Article by: Zwelibanzi Makhubo

Senior Manager: Customs & Excise

On 07 April 2021, the Supreme Court of Appeal (SCA) handed down a judgement in the matter between Levi South Africa (Levi SA) and the South African Revenue Service (SARS).

The SCA had to decide three issues: (1) Whether Southern African Development Community (SADC) origin certificates issued by SADC producers are valid, even though the payment for the imported goods is made to a third-party located outside of SADC (hereafter the origin issue); (2) Whether the commission paid by the buyer (importer) amounts to buying commission and therefore should be excluded from the price actually paid or payable for the imported goods (the buying commission issue); and (3) Whether the royalties paid by the importer were due by the buyer ‘directly or indirectly, as a condition of sale of the goods for export to the Republic’ (the royalties’ issue).

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Background and Facts

The background and facts giving rise to this dispute are detailed below as follows.

During the period from 2010 to 2014, Levi SA had two distinct arrangements for the purchase of goods manufactured by two producers located in the SADC Member States. The first arrangement relates to a period prior to 2011 during which Levi SA imported goods directly from the two SADC manufacturers. In the second arrangement, Levi SA purchased the goods via an intermediary located outside of the SADC Member States. 

Furthermore, Levi SA paid a percentage of the purchase price of the goods imported from the manufacturers in SADC Member States to Levi Strauss Asia Pacific Division Pte Ltd (Levi APD). The payment to Levi APD was covered under the Buying Agent Agreement (hereafter BAA) concluded in 2005. Moreover, in terms of a Trademark License Agreement (hereafter the TLA) dated 01 December 2010, Levi SA also paid royalties to Levi Strauss & Co (LS & Co) at varying rates on every sale of goods imported or manufactured.

The 2011 changes gave rise to the origin issue. The issue of the buying commission arose from the payment of the percentage of the purchase price of goods imported by Levi SA to Levi APD under the BAA. The TLA agreement between Levi SA and LS & Co gave rise to the royalty issue. The SCA considered all three issues and decided as follows.

Decision

The Origin Issue

The SCA considered whether Rule 2.1 in Annex I of the SADC Treaty Protocol requires that the movement of the originating products and the commercial transaction should originate in the SADC Member States. Rule 2.1 provides that:

“For the purpose of implementing this Protocol, goods shall be accepted as originating in a Member State if they are consigned directly from a Member State to a consignee in another Member State.”

Levi SA argued that Rule 2.1 only requires the originating products to be shipped from one SADC Member State to another SADC Member State. SARS contended that Rule 2.1 also requires that the payment for the originating products should also be between parties in the SADC Member States. Levi SA made payments to a party outside SADC. The SADC certificates are therefore not valid.

The SCA held that the SADC Treaty Protocol is only concerned with the physical origin of the goods and not the commercial origins of the transactions giving rise to the movement. The SADC certificates of origin issued by the SADC producers are therefore valid.

The SCA set aside the order of the High Court in relation to the origin issue. Therefore, the SARS determination that the SADC Certificates of Origin issued by the SADC producer is invalid and demand for the payment of customs duty and Value Added Tax (VAT) is set aside.

The Buying Commission Issue

The SCA considered whether a percentage of the purchase price for the imported goods paid or payable under the BAA amounts to buying commission. If so, should such amounts be excluded from the price actually paid or payable determined for imported goods, adjusted in terms of section 67 (1) (a) of the Act Section 67 (1) (a) provides that, in ascertaining the transaction value of any imported goods, there shall be added to the price actually paid or payable for the goods—

“(a) to the extent that they are incurred by the buyer but are not included in the price actually paid or payable

(i) any commission other than a buying commission”

Levi SA argued that Levi APD was appointed as buying agent in terms of a BAA and therefore acted as a representative of Levi SA in the purchase of the goods imported from the SADC producers. The payment of ‘buying commission’ was for services rendered by Levi APD (the “buying agent”). SARS contended that given Levi SA’s procurement process, Levi APD was not an agent for Levi SA. Therefore, the fee or commission paid by Levi SA to Levi APD was not buying commission and shall be added to the price actually paid or payable for the goods imported from the SADC producers.

The SCA held that the range of functions provided by an intermediary are not decisive in determining whether a commission paid by the importer amounts to buying commission. While the nature of the relationship between the importer and the agent is of fundamental importance, the nature of the relationship is not decisive either. However, what is decisive is does the intermediary act on behalf of the importer and in accordance with the importer’s wishes (i.e., not of the intermediary's own accord or under the directions of a third party). An intermediary acting on its own accord or under the directions of a third party, other than the importer, is not an agent.

The court undertook a close examination of the BAA and the totality of the prevailing circumstances around the role of Levi APD and Levi SA in the purchase of the imported products and determined that Levi SA was in a subordinate position to Levi APD or LS & Co, with little or no scope for independent action. Levi APD was therefore not acting as a buying agent on behalf of Levi SA. The commissions paid by Levi SA may not be excluded in determining the price actually paid or payable for the imported goods. Therefore, the commissions paid by Levi SA may not be excluded in determining the price actually paid or payable for the imported goods.

The SCA upheld the High Court decision on the payment of a percentage of the purchase price of the imported goods. The payment must therefore be added to the price actually paid or payable in determining the transaction value as required under section 67 (1) (a).

The Royalties Issue

The SCA considered whether royalties paid under the TLA should be added to the price actually paid or payable for the goods imported from the two SADC producers, as required under section 67 (1)(c) of the Act. Section 67 (1) (c) provides that, in ascertaining the transaction value of any imported goods, there shall be added to the price actually paid or payable for the goods—

royalties and license fees in respect of the imported goods, including payments for patents, trade-marks and copyright and for the right to distribute or resell the goods, due by the buyer, directly or indirectly, as a condition of sale of the goods for export to the Republic, to the extent that such royalties and fees are not included in the price actually paid or payable, but excluding charges for the right to reproduce the imported goods in the Republic”

Section 67 (1) (c) therefore requires that, for royalties to be added to the price paid or payable: (1) they must directly or indirectly due by the buyer as a condition of the sale of the goods imported, and (2) they must be paid or payable in respect of the goods imported. In Commissioner for South African Revenue Service v Delta Motor Corporation (Pty) Ltd [2002] ZASCA 114 (hereafter the Delta case), the SCA held that both requirements must be present. Absent one, the payment for royalties shall not be added to the price actually paid or payable for the imported goods. The court's decision in Levi SA only considered whether the royalties paid or payable were directly or indirectly due by the buyer as a condition of the sale of the goods imported. There was no dispute as to whether the royalties were paid or payable in respect of the goods imported.

SARS had determined that the payment for royalties had to be added in determining the transaction value. Levi SA argued that the TLA expressly provided that the royalties paid or payable should not be considered a condition of purchase or import of any product by Levi SA or sale of any product to Levi SA.

The SCA held that section 67(1)(c) is concerned with the contract in terms of which the goods are imported. Th section does not require that the contract should have terms providing for the payment of royalties. Royalties may become payable directly or indirectly. They are paid directly where the terms of the contract or royalty agreement link the payment of the royalty amount to the sale of the imported goods. Indirectly where the relationship between exporter, importer, and licensor, viewed wholistically, is such that the goods imported would not be sold to the importer without the payment of the royalties becoming due.

The court determined that the obligations of Levi SA under the TLA, seen in light of the Levi Strauss group procurement policies, leads to the conclusion that the royalties were paid as a condition of the sale of the imported goods. Therefore, the commissions paid by Levi SA may not be excluded in determining the price actually paid or payable for the imported goods.

The SCA upheld the High Court decision on the payment of royalties. The payment of royalties should be added to the price actually paid or payable in determining the transaction value as required under section 67 (1) (c).

The Buying Commission Issue

The SCA considered whether a percentage of the purchase price for the imported goods paid or payable under the BAA amounts to buying commission. If so, should such amounts be excluded from the price actually paid or payable determined for imported goods, adjusted in terms of section 67 (1) (a) of the Act. Section 67 (1) (a) provides that, in ascertaining the transaction value of any imported goods, there shall be added to the price actually paid or payable for the goods—

“(a) to the extent that they are incurred by the buyer but are not included in the price actually paid or payable—

(i) any commission other than a buying commission”

Levi SA argued that Levi APD was appointed as buying agent in terms of a BAA and therefore acted as a representative of Levi SA in the purchase of the goods imported from the SADC producers. The payment of ‘buying commission’ was for services rendered by Levi APD (the “buying agent”). SARS contended that given Levi SA’s procurement process, Levi APD was not an agent for Levi SA. Therefore, the fee or commission paid by Levi SA to Levi APD was not buying commission and shall be added to the price actually paid or payable for the goods imported from the SADC producers.

The SCA held that the range of functions provided by an intermediary are not decisive in determining whether a commission paid by the importer amounts to buying commission. While the nature of the relationship between the importer and the agent is of fundamental importance, the nature of the relationship is not decisive either. However, what is decisive is does the intermediary act on behalf of the importer and in accordance with the importer’s wishes (i.e., not of the intermediary's own accord or under the directions of a third party). An intermediary acting on its own accord or under the directions of a third party, other than the importer, is not an agent.

The court undertook a close examination of the BAA and the totality of the prevailing circumstances around the role of Levi APD and Levi SA in the purchase of the imported products and determined that Levi SA was in a subordinate position to Levi APD or LS & Co, with little or no scope for independent action. Levi APD was therefore not acting as a buying agent on behalf of Levi SA. The commissions paid by Levi SA may not be excluded in determining the price actually paid or payable for the imported goods. Therefore, the commissions paid by Levi SA may not be excluded in determining the price actually paid or payable for the imported goods.

The SCA upheld the High Court decision on the payment of a percentage of the purchase price of the imported goods. The payment must therefore be added to the price actually paid or payable in determining the transaction value as required under section 67 (1) (a).

The Royalties Issue

The SCA considered whether royalties paid under the TLA should be added to the price actually paid or payable for the goods imported from the two SADC producers, as required under section 67 (1)(c) of the Act. Section 67 (1) (c) provides that, in ascertaining the transaction value of any imported goods, there shall be added to the price actually paid or payable for the goods—

royalties and license fees in respect of the imported goods, including payments for patents, trade-marks and copyright and for the right to distribute or resell the goods, due by the buyer, directly or indirectly, as a condition of sale of the goods for export to the Republic, to the extent that such royalties and fees are not included in the price actually paid or payable, but excluding charges for the right to reproduce the imported goods in the Republic”

Section 67 (1) (c) therefore requires that, for royalties to be added to the price paid or payable: (1) they must directly or indirectly due by the buyer as a condition of the sale of the goods imported, and (2) they must be paid or payable in respect of the goods imported. In Commissioner for South African Revenue Service v Delta Motor Corporation (Pty) Ltd [2002] ZASCA 114 (hereafter the Delta case), the SCA held that both requirements must be present. Absent one, the payment for royalties shall not be added to the price actually paid or payable for the imported goods. The court's decision in Levi SA only considered whether the royalties paid or payable were directly or indirectly due by the buyer as a condition of the sale of the goods imported. There was no dispute as to whether the royalties were paid or payable in respect of the goods imported.

SARS had determined that the payment for royalties had to be added in determining the transaction value. Levi SA argued that the TLA expressly provided that the royalties paid or payable should not be considered a condition of purchase or import of any product by Levi SA or sale of any product to Levi SA.

The SCA held that section 67(1)(c) is concerned with the contract in terms of which the goods are imported. Th section does not require that the contract should have terms providing for the payment of royalties. Royalties may become payable directly or indirectly. They are paid directly where the terms of the contract or royalty agreement link the payment of the royalty amount to the sale of the imported goods. Indirectly where the relationship between exporter, importer, and licensor, viewed holistically, is such that the goods imported would not be sold to the importer without the payment of the royalties becoming due.

The court determined that the obligations of Levi SA under the TLA, seen in the light of the Levi Strauss group procurement policies, leads to the conclusion that the royalties were paid as a condition of the sale of the imported goods. Therefore, the commissions paid by Levi SA may not be excluded in determining the price actually paid or payable for the imported goods.

The SCA upheld the High Court decision on the payment of royalties. The payment of royalties should be added to the price actually paid or payable in determining the transaction value as required under section 67 (1) (c).

Analysis

In our view, the judgement provides clarity on the validity of SADC certificates of origin in relation to Rule 2.1 of the SADC Treaty Protocol. According to the SCA decision in Levi SA, the rule only requires the SADC originating products to physically move from one SADC Member State to another. Payment for the imported goods need not flow between parties in the SADC Member States.

With reference to buying commission, the Levi SA case lays down the decisive criterion for determining when a fee or commission paid to an intermediary amount to “buying commission.” The decisive criterion is whether the intermediary acts on its own accord or under the direction of a third party, other than the importer. Where the intermediary acts on its own accord or under the direction of a third party (who is not the importer), the intermediary is not an agent and therefore the fees paid by the importer do not amount to buying commission. The fact that the agreement giving rise to the payment of the commission or fee between the importer and the intermediary is titled “Buying Agency Agreement,” names the intermediary as the “buying agent,” and specifies a fee or commission paid to the intermediary as a “buying commission,” is insufficient. In determining if the intermediary is acting as an agent on its own accord or on the importer’s wishes, the agreement must be viewed in its totality together with the prevailing circumstances.

On the royalties issue, the SCA determined the circumstances in which royalties shall be directly or indirectly due by the buyer as a condition of the sale of the goods imported. Royalties shall be directly due to the buyer if the terms of the contract or royalty agreement link the payment of the royalty to the sale of the imported goods. The royalties would be indirectly due, where the relationship between exporter, importer, and licensor, viewed holistically, is such that the imported goods would not be sold to the importer without the obligation for the importer to pay royalties. The fact that the royalty agreement or contract of sale expressly or tacitly provides that the royalties paid or payable should not be considered as a condition of purchase of the imported goods only conveys the intention of the parties concluding the agreement. Moreover, in arriving at the decision as to whether the royalty payment must be added or excluded, the importers' obligations under the agreement providing for the royalty payments must be considered on the back of the procurement arrangements of the parties involved.

Conclusion

In view of the foregoing, importers paying buying commissions and/or royalties (including License fees) in connection with imported goods should consider applying for a customs value determination with SARS. A voluntary application for value determination will afford SARS the opportunity to consider the transactions giving rise to the payments together with the prevailing circumstances, in their totality, upfront. SARS will then determine if such payments should be excluded from or added to the transaction value. If the importer is not in agreement with SARS’ decision, the importer will have the opportunity to appeal the decision through the various SARS Customs Internal Dispute Resolution channels or approach the High Court. In our view, a voluntary application may mitigate any adverse determination in the future. An adverse determination may operate with a retrospective effect which may result in a demand for customs duties going back 2 years from the date of the determination, the underpaid import VAT, penalties, and interest.