Income Tax Case No: 9992

• Jurisdiction: South Africa
• Judge: Wunsh J
• Judgment Date: 22 March 1996
• Docket Number: 9992
• Court: Transvaal Income Tax Special Court

Wunsh J:

The appellant is a manufacturer of motor vehicles which also manufactures some of the components for its products. This appeal is against assessments for the 1991 and 1992 years of assessment which had the effect of including in the determination of the appellant's taxable income, or, more specifically, not allowing as deductions for that purpose rebates from excise duty which it enjoyed in terms of Phase VI of the local content programme of the Department of Trade and Industry referred to more fully later in this judgment. According to the evidence which was submitted to us and legislative provisions to which we have referred, the rebates were arrived at as follows. We reflect the material provisions as the questions we have to decide are not affected by what we leave out.

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1.

After manufacture the motor vehicles were delivered to and kept in the appellant's warehouses (which were presumably licensed for that purpose in terms of section 21 (1) of the Customs & Excise Act, No 91 of 1964 ("the Customs & Excise Act")).

2.

When the vehicles were delivered from a warehouse they were entered for home consumption and duty became payable in terms of section 37(1)(b) of the Customs & Excise Act, at the excise rate of duty applicable in terms of Schedule No 1 to the Act ("Schedule 1"), thereon.

3.

In terms of various tariff items which are prefixed "(1)" the excise duty was 40%. 40%. Nothing in this appeal turns on the value on which the duty was calculated.

4.

The period of account for excise duty is one of three months. The first quarter in a calendar year commences on 1 March and the last on 1 December.

5.

Within two weeks of the end of each "excise quarter" the appellant was obliged to make a return in a prescribed form to the Department of Customs & Excise and the duty for which it had become liable had to be paid on the

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penultimate day of the month following that quarter.

6.

The appellant was entitled, in terms of rebate item 609.17 of the tariff, to a rebate of 50 per cent of the "local content value" of the motor vehicles removed with a maximum rebate not exceeding 37,5 per cent of the total excise value thereof.

The local content value", as defined in Note 3 of the rebate item, is, insofar as relevant:

"the value for excise duty purposes of all motor vehicles ... removed from a customs and excise manufacturing warehouse during a quarter for excise duty purpose less the total net foreign currency usage in respect of such warehouse as calculated in terms of Note 6(i) to (viii)".

The "net foreign currency usage" is defined in Note 1(c) to Rebate item 609.17. The relevant provisions are:

"(c)

'net foreign currency usage' in respect of goods manufactured in a customs and excise manufacturing warehouse means:

(i)

the value of imported goods (excluding consumables,

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petrol, distillate fuels, lubricating grease and prepared engine, gearbox, steering case and drive-axle lubricating oils) used in the manufacture of all motor vehicles removed and components exported or supplied to other manufacturing warehouses during a quarter for excise duty purposes, as certified by the Director-General: Trade and industry

plus

the value for customs duty purposes of -

(ii)

tooling imported

(iii)

foreign currency usage in respect of goods for use in the manufacture of motor vehicles and components therefor acquired from any person in the common customs area

(iv)

licence fees and royalties paid directly or indirectly to any person outside the common customs area in respect of motor vehicles and components therefor

less

(v)

f.o.b. value of motor vehicles and components therefor, including replacement parts and accessories but excluding the foreign currency usage of such replacement parts and accessories, exported by such manufacturing warehouse

(vi)

f.o.b. value of locally manufactured or secondhand tooling exported by such manufacturing warehouse

(vii)

foreign currency earnings as defined in Note 1 (e), ceded

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by local component manufacturers/suppliers or other exporters in the common customs area to such manufacturing warehousein respect of motor vehicle components and replacement parts and accessories or tooling exported by manufacturers/suppliers or exporters, but excluding the foreign currency usage in respect of such components and replacement parts and accessories or tooling

..."

Some of the other deductions provided for may have been taken into account but the identification thereof is not an issue in this appeal and they would not be affected by the principle established in this decision. The "foreign currency usage" and "foreign currency earnings" referred to are (Notes 1 (d) and (e):

(d)

"'foreign currency usage' in respect of component manufacturers/suppliers means-

the value for customs duty purposes of-

- such imported components and replacement parts and accessories imported by such manufacturer/supplier or acquired from any person in the common customs area

- any imported goods (excluding consumables, petrol distillate fuels, lubricating grease and prepared engine, gearbox, steering

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case and drive-axle lubricating oils) imported by such manufacturer or acquired from any person in the common customs area for the manufacture/assembly of such components and replacement parts and accessories

- tooling imported

plus

- licence fees and royalties paid directly or indirectly to any person outside the common customs area in respect of such components and replacement parts and accessories

(e)

'foreign currency earnings' in respect of component manufacturers/suppliers means-

- f.o.b. value of motor vehicle components and replacements parts and accessories exported directly by such manufacturer/supplier

- licence fees and royalties earned in respect of motor vehicle components and replacement parts and accessories

- f.o.b. value of locally manufactured or second-hand tooling exported."

In a nutshell the appellant was entitled to a rebate (subject to the prescribed maximum limit) of 50% of the amount arrived at by deducting from the dutiable value of the motor vehicles which left its warehouse the excess of the foreign currency expended by it in importing goods for the manufacture of those motor vehicles and foreign currency expended by the component manufacturers in the common customs area from which it acquired components for the motor vehicles on the one hand over on the

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other hand the foreign exchange earned by it in exporting those motor vehicles and the foreign currency earnings ceded to it by local component manufacturers and suppliers in that area.

The rebates enjoyed by the appellant amounted in its year ended 31 December 1991 to R928 693 221 and in the following year to R953 622 814. The appellant's year and spanned an excise quarter and, as we understood the evidence of its finance director, its annual financial statements took into account in each case the estimated excise duty payable on the motor vehicles released from the warehouses in December without the relevant rebates. As will be seen later, the appellant split each of these two rebate discounts into two for the purpose of its income tax calculation.

The following illustration was given of the way in which the rebate was calculated:

Gross dubitable value	R100 000	R100 000
Net foreign exchange used in manufacture	R 40 000	R 25 000
Therfore, local content	R 60 000	R 75 000

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Excise duty at 40% on dutiable value	R40 000	R40 000
Local content rebate (50% of local content)	R30 000	R30 500
Duty payable	R10 000	R 2 500

As it is possible for a manufacturer to take cession of foreign currency earnings from others, it could for any excise quarter have a credit balance. In that case the balance is carried forward to the following quarter.

According to the evidence credits were paid in cash until June 1991. The Customs and Excise Act did not make provision for this, but the Board of Trade and Industry paid to qualifying manufacturers, in terms of Phase VI of the local content programme for the industries manufacturing motor vehicles and automotive components, the credit amounts due to them. This practice was discontinued in June 1991 because funds were not available for that purpose.

Specimens of the returns submitted by the appellant to the Department of Customs & Excise were handed in. For example, that for the quarter ended 31 May 1992 was:

Excise Duty as per DA 175.20	R280 207 863,26
Less Rebate as per Schedule DA 175.75	R249 652 185,19
Total Excise Duty	R 30 555 678,07

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The supporting calculations show that the excise duty was 40% of the "net invoice price in respect of duty paid removals" which was R700 519 658, that the maximum rebate which would have been allowed was 37,5% of the net invoice price i.e. R262 694 487,17 and that the total rebate earned was made up of:

"Schedule DA 193,76	R244 204 282,85
Schedule DA 193,77	R 5 447 898,34
	R249 652 185,19

We do not know to what DA 193,76 and DA 193,77 refer or how these two amounts were calculated, despite our repeated requests at tile hearing of the appeal to be furnished with the information. But the principle on which the division is made emerged from the evidence to which we shall refer in due course.

The rebates to which we have referred were enacted pursuant to and to give effect to what is called Phase VI of the local content programme for the industries manufacturing motor vehicles and automotive components. Although we were...