
(2) SA 157
(SCA) para 8.
[6]
Bothma-Batho
Transport (Edms) Bpk v S Bothma & Seun (Edms) Bpk
2014
(2) SA 494
(SCA) at paras [10] to [12].
[7]
International
Business Machines SA (Pty) Ltd v Commissioner for Customs and Excise
1985
(4) SA
852
(SCA).
[8]
Rule 3(a) says:
‘
When by
application of Rule 2 (b) or for any other reason, goods are
prima
facie
, classifiable under
two or more headings, classification shall be effected as follows:
(a) The heading which
provides the most specific description shall be preferred to
headings providing a more general description.
However, when two or
more headings each refer to part only of the materials or substances
contained in mixed or composite goods
or to part only of the items
in a set put up for retail sale, those headings are to be regarded
as equally specific in relation
to those goods, even if one of them
gives a more complete or precise description of the goods.’
[9]
Miller AJA,
whilst noting that the situation did not arise in that case remarked
that ‘the Brussels Notes appear to serve
as guides and aids to
classification properly to be made in accordance with the terms of
the headings read with the relevant
sections and chapter notes’.
[10]
See
also
Commissioner
of Customs and Excise v Capital Meats CC (In Liquidation) and
Another
1999(1)
SA 570 (SCA) [1998] ZASCA 80.
[11]
See the meaning
of spirituous in the
Oxford
Dictionary.