IN THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA

CASE NO 279/2001

In the matter between

THE COMMISSIONER FOR THE SOUTH AFRICAN
REVENUE SERVICE

Appellant

and

DELTA MOTOR CORPORATION (PROPRIETARY)
LIMITED

Respondent

________________________________________________________________________

CORAM:
HOWIE,  OLIVIER,  BRAND,  NUGENT  JJA  et LEWIS
AJA
________________________________________________________________________

Date Heard:
27 Augustus 2002

Delivered:
23 September 2002

Customs duty - whether royalty part of price of goods or otherwise dutiable
________________________________________________________________________

J U D G M E N T
________________________________________________________________________

HOWIE JA

HOWIE  JA
[1] The respondent is a motor vehicle manufacturer and distributor.
Since 1987 it has imported vehicle parts in the form of what are known as
CKD (completely knocked down) kits on an ongoing basis from Adam Opel
Aktiengesellschaft, Germany (‘Opel’).   Having for years paid customs duty
calculated on the invoiced amount payable per kit, the respondent, in about
1997 was advised by a consultant that the invoiced amount had in the past
included not only the purchase price of the kit but also an unspecified charge
by Opel for engineering, styling and tooling (‘EST’).   Acting on this advice,
the respondent requested a refund of customs duty on the ground that the
EST charge was not part of the price payable for a kit but rather a non-
dutiable royalty.   When the appellant refused a refund the respondent sought
and obtained in the High Court at Pretoria a declaratory order by Botha J

that the EST charges were not part of the value of the kits for customs duty
purposes.    With the necessary leave, the appellant appeals.
[2] The appellant’s reaction to the refund request and the attitude he
adopted in the litigation were very largely influenced by what he obviously
regarded as considerations militating against the honesty and reliability of
the respondent’s crucial assertions.   The EST charges were never separately
invoiced and the invoices that pertained to the kits failed to specify either the
fact or the amount of an EST charge.   Nor for a long time did the written
agreements that governed the respondent’s contractual relationship with
Opel refer to these charges.   Only in 1998 was an amendment signed which
purported to record their existence, nature and purpose.   Understandably,
perhaps, the essential allegations in the founding affidavit were met with a
firmly enunciated expression of scepticism in the opposing affidavits.

[3] Be that as it may, the need for a detailed factual analysis and
evaluation of the voluminous papers in order to resolve what I might call the
credibility challenge is unnecessary.   In the end the appellant possessed no
evidence with which to counter that of the respondent and the main facts on
which the respondent relied in the founding papers were substantiated by
even further evidence in the replying affidavits.   Faced with that situation
when the matter came before the Court below, it was open to the appellant to
request an oral hearing at which the respondent’s relevant deponents could
be cross-examined.   That course he elected not to adopt.   The challenge
was not followed through.   The omission to call for cross-examination is
significant because subsequent to the refund request senior members of the
appellant's staff visited the respondent's premises and had access to available
relevant records including contemporary documentation containing
references to EST charges.   Having had that opportunity, the furthest that

the appellant's deponents were prepared to venture on the subject of these
charges was that the documentation justified 'the impression' that they
formed part and parcel of the purchase price payable for a kit.   In other
words their existence and nature, and their having been contractually due
and paid form the outset, were not really open to dispute.
[4] In the circumstances there is no sound reason, in my view, to question
the correctness of the finding by the learned Judge that, notwithstanding the
criticisms advanced in the affidavits and arguments on behalf of the
appellant, the matter had to be resolved on the facts presented by the
evidence for the respondent.
[5] Briefly summarised, those facts are the following.   The agreements
referred to include three of relevance here.   The first is an assembly and
distribution (A and D) agreement;  the second, a trademark licence
agreement; and the third, a supply agreement.   Respectively they relate to

the assembly, sale or servicing by the respondent of Opel motor vehicles in
South Africa and neighbouring countries.   Save for the amendment I have
mentioned their provisions that are material in this case have remained the
same since 1987.
[6] The A and D agreement licenses the respondent to effect or procure
the local manufacture of parts, to use those parts with or without the
imported kits in the assembly of complete vehicles, to sell and service such
vehicles, to sell spare parts and accessories imported separately from the kits
and to use Opel's technical information and technology in all these
endeavours.   In terms of this agreement a royalty is payable by the
respondent to Opel for the right to carry on the stated activities.   This
royalty has to be determined 'by reference to' paragraph 4(c) of the supply
agreement.

[7] The trademark licence agreement grants the respondent and its dealers
the use of Opel trademarks in the marketing of vehicles and spares.
[8] The supply agreement is the one which governs the purchase of the
kits and separately imported parts and accessories.   In terms of paragraph
4(c), if no kits are imported a royalty is nevertheless payable in respect of
each vehicle sold.   The royalty is for the license to carry on the activities
referred to in the A and D agreement and amounts to 'not less than 3% of the
price of a CKD set representing the total vehicle'.   (That position does not
pertain to one particular model but this makes no difference for present
purposes.)   Accordingly, reading paragraph 4(c) of the supply agreement
with the A and D agreement, liability for the royalty payable under the latter
is triggered by the sale of every Opel vehicle which the respondent
assembles.

[9] The subject of royalties has therefore been contractually provided for
all along but the respondent’s case is that the EST charges were never
positively identifiable as the subject matter of any of the royalty provisions
until the 1998 amendment already mentioned.
[10] In that amendment, allegedly formulated to bring the relevant royalty
provisions into conformity with the factual situation, the EST charge was
defined and explained.   The essential question is whether the amendment
correctly reflects the picture conveyed by the evidence comprising the
respondent’s affidavits and supporting documentation.
[11] What the 1998 amendment records in this regard is that the EST
charge comprises an engineering and styling portion and a tooling portion,
and that it is the engineering and styling portion that represents the royalty
payable in terms of the A and D agreement (and, where, applicable payable
under paragraph 4(c) of the supply agreement).   The tooling charge, on the

other hand, 'covers the rebilling of a portion of the total component tooling
investment incurred by Opel for a defined range of vehicles'.   Nevertheless,
as the agreement goes on to state, the tooling portion, together with the
engineering and styling portion, is levied and payable whether or not the
respondent orders kits from Opel, as long as assembled Opel vehicles are
sold.   In all these respects, so it seems to me, the agreement conforms to the
factual position which the evidence establishes.
[12] From the evidence the following emerges.   A kit does not contain all
the component parts necessary for the assembly of a complete vehicle.   In
most cases the majority of the required components are locally
manufactured.   Opel’s expenses in respect of the design, construction,
development and tooling involved in the production of a new vehicle line are
recovered by imposing a worldwide royalty in the form of the EST charge.
This has been levied and paid by the respondent since 1987.   It is paid, as

the A and D agreement provides, in consideration for the right to assemble,
sell and service Opel vehicles, to manufacture and sell Opel parts and to use
Opel trademarks and technology.
[13] It has remained relatively constant in amount and is not related to or
calculated with reference to the cost, weight, number or value of the
components in a kit.   It is payable in respect of every assembled vehicle
actually sold and it is payable even if an assembled vehicle should contain
no components from an imported kit.   Because it was always anticipated
that every kit would be used in the assembly of a sold vehicle the EST
charge was, as a matter of practical convenience (and because, until 1997, it
was a matter of no moment to either Opel or the respondent) simply
included in the invoiced amount pertaining to the imported kits and paid
pursuant to such invoicing.   Should an assembled vehicle not be sold,
however, Opel would be obliged to refund the EST paid on such invoice.

Although this obligation is not expressed in any agreement it is plainly
implicit - an EST charge would have been paid without having been due.   In
short, therefore, if a sold vehicle contains no kit components the EST charge
is still payable.   On the other hand, if a vehicle assembled from a kit is not
sold, EST (ostensibly invoiced as part of the kit price) will be refundable.
[14] The EST charge is not payable either in respect of the Opel
components that are imported separately from the kits or in respect of the
right to sell such components.
[15] Nothing on record shows, or even implies, that the royalty payable
under the A and D agreement has never been paid, nor, accepting that it
always has been paid, that it was accounted for elsewhere in the respondent's
records, quite separately from the EST charges.   In other words there is no
suggestion that this royalty is not truly part of the EST charge.

[16] Counsel for the appellant sought to discount the evidence concerning
liability for the EST charge by contending that the written agreements, none
of which made any mention of it prior to 1998, were unambiguous and in
any event contained non-variation clauses.   There are two answers.   The
first is that it was, generally speaking, for the contracting parties alone to
enforce compliance, or sanction non-compliance, with their covenants.  This
case does not constitute an exceptional situation in which the appellant, an
outsider, can complain and counsel did not suggest it was.   The second
answer is that the A and D agreement has always stipulated for a royalty and
Opel has always levied and been paid the EST charge.   The 1998
amendment and the evidence have done nothing more than achieve
rectification by identifying the engineering and styling portion of the EST
charge as being the royalty in question.   So much for the facts.

[17] The relevant provisions of the Customs and Excise Act 91 of 1964 are
s 41(4)(a) and ss 65, 66 and 67.   What the last-mentioned three sections lay
down (as applied to the present case) is that the value of imported goods for
customs duty purposes is the transaction value, which in turn means the
price actually paid or payable for the goods with the addition, if applicable,
of any separate royalty or licence fee which, inter alia  is payable in respect
of the goods as a condition of their sale.
[18] Section 41(4)(a) requires an exporter to declare in a prescribed invoice
all particulars in respect of the transaction value or any royalty and any
information which bears upon the transaction value.   Such particulars,
except where the appellant determines otherwise, must 'relate to' the final
amount of the transaction value or royalty.    The appellant did not
'determine otherwise' in terms of this paragraph and accordingly the
particulars declared 'related to' the transaction value.   In so far as the

invoices issued by Opel failed to set out the prices payable for the kits
separately from the EST charges the appellant was thus entitled, before the
refund request, to assess duty on the invoiced amounts.   However, nothing
in that subsection prevented the respondent from afterwards establishing the
correct state of affairs.
[19] Reverting to the matter of the price actually paid or payable, this
phrase is defined in s 65(9) to mean 'the total payment made or to be made,
either directly or indirectly, by the buyer to or for the benefit of the seller for
the goods, but does not include ... payments passing from the buyer to the
seller which do not directly relate to the goods'.
[20] There is undeniable logical force in the submission made on behalf of
the appellant that a commercially accepted and realistic way for a
manufacturer to recover design and development costs would be to include
appropriate recoupment into the selling price of its manufactured articles.

But that is what any buyer of manufactured goods must expect to pay for.
The situation depicted by the evidence in this case has a crucial additional
feature.   The manufacturer - Opel - was giving the buyer - the respondent -
the rights spelt out in the A and D agreement.   Those rights empowered the
respondent, under licence, itself to assemble Opel vehicles and sell them for
its own account when it had incurred none of the expenses of the kind for
which the EST charges are intended to compensate.   Apart from that, the
respondent was at liberty to obtain all necessary parts from sources other
than Opel and if it did buy kits from Opel it was free to specify that they
contain only a relatively low percentage of the total components that were
necessary for an entire vehicle.  The respondent was accordingly entitled by
the licence to use Opel's technology even if it used few Opel components or
none.   For such rights it is commercially realistic, and common practice,

that the manufacturer be paid a royalty over and above the price of the
goods.
[21] Every royalty, moreover, whether payable under the A and D
agreement or, in the event of no kit importation, under paragraph 4(c) of the
supply agreement, is by reason of the specific terms of that paragraph, in
addition to, and therefore not part of, the price of the kit.   The engineering
and styling components of the EST charge are consequently clearly excluded
from the price of the kit.   Although the tooling portion is not expressly said
to be a royalty it is just as separate from the price payable as are the
engineering and styling portions.
[22] On the facts of this case, therefore, I consider that the EST charges did
not directly relate to the kits and they were accordingly not part of the price,
actually paid or payable, of the imported goods.

[23] The remaining issue is whether they constituted royalties or licence
fees within the meaning of s 67(1)(c) of the Act, namely -
'royalties and licence 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 ...'

For paragraph (c) of s 67(1) to render a royalty or licence fee dutiable all the
constituent elements of the paragraph must be present.   Absent any one, the
provision is inapplicable.
[24] For the appellant, reliance was placed on the decision of the court of
first instance in Samcor Manufacturing (Pty) Ltd v The Commissioner for
the South African Revenue Service, an unreported judgment of the Transvaal
Provincial Division in case 22655/98.   The judgment went off on a point not
decided when the matter later went on appeal.   (The appeal judgment is
reported as Samcor Manufacturing (Pty) Ltd v Commissioner, South African

Revenue Service 2002 (4) SA 823 (SCA).)   Essentially on the contents of
the agreements involved in that case it was held by the High Court that the
payments in dispute there were at least indirectly due as a condition of sale.
According to the relevant contractual provisions in that case payment of a
royalty was required 'for each set of [imported] CKD parts'.   Here, by
contrast, payment of a royalty is required 'in respect of each vehicle sold'.
The Samcor case is therefore clearly distinguishable and of no assistance to
the appellant.
[25] In the present matter the sale of kits to the respondent is regulated by
the supply agreement.   Nothing in that agreement makes the charges now in
dispute payable as a condition of sale.   The engineering and styling charges
constitute the royalty payable, not in terms of the supply agreement but the
A and D agreement.   As for the tooling charges (assuming they amount to
royalties or licence fees) they, too, are not payable pursuant to anything

contained in the supply agreement.   The EST charges are consequently not
payable 'as a condition of sale'.   On the contrary, in so far as the supply
agreement does apply to these charges it makes them payable even if no kits
are sold (so long, of course, as assembled vehicles are sold).
[26] It follows further from what has been said already that the EST
charges are paid "in respect of" assembled vehicles sold and not "in respect
of" the imported kits.
[27] The terms of s 67(1)(c) are accordingly inapplicable and in
consequence the EST charges were not dutiable.
[28] The appeal is dismissed, with costs, including the costs of two
counsel.
CT HOWIE
JUDGE OF APPEAL
CONCUR:
OLIVIER  JA
BRAND JA
NUGENT  JA
LEWIS  AJA