Trade Technical: Court offers clarity on tariff determinations – common sense, pragmatism and business-like results are part of the approach


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The recent High Court decision in Diageo v CSARS has clarified the approach to interpreting the law on tariff determinations in South Africa.

This case concerned whether the tariff determination made by SARS in terms of section 47 of the Customs and Excise Act for the product ‘Cape Velvet Cream Original’ (‘CVCO’), a liqueur manufactured by Diageo, to be classifiable under Tariff Item 104.23.22 and Tariff Subheading 2208.70.22 of Part 1 of Schedule No.1 to the Act, viz ‘Other’. The court of first instance had used a literal or text-based approach that found that there is no ambiguity in the Additional Note in question and thus, the interpretation of the Note ‘need go no further than its clear and unambiguous wording.’ As a result, it agreed with the Commissioner’s interpretation of the Additional Note and its subsequent tariff classification.

In this regard, section 47(8)(a) of the Customs and Excise Act provides for the interpretation of tariff determinations in accordance with the International Convention on the Harmonised Commodity Description and Coding System (HS) and to the Explanatory Notes. This is subject to the rule that where the application of any part of such Notes, addendum or any explanation thereof is optional, the application of such part, addendum or explanation shall be in the discretion of the Commissioner. Explanatory Notes are the official interpretation of the HS approved by the World Customs Organisation (WCO) Council and are an indispensable complement to the HS. They provide guidance on the scope of each heading, a list of the main products that each position includes and excludes, and their technical description.

In this matter, on appeal to a full bench of the High Court, Diageo argued that the CVCO referred should be classified under Tariff Item 104.23.21 and Tariff Subheading 2208.70.21. In simple terms, these are products with an alcoholic strength by volume exceeding 15 percent by volume but not exceeding 23 percent by volume.

In response, the full bench of the High Court explained that the approach to the legal interpretation of the rules for tariff determinations must be the purposive or text-in-context approach thereby rejecting the text-based or literal approach of the court of first instance. This purposive approach requires the interpreter to go beyond the objective meaning of words. This is a unitary exercise that considers the text, context, and purpose. You always start with the language of the provision itself. This meaning can only be understood in light of the context, surrounding circumstances and purposes of that statute. Context and language must thus be considered together; neither is predominant, but both are parts of a unitary interpretative process. Thus, the appeal court held that this approach must be followed even where the words to be construed are ‘clear and unambiguous’, thereby rejecting the literal approach of the court that first heard this matter.

Using the purposive approach, the full bench of the High Court found that the Commissioner erred in failing to make a tariff determination holistically having regard to its purpose within the broader customs and excise regulatory regime. It is also in this context, that Diageo’s reliance on the de minimis doctrine (i.e., the law is not concerned with trivial matters) was considered by the court.

The full bench thus contextualised tariff determinations by explaining the relationship between the World Trade Organisation (WTO) and the World Customs Organisation (WCO) and how the latter was created to clarify customs issues under the General Agreement on Tariffs and Trade 1994 (GATT), the main agreement for trade in goods in the WTO. According to this court, the HS nomenclature was developed by the WCO and entered into force on 1 January 1988. The HS is a complete product classification system covering 5000 products. It was designed as a ‘core’ system’ to which countries adopting it could make further subdivisions according to their tariff and statistical needs. These descriptions are arranged into 97 chapters and grouped into 21 sections. The HS contains interpretative rules and section, chapter, and subheading notes for use in the classification of merchandise.

The General Rules for the Interpretation of the Harmonised System (‘GRI’) are the rules that govern the classification of goods under the HS. Parties are required to apply the GRI and all section, chapter, and subheading notes without modification to the scope of the sections, chapters, headings, or subheadings of the HS. Each contracting party is allowed to adopt in its national tariff system further detailed subdivisions for classifying goods so long as any such subdivision is added and coded at a level beyond the 6-digit numerical code provided in the HS. Coding beyond the 6-digit level is usually at the 8-digit level and is generally referred to as the “national level.

In short, classification as between headings is a three-stage process: first, interpretation, which entails the ascertainment of the meaning of the words used in the headings 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 the process of classification, determining the meaning of the tariff heading is the crucial first stage. Only then can one proceed to the second stage of considering the nature of the products in issue to determine in the third stage whether they fall within the class of products identified in the tariff heading. This distinction must not cause the nature of the products to be used to colour the meaning of the tariff heading.

The court then using the purpose and context of the tariff subheading 2208.70.21, established that the manufacturing process and inherent characteristics of liqueur, an ingredient can only be regarded as an alcoholic ingredient if it significantly contributes to the alcohol by volume (ABV) of the final product. Thus, the court agreed with Diageo’s argument that the note in question, Additional Note 4(b) was introduced to prevent a situation where a manufacturer uses the more expensive wine spirits but then adds non-expensive C-spirits thereto and, in doing so, increases the alcohol content of the beverage with the cheaper C- spirits, but simultaneously benefit from the lower rate of excise duty. In this case, the ingredient was a ‘non-alcoholic ingredient’ despite the ABV of the ingredient. It was not disputed that the ABV of the flavouring which is added to the wine spirits is 0.000252%. The alcohol content of the wine spirit base is 15.99999964%. Since the lower tariff was introduced to promote the use of the more expensive wine spirits in the manufacturing process of liqueur, it would be inherently contradictory to find that a product of which the alcohol content is only increased by 0.00004% is then excluded from the benefit of a lower tariff. This would be a tariff determination that is insensible and unbusinesslike because it undermines the purpose of the tariff subheading.

This coupled together with the principle of de minimis non curat lex, which encapsulates that the law does not concern itself with a fact or thing that is so insignificant that a court may overlook it in deciding an issue or case, meant that court ruled in favour of Diageo. This principle requires that ‘mere trifles and technicalities must yield to practical common sense and substantial justice’. It has been applied in South Africa mostly in criminal matters. But the rationale for invoking the principle is similar, and the principles flowing from the case law provide guidance in this matter. The principle depends solely on the facts of each case, a value judgment and the purpose of the standard. Thus, the court held that the insignificance of the added 0.000252% of alcohol in the vanilla flavouring is affirmed by SARS’ Excise External Policy on Spirits. This principle had not been applied in the context of customs and excise duty. The court was referred to precedents emanating from the United States where the courts have used the de minimis maxim in customs cases. The court saw it as appropriate to seek guidance from other legal systems since both South Africa and the United States are members of the WCO, and the fact that the de minimis principle is not foreign to the sphere of international trade. Ultimately, the court held that the law does not consider the ABV of the vanilla flavouring to be classified as an alcoholic ingredient.

Therefore, in making a tariff determination, SARS must follow a purposive and holistic approach using the context, surrounding circumstances, WTO law, common sense, the practical realities of the product in question and reach a conclusion that is sensible and businesslike.

This is the stuff we do when normal people are sleeping. Think about complicated tariff classification issues.

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