THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT

Reportable
Case no: 1010/2019

In the matter between:
CONSOL GLASS (PTY) LTD

APPELLANT

and

THE COMMISSIONER FOR THE
SOUTH AFRICAN REVENUE SERVICE
RESPONDENT

Neutral citation: Consol Glass (Pty) Ltd v The Commissioner for the
South African Revenue Service (1010/2019) [2020]
ZASCA 175 (18 December 2020)
Coram:
NAVSA, WALLIS, MAKGOKA JJA and SUTHERLAND
and UNTERHALTER AJJA

Heard:
10 November 2020
Delivered: This judgment was handed down electronically by
circulation to the parties’ representatives by email, publication on the

Supreme Court of Appeal website and release to SAFLII. The date and
time for hand-down is deemed to be 09h45 on 18 December 2020.
Summary: Tax liability under the Value-Added Tax Act 89 of 1991 –
services rendered in respect of a debt refinancing transaction –
disallowance of input tax deduction claimed in respect of fees paid for
services provided by local vendors – imposition of tax on imported
services in terms of s7(1)(c) - interpretation of the definitions of input tax
and imported services – meaning of 'the purpose of consumption, use of
supply in the course of making taxable supplies.'

ORDER

On appeal from: The Tax Court, Gauteng (Louw J, sitting as court of
first instance):

The appeal is dismissed with costs, including the costs of two
counsel.

JUDGMENT

UNTERHALTER AJA (NAVSA, WALLIS and MAKGOKA JJA
and SUTHERLAND AJA concurring)
[1] The Appellant, Consol Glass (Pty) Ltd (‘Consol’), manufactures
and sells glass containers. It is a vendor, registered as such under the
Value-Added Tax Act 89 of 1991 (‘the VAT Act’). In 2012, Consol
restructured its debt. In doing so, it procured services, some from local
vendors and others from suppliers resident outside of South Africa.
Services of this latter kind are defined in the VAT Act as imported
services. In July 2015, the Respondent, the Commissioner, raised
additional assessments in respect of Consol’s value-added tax (‘VAT’)
liability for five tax periods in 2012.  The additional assessments
disallowed input tax deductions that Consol had claimed in relation to the
services provided by local vendors. The Commissioner imposed output
VAT on the imported services procured by Consol.

[2] Consol lodged an objection to the additional assessments. The
objection was disallowed. Consol appealed the additional assessments to
the tax court. The tax court dismissed Consol’s appeal, save in respect of

the 10% penalty imposed by the Commissioner. There is no cross appeal
by the Commissioner of this order. The appeal before us thus concerns
the disallowance by the Commissioner of the input tax deductions and the
imposition by the Commissioner of output value-added tax in respect of
the imported services procured by Consol.

The facts
[3] In order to understand why Consol procured the services that it did
in 2012, it is necessary to describe certain transactions that took place in
2007. During April 2007, Consol, then a shell company, acquired the
businesses of Consol Limited and two of its subsidiaries. These
businesses were acquired as going concerns. Upon making these
acquisitions, Consol commenced trading, continuing the glass making
businesses previously conducted by the three companies.

[4] These acquisitions formed part of a leveraged buy-out. In simple
terms, a leveraged buy-out is the acquisition by one company of another
(or its assets and liabilities) using a significant amount of debt to fund the
cost of acquisition.

[5] The transaction in 2007 took place in the following manner. First,
in December 2006, through a scheme of arrangement, Consol Holdings
Limited (Consol Holdings) offered to acquire the ordinary share capital of
Consol Limited, then a listed company. The shareholders of Consol
Limited approved the scheme, and upon sanction by the high court, the
scheme became operative in April 2007. The scheme entitled the
shareholders of Consol Limited to receive a cash consideration for their
shares, or to elect to receive cash and Consol Holdings shares. The effect

of the scheme was to buy out the public shareholders of Consol Limited
and to constitute a consortium of private equity investors, styled the Brait
Fund IV, as the controlling shareholder of the new holding company,
Consol Holdings. Consol Holdings made use of bridging finance to buy
the shares of Consol Limited.

[6] Second, a reorganisation was effected. Consol, a shell company
and a wholly owned subsidiary of Consol Holdings, was used to acquire
the businesses of Consol Limited and its two subsidiaries. Consol was
able to make these acquisitions by securing debt funding.  The debt
funding took the form of Eurobonds issued by Consol. The debt was
denominated in Euros, and hence Consol’s obligations to pay interest and
redeem the bonds were in Euros. In order to cover the risk of Rand
volatility against the Euro (since Consol’s revenue was Rand based, but
its debt obligations were in Euros), Consol entered into collateral hedging
agreements to cover its Euro exposure.

[7] Third, the consideration paid by Consol for the acquisition of the
businesses was then distributed as a dividend by the vendor companies to
the holding company, Consol Holdings. Consol Holdings, in turn, was
obliged to use the proceeds of the dividend to repay the bridging loan
secured by it.

[8] One salient feature of the transaction in 2007, relevant for present
purposes, was that the operating businesses of the listed company Consol
Limited, and its two subsidiaries, were, upon the execution of the
reorganisation, acquired by Consol, funded by the debt that Consol had
secured by issuing Eurobonds. Functionally these businesses were

otherwise unchanged and continued precisely the same business
operations that they had engaged in prior to the transaction in 2007.

[9] The evidence of Mr Nayager, the Chief Financial Officer of
Consol, who testified before the tax court on behalf of Consol, was that,
in the period 2007 – 2012, the cost of servicing Consol’s Euro debt and
securing hedging cover for its Euro exposure became ever more
expensive. This was because the Rand depreciated against the Euro and
was subject to much volatility. As a result, in 2012, Consol sought
competitive funding in the South African market, denominated in Rand,
to replace its Eurobond debt and unwind the hedging positions. A
consortium of South African banks agreed to lend some R5 billion to
Consol. This took place in terms of an agreement, styled the Common
Terms Agreement, concluded on 7 July 2012 between Consol and a
number of lenders. In terms of the Flow of Funds Agreement, concluded
at the same time as part of these arrangements, the debt funding secured
by Consol was to be used to redeem the Eurobonds and unwind the
hedging instruments. I shall refer to these arrangements as the refinancing
transactions.

[10] In order to retire the Eurobond debt, unwind the hedge positions
and secure domestic loans, Consol procured various services. The
services fell into two categories. First, Consol procured the services of
local service providers. The South African banks that participated in the
lending consortium charged arranging and structuring fees. Consol
retained the services of two firms of South African attorneys. These firms
gave advice and drafted agreements to put in place the refinancing
transactions. Second, foreign service providers were retained to advise

upon the early redemption of the Eurobonds and the unwinding of
Consol’s hedging positions.

[11] These service providers, local and foreign, raised fees that were
paid by Consol. Consol’s liability for VAT, arising from the fees incurred
by it, gives rise to the appeal before us.

The Issues
[12] Two issues require determination in this appeal. First, was the tax
court correct to find that the Commissioner was entitled to disallow the
input tax claimed by Consol on the fees charged to it by local service
providers? Second, was the tax court correct to find that Consol was
obliged to declare and pay VAT on the fees paid by Consol to non-
resident suppliers for their services?

[13] The first issue turns upon the meaning and application of the
definition of input tax. In relevant part, ‘input tax’ in s1 of the VAT Act
is defined as:
'(a) tax charged under section 7 and payable in terms of that section by –
(i)
a supplier on the supply of goods or services made by that supplier to the
vendor; …
where the goods or services concerned are acquired by the vendor wholly for the
purpose of consumption, use or supply in the course of making taxable supplies….'

[14] Whether Consol was entitled to deduct as input tax the VAT paid
on the services supplied to it by local service providers depended upon
whether these services were acquired by Consol for the purpose of
consumption, use or supply in the course of making taxable supplies.
That enquiry raised two issues. First, for what purpose did Consol acquire

the services? Second, did Consol do so in the course of making taxable
supplies. The relationship between the purpose for which the services
were acquired and the use to which these services were put lies at the
heart of the matter.

[15] As to the second issue, that is, whether Consol was obliged to pay
VAT on the services supplied to it by the service providers who carried
on their business outside of South Africa, a similar enquiry is required.
Section 7(1)(c) of the VAT Act levies VAT on the supply of any
imported services by any person.
‘Imported services’ are defined in s1 of the VAT Act to mean:
‘a supply of services that is made by a supplier who is resident or carries on business
outside of the Republic to a recipient who is a resident of the Republic to the extent
that such services are utilized or consumed in the Republic otherwise than for the
purpose of making taxable supplies.’

[16] Stated affirmatively, this provision entailed that no VAT could be
levied on the supply of services to Consol by suppliers who carried on
business outside of South Africa if those services were utilized or
consumed in South Africa by Consol for the purpose of making taxable
supplies. Here too, the issue is this: did Consol make use of the services
of foreign suppliers for the purpose of making taxable supplies?

Exempt Supply
The Commissioner submitted that the services, local and foreign, were
not acquired by Consol to make taxable supplies, but rather to make an
exempt supply in the form of a financial service. A ‘debt security’ in
terms of s 2(2)(iii) of the VAT Act means ‘an obligation or liability to

pay money that is, or is to be, owing by any person’. In terms of s 2(1)(c)
of the VAT Act:
‘The issue, allotment, drawing, acceptance, endorsement or transfer of ownership of a
debt security’
is deemed to be a financial service. Consol procured the services to
enable it to conclude the new loan facility.  Section 12 lists the goods and
services that are exempt from VAT imposed under s7(1)(a). One category
of exempt supply is the supply of any financial service. One variant of a
financial service defined in s2(1)(c) is the issue of a debt security. The
Commissioner contended that, in securing the loans from the consortium
of banks under the refinancing transactions, Consol issued a debt security.

[17] If that be so, it was contended, Consol did not acquire the local
services for the purpose of use in the course of making taxable supplies.
Nor did Consol utilize the foreign services for the purpose of making
taxable supplies. Taxable supply is defined in s1 to mean any supply of
goods or services which is chargeable with tax under the provisions of
s7(1)(a). However, since s12(a) read with s2(1)(c) excludes the issue of a
debt security from VAT imposed under s7(1)(a) the issue of debt is not
the making of a taxable supply.

[18] It would then follow that if Consol made use of the local and
foreign services supplied to issue a debt security, it did not utilize these
services for the purpose of making, nor in the course of making, a taxable
supply. Hence, Consol was not entitled to the deduction of input tax that
it had claimed in respect of the local services acquired by it. So too,
Consol was obliged to declare and pay VAT on the fees paid by Consol to
non-resident suppliers for their services. I shall refer to this submission,
made on behalf of the Commissioner, as the exempt supply submission.

[19] The exempt supply submission failed to comprehend the position
of Consol as a vendor within the scheme of the VAT Act. It is essential in
any VAT enquiry to identify at the outset the enterprise that the vendor is
conducting.1 Section 23(1) requires that every person who carries on an
enterprise, and is not registered for VAT, is required to be registered. A
vendor is defined in s1 to be any person who is or is required to be
registered under the VAT Act. An enterprise, in the case of a vendor, is
defined in s1 to mean any enterprise or activity which is carried on
continuously or regularly by any person in the Republic.

[20] Consol registered as a vendor under the VAT Act. It did so because
it carried on an enterprise. The enterprise carried on by Consol was the
manufacture and sale of glass containers. The imposition of VAT in terms
of s7(1) was levied on the supply by any vendor of goods or services
supplied by that vendor. In the case of Consol, VAT was levied on its
sales of glass containers. That was the enterprise carried on by it. Consol
at no stage carried on a financial services enterprise.

[21] Consol, like every other enterprise, required a variety of inputs in
order to carry out the enterprise upon which it is engaged. As the facts of
this case make plain, Consol raised loans to acquire the businesses that
then constituted the enterprise conducted by it. Consol concluded the
refinancing transactions, which included taking out loans with a
consortium of local banks, when it had previously raised funds by issuing
Eurobonds.

1 Commissioner for the South African Revenue Services v De Beers Consolidated Mines Ltd [2012]
ZASCA 103; 2012 (5) SA 344 (SCA) paras 44 – 47.

[22] Neither the original issuance of the Eurobonds, nor the loans
secured from the local consortium, transformed Consol from a vendor
engaged upon the enterprise of selling glass containers into a vendor
engaged also upon the enterprise of supplying financial services by
issuing debt. Consol elected to borrow money to acquire the businesses. It
did so to carry on the enterprise of selling glass containers. When Consol
entered into the refinancing transactions and borrowed moneys from the
lending consortium, it remained the same enterprise – a seller of glass
containers. It did not become, in addition, a supplier of financial services.
Put simply, when an enterprise borrows money, it is supplied a financial
service, it does not become the supplier of a financial service. To hold
otherwise is to confuse a borrower with a lender. The lender supplies the
financial service, the borrower receives that service. Consol is simply not
a vendor of financial services. It registered as a vendor in respect of the
enterprise upon which it engaged, that is, as a manufacturer and seller of
glass containers and so it remained.

[23] That disposes of the exempt supply submission. It is therefore
unnecessary to reach any of the other issues raised by this submission.
One problem is that a conventional loan agreement does not readily fall
within the concept of a ‘debt security’. The definition in s 2(2)(iii)
provides that it is ‘an interest in or right to be paid money’; or ‘an
obligation or liability to pay money’ that is, or is to be, owing by person.
An obvious example of a debt security is a bond or a similar financial
instrument of the type that banks, some large companies, public
authorities, public enterprises and various levels of government issue to
secure funding. Another is a letter of credit or bill of exchange other than
a cheque. A conventional loan agreement under which a bank agrees to

lend money to its customer does not fit comfortably within this definition.
What is contemplated, as is apparent from s 2(1)(c), is a document that
may be issued, allotted, drawn, accepted, endorsed or the ownership of
which may be transferred. Again, that is typical of bonds and certain
types of financial instruments, of which a loan agreement is not one.

[24] The definition says that a debt security does not include a cheque.
However, the definition of a cheque in s 2(2)(i) goes far beyond the
conventional notion of a cheque. It means:
‘A bill drawn on a bank payable on demand, a postal order, a money order, a
traveller’s cheque, or any order or authorisation (whether in writing, by electronic
means, or otherwise) to a financial institution to credit or debit any account’.

[25] This exclusion casts light on the meaning of a debt security.
Particularly in international trade, payment of the price of goods is
conventionally secured by way of either a bill of exchange or, more
frequently, a letter of credit. Once that is drawn, and perhaps accepted or
endorsed by the drawer’s bank, such instruments can be transferred from
one person to another, usually by way of endorsement. On presentation
they constitute a right to be paid money by the holder thereof. Conversely
they constitute an obligation by various parties, but particularly the issuer
or drawer of the bill or letter of credit, to pay money. All of this is
entirely inconsistent with the notion that a conventional agreement of
loan constitutes a debt security.

[26] That being the case, the exempt supply submission must fail.
Consol was not a supplier of financial services. Consol was a
manufacturer and supplier of glass containers. Those were not goods
exempt from VAT imposed under s7(1)(a). VAT was levied on the

supply by Consol of its glass containers. And it followed that the exempt
supply submission could not avoid the principal issues as to whether the
local services acquired by Consol were acquired for the purpose of use in
the course of making taxable supplies and whether the imported services
were utilized by Consol for the purpose of making taxable supplies.

Taxable supplies
[27] I turn to consider these issues. Counsel were at odds as to the
nature and closeness of the connection that must exist between the use of
the services acquired by Consol and the making of taxable supplies by
Consol, that is to say, the supply of glass containers. It was submitted on
behalf of Consol that there must be some nexus or link between the
services acquired and the making of taxable supplies. Unsurprisingly, this
undemanding test did not find favour with the Commissioner’s counsel
who submitted that the use of the services must be closely associated with
the making of taxable supplies or an integral part of the processes used to
make taxable supplies. Anything less is too remote.

[28] The relevant part of the definition of input tax, quoted above, has
these components. The services must be acquired wholly or partly for the
purpose of consumption, use or supply. Acquisition for some other
purpose will not do. Acquiring to consume, use or supply will not suffice
if the purpose of the acquisition is not in the course of making taxable
supplies. In this case, this means in the course of manufacturing and
selling glass containers. The Commissioner submitted that ‘in the course
of’ connotes ‘during’ or ‘in the process of’ manufacturing and selling
glass containers, rather than steps preparatory to such process.2

2 Relying upon ITC 174465 SATC 154.

[29] It is of limited assistance to make use of synonyms in order to
understand the specificity of the statutory formulation: in the course of
making taxable supplies. Two observations assist the interpretative
exercise. First, the diversity of goods and services that may constitute
taxable supply in a modern economy and the complexity of the lines of
supply that may be used in the making of such goods and services should
not be underestimated. An interpretation that is too restrictive of what is
required to make taxable supplies runs the risk of underestimating this
diversity and complexity.

[30] Second, since the purpose of acquisition is for consumption, use or
supply, it is helpful to consider how these attributes of the goods or
services acquired have utility in the making of the taxable supplies. It is
this functional relationship that signifies. One way of analysing this
relationship is to consider the following: for a given quantity of output,
what inputs of goods or services are consumed, used or supplied to make
or produce that output. Some inputs will clearly qualify. For example, in
the making of glass containers, cullet (waste glass) is often used as a raw
material. Other goods and services will not qualify at all and others may
require difficult judgments in determining on which side of the line they
fall.

[31] Similar considerations are of application in the interpretation and
application of the definition of imported services in s1. The definition
specifies a relationship between the supply of imported services to a
recipient and the extent to which such services are utilized or consumed,
otherwise than for the purpose of making taxable supplies. Although the
definition focuses upon supply for a purpose other than the making of

taxable supplies, the enquiry is much the same as that contemplated by
the relevant portion of the definition of input tax. In both definitions there
is a differentiation between the purpose of making taxable supplies and
other purposes. Under both definitions, the determination as to whether
the supply was for the purpose of making taxable supplies provides an
answer as to whether the requirements of the definition are met. The
definition of imported services does not extend to the supply (as opposed
to the use or consumption) of services otherwise than for the purpose of
making taxable supplies. But this difference has no relevance for present
purposes. I turn next to the application of these statutory concepts to the
facts of this case.

[32] Consol procured and made use of the local and imported services
for the purpose of executing the refinancing transactions. Consol’s
grounds of appeal as to the application of the law to the facts relied upon
the contention that the Eurobonds were utilized to acquire the assets in
order to make taxable supplies, that is to say, to manufacture and sell
glass containers. The refinancing transactions substituted local debt for
foreign debt with the same object.

[33] It is therefore to the original transaction in 2007, in terms of which
Consol acquired its glass manufacturing businesses, that we must look to
determine the purpose for which the local and imported services were
procured in 2012. The premise of Consol’s contention was that the
purpose of securing funding to acquire the businesses to make taxable
supplies in 2007 did not, in substance, change and remained in place in
2012. The substitution of local debt for foreign debt permitted Consol to
continue the very same businesses it had acquired in 2007. Those

businesses were fully functional and engaged upon the very enterprise
that Consol now conducts.

[34] I have described above how Consol came to acquire the businesses
of Consol Limited and its two subsidiaries as part of a leveraged buy-out.
The reorganisation placed the operating businesses into a new entity,
Consol. A new holding company, Consol Holdings, held all the equity in
Consol Limited and Consol. And Consol Holdings was controlled by a
private equity consortium. The net proceeds of the Eurobond debt were
used to effect this reorganisation.

[35] Consol’s appeal rested upon the initial premise that the Eurobonds
were utilized by Consol in 2007 to acquire the assets so as to make
taxable supplies. Was this premise correct?

[36] One aspect of the reorganisation was indeed Consol’s acquisition of
the operating businesses and the use of the Eurobond debt to do so. But
the reorganisation must be considered in its totality. What change did the
reorganisation effect? The operating businesses, both before and after,
continued to make glass containers. That these operating businesses were
now held in a different entity within the Consol group was of no
consequence to the enterprise carried on by these businesses. The
structure of the group changed, and new shareholders were placed in
control of a new holding company. But not, on the evidence, to bring
about some material change to the business of making glass containers.
And most important of all, the stated purpose of the Eurobond debt was to
effect the reorganisation of the Consol group of companies. Nothing of
that reorganisation was directed to any change in the making of taxable

supplies, that is, in the manufacture of glass. That being so, there was no
functional link between the issue of the Eurobonds and the making of
taxable supplies. Consol’s initial premise does not hold.

[37] It follows according to the logic of Consol’s argument, that if the
Eurobond debt was not issued in 2007 with the purpose of making taxable
supplies, then neither was the raising of local debt in 2012. The purpose
remained the same: to maintain the funding for the reorganisation of the
Consol group of companies. Once that was so, the procurement of local
and imported services in 2012 was not used by Consol in the course of
making taxable supplies. The purpose of using these services was to
replace Eurobond debt with local debt and thereby continue to finance the
reorganisation that had taken place in 2007.

[38] Something was made in the evidence and in the argument before us
of the fact that in 2007 some R227 million was spent on capital
expenditure. Mr Nayager testified that the main item of such expenditure
was the rebuild and expansion of the Bellville plant. Reference was also
made in the offering memorandum to the use of the proceeds of the
Eurobonds for prefunding capital expenditure. The relevant footnote
stated that any remaining funds, after the repayment of short-term
borrowings, would be used partially to fund the expansion of the Bellville
facility.

[39] The use of funds for capital expenditure, set out in the offering
memorandum, was hedged about with qualifications. The memorandum
sought to raise some R4 billion by issuing Eurobonds, the balance of R2.5
billion was to be sourced from share capital and shareholder loans. Of the

total funding of R6.5 billion, R200 million was allocated to the
repayment of debt and the prefunding of capital expenditure. Of this sum,
short term borrowing was first be repaid. If anything remained after the
completion of the transaction, then, what remained would be used
partially to fund the expansion of the Bellville facility.

[40] This provision for the Bellville facility was so modest and subject
to such conditionality that it simply cannot be said to amount to the
purpose for which the Eurobonds were issued. The Eurobonds were
issued to facilitate the reorganisation. Without the reorganisation, there
would have been no need to secure Eurobond debt. The reorganisation
was not undertaken to expand the Bellville facility. The expansion was
entirely incidental to the reorganisation. That being so, there is no basis to
contend that the Eurobond was issued with the purpose of funding capital
expansion, and in this sense, for the making of taxable supplies.

[41] One further matter arose in the course of argument before us.
Although the issue of the Eurobonds was to effect the reorganisation, the
raising of local debt in 2012 was undertaken to provide a more cost
effective debt structure, and thereby reduce Consol’s costs of servicing its
debt and avoid its hedging costs. In this, Consol was successful. Consol
produced a schedule comparing the cost of the original debt in the period
2007- 2013 and the cost of the refinanced debt in the period 2013 – 2018.
The difference in the cost of the debt over the periods compared is some
R275 million.

[42] The local and imported services procured by Consol in 2012 were
used to effect the refinancing of Consol’s debt. That refinancing reduced

Consol’s costs. The consequences of this for Consol’s free cash flow, its
profits and Consol’s capacity to fund capital expenditure or otherwise to
enhance its manufacturing capability was little explored in evidence,
since this was not the focus of the trial before the tax court.

[43] The issue that arises is whether the refinancing, by reason of these
cost savings, may be found to have a functional link to the manufacture
by Consol of glass containers, and hence, to the making of taxable
supplies.

[44] The difficulty in considering this issue is whether it formed part of
the case before the tax court. Rule 32(1) of the tax court rules requires an
appellant to deliver a statement of its grounds of appeal. The statement
must set out the material facts and legal grounds upon which the appellant
relies for the appeal. The statement is a pleading, defining the issues so
that the Commissioner knows the case to be adjudicated.3

[45] Consol’s statement of grounds included the following:
‘Consol Glass operates in a very competitive market. The reduction of input costs is
essential in order to maintain a competitive position in the market. The expenses that
were incurred, substituting (refinance) the Eurobonds with local funding was in order
to put in place less expensive funding which made Consol Glass more competitive
and more productive in making taxable supplies, ie producing glass bottles.’

[46] he statement of grounds was divided into facts, legal grounds and
the application of the law to the facts. The ground of appeal just cited was

3 Commissioner for the South African Revenue Service v Massmart Holdings Limited IT 14294 para 5

advanced as a fact. The ground of appeal advanced that applied the law to
the facts was quite different. It is summarized in paragraph [31] above.
There it was contended that the Eurobonds were utilized to acquire assets
in order to be able to make taxable supplies. The substitution of this debt
with locally acquired finance fulfilled the same function, that is, to
finance the assets needed by Consol to make taxable supplies.

[47] A fair reading of the statement of grounds indicates that Consol’s
case was based upon the contention that the Eurobonds and the
replacement funding were utilized to acquire assets so as to manufacture
glass containers. It requires some ingenuity to appreciate that Consol
could also have been contending that the refinancing was undertaken to
make Consol more competitive. The first ground was predicated upon the
continuity of purpose to acquire assets that commenced in 2007 when
Consol acquired the businesses and remained the purpose of the
refinancing. The ground of appeal, based on Consol’s competitive
positioning, raises entirely distinctive issues. For example, what were the
competitive constraints under which Consol operated, in what market,
requiring what competitive response that informed the refinancing
transaction?

[48] The parties did not understand the case to be concerned with
Consol’s competitive positioning and the relationship of this to the
refinancing transaction. This was not the basis upon which the trial was
run, nor was it the basis upon counsel argued their cases, either in the tax
court or before this court. There can be little doubt that the refinancing
was intended to place Consol in a position to continue to fund the original
reorganisation at a lesser cost, and it did so. What the savings achieved by

Consol permitted it to then to do was a matter of effect rather than
purpose, beyond the remit of the pleaded case.

[49] In these circumstances, no injustice is done to Consol to hold it to
the case that it sought to make out. Furthermore, the paucity of evidence
that bears upon a case predicated upon competitive positioning, and the
many questions that arise from it that cannot be answered on the evidence
before us, provides a strong indication that we should not entertain such a
case. And I decline to do so.

[50] For these reasons, the appeal is dismissed. Counsel were in
agreement that the costs of the appeal should follow the result. The
following order is made:
The appeal is dismissed with costs, including the costs of two
counsel.

________________________
DAVID UNTERHALTER
ACTING JUDGE OF APPEAL

Appearances
For appellant:
C Louw SC

Instructed by:
Cliffe Dekker Hofmeyr, Johannesburg;

Honey Attorneys Inc, Bloemfontein
For respondent:
M W Janisch SC (with him ST Seshoka)

Instructed by:
State Attorney, Cape Town and Bloemfontein

THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
MEDIA SUMMARY OF JUDGMENT DELIVERED
Consol Glass (Pty) Ltd v The Commissioner for the South African Revenue Service
(Case no 1010/2019) [2020] ZASCA 175
From:
The Registrar, Supreme Court of Appeal
Date:
18 December 2020
Status:
Immediate
The following summary is for the benefit of the media in the reporting of this case and does not form
part of the judgments of the Supreme Court of Appeal

Today the Supreme Court of Appeal (SCA) handed down judgment in an appeal against an
order of the Tax Court, Gauteng (Louw J), which turned upon the appellant’s (Consol’s)
liability under the Value-Added Tax Act 89 of 1991 ( the VAT Act) for services rendered to
Consol in respect of a refinancing transaction.  The appeal was dismissed.

In 2012, Consol restructured its debt. In doing so, it procured services, some from local vendors
and others from suppliers resident outside of South Africa. The Commissioner raised additional
assessments in respect of Consol’s VAT liability. The Commissioner disallowed input tax
deductions that Consol had claimed in relation to the services provided by local vendors, and
imposed output VAT on the imported services procured by Consol. Consol appealed to the tax
court. The tax court dismissed the appeal, save in respect the 10% penalty imposed by the
Commissioner. Consol appealed to the SCA.

During 2007, Consol, then a shell company, acquired the businesses of the listed company
Consol Limited and its two subsidiaries. The acquisition formed part of a leveraged buy-out.
Consol made these acquisitions by securing debt funding in the form of Eurobonds. Consol
decided to guard against the risks of its Euro exposure by concluding collateral hedging

agreements. This funding and the hedges proved expensive. In 2012, Consol concluded
agreements with a consortium of banks to secure funding in the South African market so as to
replace its Eurobond debt and unwind its hedging positions. Consol procured services, local
and imported, to effect this refinancing.

The appeal concerned two issues. First, was the tax court correct to find that the Commissioner
was entitled to disallow the input tax claimed by Consol on the fees charged to it by local
service providers? Second, was the tax court correct to find that Consol was obliged to declare
and pay VAT on the fees paid by Consol to non-resident suppliers for their services? These
issues turned upon whether the services were acquired by Consol for the purpose of
consumption, use or supply in the course of making taxable supplies. If the services were so
acquired, Consol was entitled to claim the input tax deductions and was not liable for the output
VAT imposed on the imported services.

The Commissioner submitted that the services were not so acquired. Rather, Consol acquired
the services to make an exempt supply in the form of a financial service. Consol did so in
securing loans from the consortium of banks under the refinancing transactions and thereby
issued a debt security, one species of financial service. Consol, so it was contended, made use
of the local and foreign services to issue a debt security, and thus did not do so for the purpose
of making a taxable supply.

The  SCA found that this submission was insupportable. Consol was registered under the VAT
Act as a vendor engaged upon the enterprise of manufacturing and selling glass containers.
Neither the original issuance of the Eurobonds, nor the loans secured from the local consortium
of banks, transformed Consol from a vendor of glass containers to a vendor supplying financial
services. Consol was a borrower not a lender and hence not a vendor of financial services.  The
services were  thus not procured to make an exempt supply.

Consol contended that it procured the local and imported services to execute the refinancing
transactions, which substituted local debt for foreign debt. The refinancing had the same
purpose as the  original issuing of the Eurobonds: to permit Consol to acquire the assets in
order to make taxable supplies, that is to say, to manufacture and sell glass containers.

The SCA found that since, under the statutory definition, the acquisition of the services is for
consumption, use or supply it is helpful to consider how these attributes of the services have
utility in the making of taxable supplies. It is this functional relationship which signifies.
Consol’s appeal rested on the premise that the Eurobonds were utilized in 2007 to acquire the
assets from Consol Limited so as make taxable supplies. The acquisition, however, did not
make any material change to the  operating businesses acquired by Consol. The reorganisation
of the Consol group was of no consequence to the enterprise carried on by these businesses.
They continued to manufacture and sell glass containers both before and after the
reorganisation. There was thus no functional link between the issue of the Eurobonds and the
making of taxable supplies. And once that was so, the services procured to effect the
refinancing of the Eurobond debt lacked a functional link for the same reason.

Accordingly, the SCA dismissed Consol’s appeal with costs, including the costs of two
counsel.

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