Page 763 - SAIT Compendium 2016 Volume1

CASE DIGEST 2013–2014
Held
The court approached the classi cation by rst con rming the principles applicable to the interpretation of tariff headings. In this regard the court con rmed that the schedule is subject to harmonised commodity description and coding system as well as its explanatory notes as issued by the World Customs Organisation. It con rmed the structure of Schedule 1 as laid out by the courts as comprising of sections, chapters and subchapters. The title descriptions in the chapters and subchapters are referred to as headings. Under each heading are subheadings where the relevant duty is stated. Each section and each chapter are headed by notes for interpretative purposes. The classi cation should be done based on the terms of the headings and any relevant section or chapter notes and not the headings itself. The court stated that the explanatory notes are intended to explain and supplement the relevant headings and section or chapter notes and therefore must not be construed to override or contradict the plain meanings of the headings or notes. No section notes applied in the current instance. The court con rmed that the classi cation process is a three-stage process, namely (1) interpretation of the words in the headings, subheadings and relevant section and chapter notes, (2) consideration for the nature and characteristics of the goods and (3) selection of the most appropriate heading.
The court, agreeing with the approach of the taxpayer, found that it had to determine whether the coconut products fell under tariff heading 20.08, which would then exclude SARS’ determination. This it would do by concluding whether the goods met the requirements of the tariff heading, including whether the goods retain the essential character of coconuts, for if it did, it could only be classi ed under tariff heading 20.08. The court, based on the uncontested expert witness of the taxpayer held that the goods imported did in fact retain the essential character of coconuts.
The court in examining the further argument of SARS, rejected it on four grounds. Firstly, the court concluded that the general explanatory note referred to by SARS, requires that the products may be and not must be in such physical state of being crushed or in pieces. Secondly, the uncontested expert evidence did in fact conclude that the goods are from crushed coconut. Thirdly, the court concluded that the products are arguably still in pieces as the evidence presented found that the goods were not made from only a liquid but that the coconut emulsion contained edible solids evidenced by the coconut powder. Lastly, the court found that SARS ignored the interpretative principles by over-emphasising the wording of the explanatory note and ignoring the plain meaning of the wording in tariff heading 20.08. This resulted in SARS incorrectly concluding that goods ‘prepared or preserved’ cannot extend beyond a crushed state.
The court accordingly held that the appeal succeeded and the tariff used by SARS was set aside and replaced with the tariff used by the taxpayer. The court further also awarded the cost of senior counsel in favour of the taxpayer as successful party.
11. CSARS v Mobile Telephone Networks Holdings (Pty) Ltd (966/12) [2014] ZASCA 4 (7 March 2014)
Introduction
The Supreme Court of Appeal delivered its judgment in Commissioner for the South African Revenue Service v Mobile Telephone Networks Holdings (Pty) Ltd (966/12) [2014] ZASCA 4 on 7 March 2014. This case concerns itself with the apportionment of audit fees incurred for a dual or mixed purpose in terms of s 11 (a), read with s 23 (f) and (g).
Facts
Details of the group structure: the respondent, Mobile Telephone Network Holdings (Pty) Ltd (Holdings), is a wholly owned subsidiary of the MTN Group Limited and is the holding company of ve directly held and numerous indirectly held subsidiaries and joint ventures. Holdings’ only business activities and gross income consisted of the following:
1. Dividends received for its shareholding in the subsidiaries; and
2. Interest received from loaned funds to subsidiaries (the majority interest-free) and from its group employee debenture scheme whereby it borrowed funds through debentures which were then loaned to group companies at a higher interest rate.
Holdings employed auditors to perform statutory audits on their nancial statements for the 2001–2004 nancial years for which the audit fees amounted to R1 674 932. In addition to this, Holdings also paid an amount of R878 142 to KPMG for a ‘Hyperion’ computer system in 2004. Both the audit fees and the fees for the ‘Hyperion’ computer system were claimed as deductions by Holdings during the respective tax years. The Commissioner for SARS disallowed the computer system’s fee entirely and apportioned the deduction of audit fees by permitting a deduction (based on the ratio of Holdings’ interest income as against its total revenue, which consisted of dividends and interest) between two and six per cent.
On objection to the Special Income Tax Court (ITC), the ITC upheld the disallowance of the computer system’s fee in that it constituted expenditure of a capital nature and held that 50 per cent of the audit fees are deductible (based on the ITC’s apportionment). Holdings thereafter appealed those ndings to the full court of the South Gauteng High Court where it sought a 94 per cent deduction of the audit fees based on an alleged time basis. The Commissioner cross-appealed the 50/50 apportionment order. The High Court allowed the computer system’s fees to be deductible in full and ordered the Commissioner to allow a 94 per cent deduction of the audit fees, thereby effectively dismissing the Commissioner’s cross-appeal.
On appeal to the Supreme Court of Appeal, it was held that the audit fees was a part of Holdings’ general overhead expenses enabling it to carry out all of its activities, and that it therefore necessarily attached to the performance of Holdings’ income-earning operations. The court, however, held that an apportionment needs to be made and again reiterated that an appropriate apportionment would depend on the facts of each case. Section 11 (a) of the Income Tax Act provides a deduction for the following:
‘... expenditure and losses actually incurred in the production of the income, provided such expenditure and losses are not of a capital nature...’.
SAIT CompendIum oF TAx LegISLATIon VoLume 1 755
CASE DIGEST 2013-2014