Author: Pieter Faber (SAIT Technical Executive: Tax Law & Policy)
Introduction
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.
Facts
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.
The taxpayer presented two expert witness statements to support the taxpayers 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.
Held
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 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 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 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.