Consol Glass (Pty) Ltd v The Commissioner for the South African Revenue Service

Consol Glass (Pty) Ltd ("Consol") is a manufacturer and seller of glass containers, registered as a vendor under the Value-Added Tax Act 89 of 1991 ("VAT Act"). In 2007, Consol acquired glass manufacturing businesses as part of a leveraged buy-out funded by issuing Eurobonds. In 2012, Consol restructured its debt by replacing the expensive Euro-denominated debt with cheaper Rand-denominated loans from a consortium of South African banks (approximately R5 billion). To effect this refinancing transaction, Consol procured services from both local vendors (South African banks and attorneys charging arranging, structuring, and legal fees) and foreign service providers (advising on early redemption of Eurobonds and unwinding hedging positions). Consol claimed input tax deductions for VAT paid on local services and did not declare output VAT on imported services. In July 2015, the Commissioner raised additional assessments disallowing the input tax deductions and imposing output VAT on imported services for five tax periods in 2012. Consol's objection was dismissed, and it appealed to the Tax Court, which dismissed the appeal except for a 10% penalty.

• Whether Consol was entitled to claim input tax deductions under section 1 of the VAT Act in respect of fees paid to local service providers for the debt refinancing transaction
• Whether the services acquired were 'wholly for the purpose of consumption, use or supply in the course of making taxable supplies' as required by the definition of 'input tax'
• Whether Consol was liable to pay output VAT on imported services under section 7(1)(c) of the VAT Act
• Whether the imported services were 'utilized or consumed in the Republic otherwise than for the purpose of making taxable supplies' as defined in section 1
• Whether the refinancing transaction constituted the supply of a financial service (specifically the issue of a debt security) which would be an exempt supply under section 12 read with section 2(1)(c) of the VAT Act
• The proper interpretation of 'in the course of making taxable supplies' in the context of input tax deductions
• The functional relationship between services acquired and the making of taxable supplies

The appeal was dismissed with costs, including the costs of two counsel. The Tax Court's decision was upheld, confirming: (1) the disallowance of input tax deductions claimed by Consol in respect of fees paid to local service providers for the refinancing transaction; and (2) the imposition of output VAT on the imported services procured by Consol.

The ratio decidendi is that services are only acquired 'for the purpose of consumption, use or supply in the course of making taxable supplies' within the meaning of the definition of 'input tax' in section 1 of the VAT Act when there is a functional relationship between the services acquired and the making of the vendor's actual taxable supplies. The court must identify the enterprise that the vendor is conducting and determine whether the services have utility in producing the outputs of that enterprise. Where services are procured for a debt refinancing transaction that was undertaken to maintain funding for a corporate reorganisation (rather than to change or enhance the actual production of taxable supplies), there is no functional link between those services and the making of taxable supplies, even if the operating businesses funded by the debt do make taxable supplies. The purpose of the original debt and the refinanced debt must be examined - if neither was issued with the purpose of making taxable supplies but rather to effect a corporate reorganisation, the services procured to execute the refinancing are not used in the course of making taxable supplies. A vendor that manufactures goods does not become a supplier of financial services by virtue of borrowing money; borrowing constitutes receiving, not supplying, a financial service.

The Court made several obiter observations: (1) A conventional loan agreement does not fit comfortably within the definition of 'debt security' in section 2(2)(iii) of the VAT Act. What is contemplated are instruments such as bonds that can be issued, allotted, drawn, accepted, endorsed or transferred, not standard loan agreements; (2) The definition of 'cheque' in section 2(2)(i) is very broad and goes far beyond the conventional notion of a cheque, including bills of exchange and letters of credit. This exclusion from 'debt security' casts light on what instruments are intended to fall within that definition; (3) The Court noted that determining whether services are acquired for the purpose of making taxable supplies may be assisted by considering: 'for a given quantity of output, what inputs of goods or services are consumed, used or supplied to make or produce that output'; (4) The Court observed that an interpretation of 'in the course of making taxable supplies' that is too restrictive risks underestimating the diversity and complexity of modern supply chains; (5) The Court noted that while cost savings from refinancing might have consequences for cash flow, profits, and capital expenditure capacity, such effects are matters of consequence rather than purpose and were beyond the scope of the pleaded case; (6) The Court emphasized the importance of proper pleading in tax court proceedings under Rule 32(1) of the Tax Court Rules, noting that the statement of grounds of appeal defines the issues to be adjudicated.

This case provides important guidance on the interpretation and application of the definitions of 'input tax' and 'imported services' under the VAT Act. It clarifies that: (1) The inquiry into whether services are acquired for the purpose of making taxable supplies requires examination of the functional relationship between the inputs and the vendor's enterprise; (2) A vendor does not become a supplier of financial services merely by borrowing money - the borrower receives financial services, the lender supplies them; (3) Conventional loan agreements do not readily constitute 'debt securities' for purposes of the financial services exemption; (4) Corporate reorganisations and debt restructurings, even if they result in cost savings, are not necessarily conducted 'in the course of making taxable supplies' if they do not have a functional link to the vendor's actual taxable enterprise; (5) The critical question is identifying the enterprise the vendor is conducting and determining whether the services acquired have utility in making the outputs of that specific enterprise; (6) The diversity and complexity of modern economic activities requires careful analysis, but the statutory test focuses on the purpose of acquisition in relation to the vendor's taxable supplies. The case demonstrates the importance of proper pleading in tax litigation and the court's reluctance to entertain arguments not properly raised in the grounds of appeal.