AFGTI Case Alert 1 – 2025 Commissioner for the South African Revenue Service v Diageo SA (Pty) Ltd (1063/2023) [2024] ZASCA 158 (15 November 2024)
This appeal concerned a dispute about the correct classification of a liqueur product for purposes of excise duty payable under the Customs and Excise Act 91 of 1964 (the Act).
The classification of the product by the appellant, the Commissioner for the South African Revenue Service (the Commissioner), was taken on appeal by the respondent, Diageo SA (Pty) Ltd (Diageo) to the Gauteng Division of the High Court, Pretoria (the high court) in terms of section 47(9)(e) of the Act. On 18 March 2021, the high court dismissed Diageo’s appeal and upheld the Commissioner’s classification of the product. That decision then was taken on appeal by Diageo to the full court of the Gauteng Division of the High Court, Pretoria (the full court). On 5 July 2023, the full court reversed the decision of the high court. It set aside the Commissioner’s determination and effectively found in favour of a classification contended for by Diageo. Special leave to appeal to this Court against that order was granted to the Commissioner on petition.
In terms of s 47(1) of the Act, duties are payable in respect of all excisable goods in accordance with the provisions of Schedule 1 to the Act. Part 1 of Schedule 1 to the Act contains the Headings and Subheadings which describe the goods. This part of the Schedule is based on the Harmonized System for the classification of goods. Part 2 of the Schedule to the Act also contains Item Headings, which basically mirrors the Tariff Headings in Part 1, and they serve to identify the excisable goods.
‘The legal sources applicable to tariff classification are-
(a) Schedule 1 to the Act, Part 1 of which deals with custom duties, and Part 2 with excise duties. Part 1 contains the wording of the tariff headings, section notes and chapter notes. The tariff headings in Part 1 are used in Part 2 for purposes of imposing excise duty. Schedule 1 also contains, in section A of the General Notes, the General Rules for the interpretation of the Harmonized system. . .
(b) The Explanatory notes to the Harmonized system (sometimes called ‘Brussels Notes’) issued from time to time by the World Customs Organization. In terms of s 47(8)(a) of the Act, the interpretation of any tariff heading or sub-heading in Part 1 of Schedule 1, the general rules for the interpretation of Schedule 1, and every section note and chapter note in that Part, is ‘subject to’ the Explanatory Notes.’
And case law.
In terms of General Rule 1 of the General Rules for the Interpretation of Schedule 1 to the Act: ‘The titles of Section, Chapters and sub-Chapters are provided for ease of reference only; for legal purposes, classification shall be determined according to the terms of the Headings and any relative Section or Chapter Notes and, provided such Headings or Notes do not otherwise require according to’ the other provisions of the other General Rules. There are five other General Rules. Rule 6 provides as follows:
‘For legal purposes, the classification of goods in the subheadings of a heading shall be determined according to the terms of those subheadings and any related subheading Notes and, mutatis mutandis, to the above Rules, on the understanding that only subheadings at the same level are comparable. For the purposes of this Rule the relative Section and Chapter Notes also apply, unless the context otherwise requires.’
It is now well established that the classification of products in terms of the Act, for purposes of the payment of excise duties consists of three stages. In International Business Machines SA (Pty) Ltd v Commissioner for Customs and Excise,[4] they are described as follows:
‘…[F]irst, interpretation – the ascertainment of the meaning of the words used in the headings (and relative section and chapter notes) which may be relevant to the classification of the goods concerned; second, consideration of the nature and characteristics of those goods; and third, the selection of the heading which is most appropriate to such goods.’
In Distell it was stated that ‘[t]here is no reason to regard the order of the first two stages as immutable’. The reason given there, with reference to the classification of the goods under consideration there (namely, wine coolers), was that it was convenient ‘…to consider first, the nature and characteristics of the wine coolers, as without such an understanding the importance of the words used in the Headings may be lost or undervalued’.[5] However, in Commissioner: SARS v Toneleria Nacional RSA (Pty) Ltd (Toneleria), this Court cautioned against the danger of conflating the first and second stages of the inquiry in the process of classification. In that case, which involved the classification of wooden barrels, it was stated as follows:
‘Maintaining a clear distinction between the first and second stages of the determination process was vitally important in this case, because “other coopers” products’ constitutes a category of material items of a specific type, in the same way that other items in the tariff heading, such as casks, barrels, vats and tubs, are material items capable of definition and description as a class of objects. . .
The court found the use of the de minimis principle irrelevant and inappropriate in this matter. The wording of Additional Note 4, including 4(b) is plain and unambiguous and its purpose is to provide further clarity in respect of the appropriateness of certain Subheadings for certain products. In ordinary language, it means that the Tariff Headings specified in Additional Note 4 shall only be applicable to a liqueur consisting of a wine spirit base to which the other of its parts, components, or elements, have been added, which do not contain any alcohol. It was not disputed that once the ingredients of the flavouring are mixed, the flavouring has an ABV of approximately 0.002%. The flavouring itself contributes 0.00004% to the ABV of the final product, whereas the wine spirit base contributes 15.99999% to the ABV off the final product.
On a proper construction of that note, both the flavouring and the vanilla are components of the product and, therefore, are ingredients that are added to the wine base of the product. That is so even though the vanilla is technically a secondary component of the product and is a primary component of the flavouring. It is not disputed that the vanilla itself is alcoholic. But, in any event, the flavouring itself is also not free of alcohol and is alcoholic. Therefore, the classification contended for by Diageo was not appropriate, and the correct classification of the product is under Tariff Subheading 2208.70.22 (and Item Heading 104.23.22), as contended for by the SARS, and confirmed by the high court. Consequently, the appeal to this Court succeeded and the full court’s order must be set aside and replaced with one dismissing Diageo’s appeal to that court.