Coltrade International CC v CSARS WCHC 45213/2013 (9 Sep 14)
01 October 2014
Posted by: Author: Pieter Faber
Author: Pieter Faber (SAIT Technical Executive: Tax Law & Policy)
This case is an appeal to the Gauteng division of the High
Court in Pretoria by the taxpayer, Coltrade International CC (‘Coltrade’),
against a tariff determination made by SARS, in terms of section 47(9)(a) of the
Customs and Excise Act (No. 91 of 1964) (‘Customs Act’), that the coconut milk,
coconut cream and coconut powder imported by Coltrade was incorrectly
classified. The parties have agreed that the dispute would apply to all three
the products and if the taxpayer was not successful on appeal, SARS’ tariff
determination would apply to all the goods in dispute. The court therefore had
to determine which tariff heading would apply to the goods.
Coltrade is an importer of coconut milk, coconut cream and
coconut powder into South Africa from Thailand. Coltrade received a
determination from SARS in 2005 that the goods should be classified under
tariff heading 20.08.19 as being ‘fruits, nuts and other edible parts of
plants, otherwise prepared or preserved, not elsewhere specified or included’.
In 2012, customs officials of SARS East London conducted a post clearance audit
on Coltrade and concluded that the goods should be classified under tariff
heading 21.06.90.90 as ‘other food
preparations not elsewhere specified or included in Part of Schedule 1’.
The taxpayer contended that the tariff heading 20.08.19
includes fruits, nuts and other edible parts of plants, otherwise prepared or
preserved, which by name would also include coconuts. It contended that it did
not fall under chapter 8 dealing with fruit and nuts because the product it
imported was ‘otherwise prepared or preserved’ and the exclusionary note in
that chapter specifically classify fruits and nuts not preserved as in other
chapters to fall under chapter 20. The taxpayer contended that the tariff
heading used by SARS as a miscellaneous heading would only apply to the goods
if no other more specific tariff heading applied which it contended is 20.08.
Furthermore, the explanatory note to the tariff forwarded by SARS, specifically
excludes goods which are preparations made from nuts as per tariff heading
20.08, if the essential character of the goods is given by such nuts, whereupon
it remains to be classified under tariff heading 20.08.
taxpayer presented two expert witness statements to support the taxpayer’s case
that the products it imported did retain such essential character of coconuts.
SARS did not offer any rebuttal evidence in this regard.
The first witness addressed the question whether coconut
milk and coconut cream retain the character of the original coconut meat having
regard to the processes the coconut meat is subjected to. The witness stated
that the products are produced by shredding the coconut meat and then
extracting the resulting emulsion from the fibres through crushing the pulp. In
this process the emulsion retains all the aroma, flavour and taste of the
coconut meat. The addition of water and preservatives do not alter these
characteristics but enhances it. The second independent witness confirmed the
testimony of the first witness as to the goods having retained the essential
characteristics of coconuts constituent.
SARS, agreed that the goods retained the essential
characteristics of coconuts but maintained that the requirements for tariff
heading 20.08 had still not been met by the taxpayer. SARS stated that tariff
heading 20.08 read with the two explanatory notes has two requirements and not
just one as contended by the taxpayer namely, that the physical state of the
goods has to be whole, in pieces or crushed and that it must retain the
essential characteristics. It is the former requirement which SARS stated that
the good did not meet as it has been processed to a state beyond being whole, in
pieces or crushed.
The court approached the classification by first confirming
the principles applicable to the interpretation of tariff headings. In this
regard the court confirmed 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 confirmed 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 chapter are headed by notes for interpretative purposes. The
classification 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 plan meanings of the headings or notes. No section
notes applied in the current instance. The court confirmed that the
classification process is a three stage process namely (1) interpretation of
the words in the headings, subheading and relative section and chapter notes, (2) consideration
for the nature and characteristics of the goods and (3) selection of the most
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 classified 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
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.
Please click here to view judgement.