Abc (Pty) Ltd v Commissioner for the South African Revenue Service

• Jurisdiction: South Africa
• Judge: Willis J
• Judgment Date: 07 December 2010
• Docket Number: 12262
• Court: Tax Court

Willis J:

[1]

This is a tax appeal against assessments of the appellant for the 2000, 2001 and 2002 years of assessment, ending on 30 June in each respective year. The issues in this appeal are the following:

(i)

Whether, in respect of five specific transactions for the sale of fluorspar which the appellant had despatched to customers overseas, the amounts thereof had accrued to the taxpayer in the tax year of despatch or the tax year of payment;

(ii)

Alternatively, if the amounts in question had not accrued in the year of despatch, how the "add back" in terms of section 23F (2) of the Income Tax Act, No 58 of 1962, as amended ("the Income Tax Act") should be determined;

(iii)

The deductibility of marketing fees claimed by the appellant in terms of an agreement between itself and its holding company D Ltd for the 2000, 2001 and 2002 years of assessment;

(iv)

The deductibility of management fees claimed by the appellant in terms of an agreement between itself and its holding company D Ltd for 2001 and 2002.

These issues will be dealt with seriatim.

The Accrual Issue

[2]

The main witness for the appellant was Mr A. He is an engineer by training and profession. He has more degrees than a thermometer and a string of professional qualifications. He has extensive experience, around the world, in mining.

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[3]

With effect from 1 July 1999 the appellant became a wholly owned subsidiary of D Limited, a public company listed on the Johannesburg Securities Exchange ("the JSE"). Mr A was a director of both the appellant and D Limited from the time of the taker-over of the appellant until October 2000. His evidence was corroborated in a number of material respects by Mr B who, since September 2000, has been responsible for the overall financial administration and control of the appellant. The appellant carried out mining operations in Zeerust, yielding exportable fluorspar. Fluorspar contains high concentrations of calcium fluoride which is used, inter alia, in the production of hydrofluoric acid, which has a number of industrial applications. Amongst other things, hydrofluoric acid is used in the manufacture of "CFCs". [1] In more recent years, international concerns about the release of CFCs into the Earth's atmosphere have impacted on the demand for fluorspar. CFC's in the stratosphere are believed to have depleted the ozone layer. The challenged transactions relate to fluorspar exported by the appellant by way of shipment. Mr A's evidence was that:

(i)

Purchasers have strict requirements for a high percentage of calcium fluoride (normally 97%) in the fluorspar delivered;

(ii)

Fluorspar becomes very easily contaminated during stockpiling and transportation;

(iii)

The moisture content of fluorspar needs to be carefully managed: if there too little, it blows away; if there is too much, it increases the weight thereof, resulting in higher transportation costs and a reduction of the purity of the product;

(v)

Moisture content fluctuates during transportation;

(vi)

The appellant would only be paid for the actual dry metric tonnage of the fluorspar as determined after

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delivery to the purchaser in the country of destination.

(vii)

By reason of the above, the delivery of fluorspar is subject to inspection and analysis by independent assayists nominated by the purchaser in the country of destination;

(viii)

if the fluorspar does not comply with the specifications of the purchaser, the whole shipment can be rejected by the purchaser;

(ix)

in practice they would negotiate a reduced price if the delivered product did not meet the specifications;

(x)

minor discrepancies in meeting the standards required by the purchaser could result in large adjustments to the finally agreed price;

(xi)

although, sometimes there would be advance payments made by the purchaser, the seller had no right or entitlement to appropriate these receipts until the final price had been determined, consequent upon the inspection in the country of destination.

None of this evidence was seriously challenged by the respondent. It was credible evidence supported by documentation. It is common cause that, in respect of each of the challenged transactions, the fluorspar was shipped in terms of FOB ("Free on Board") contracts from Durban to the country of destination. In each instance, the appellant arranged and paid for the insurance of the freight, recovering the costs of insurance from the purchaser at a later stage.

[4]

The respondent contends that, in each instance, the price of the exported fluorspar accrued upon the delivery thereof to the ship in Durban and the procurement of bill of lading to the purchaser's order. The appellant says: "No, the accrual only took place after the inspection and analysis by the assayists in the country of destination".

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Willis J

[5]

Fluorspar is a fungible product. Fungibles are goods that are sold by number, weight or measure. [2] The fluorspar in question was sold by number (the number of dry metric tons), weight (the dry metric tons were weighed) and measure (the measurement of the degree of purity of the calcium fluoride). [3] At least two of these determinants of price (weight and measure) were subject to verification and approval in the countries of destination. In Page N.O. v Blieden & Kaplan, [4] the following was said:

Now according to our law if a person sells a mass and leaves the exact amount of the price to be determined later either by weighing or by measuring or counting, then that price is not ascertained until the weighing or measuring or counting is done. If the price is to be ascertained by weight, it is not sufficient to measure and roughly ascertain the weight from the measurement. In some cases the weight can be accurately ascertained from the measurement but this is not always the case here. A bag of mielies does not always weigh 203lbs. – it depends on the newness of the bag, the manner it is filled, the degree of moisture in the mielies, etc. We cannot therefore say that measuring mielies is equivalent to weighing them and if we cannot do this we cannot say that all was done necessary to ascertain the exact price.

The sale is therefore a venditio imperfecta; there is no certum pretium and therefore no ownership could pass by the mere bagging of the mielies. But even if I am wrong and if the certum pretium could be ascertained by the bagging of the mielies, I doubt whether the mere placing of the mielies in Blieden & Kaplan's bags can be regarded as delivery.

Earlier, in the same judgment, the following was said:

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We have therefore to deal with a venditio imperfecta in which there is no certum pretium even if it can be said to be a corpus certum, until the bagging and weighing is complete. [5]

Similarly, in the present case, the sale of the fluorspar was, in each instance, a venditio imperfecta: there was no certum pretium until either (a) the assayist in the country of destination had confirmed that the delivery met the purchaser's specifications or, (b) if not, the parties had negotiated and agreed upon a different but mutually acceptable price in the light of the assayist's findings. The sales in question were, in effect, subject to suspensive conditions.

[6]

Ordinarily, where goods have been shipped in terms of FOB contracts, ownership of the goods passes upon the handover of a bill of lading to the purchaser in respect thereof, but even if the contract of shipment is FOB, where the purchaser could refuse to accept the goods upon inspection, this general rule does not apply: there must have been a mutual intention that ownership should pass upon loading on the ship. [6]

[7]

As Johannes Voet said:

Sequatur insuper acceptatio facienda eum, in quem res transitura est, ut ita concurrant affectus ex utraque parte contrahentium, et animus utriusque consentiat in dominii translationem. [7] (emphasis added).

The Latin may be translated as follows:

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Furthermore, the making of an acceptance must ensue on the part of him to whom the property is to pass, so that in this way the inclinations of the contracting parties on both sides may come together and the minds of both may agree to the transfer of ownership. [8]

Thus, as between the appellant and the purchasers of fluorspar, this mutual intention between the seller and the purchaser as to the event which triggers the passing of rights and obligations when goods are to be in transit is of critical importance. [9] Even where one is not dealing with finished goods...