Assmang (Pty) Ltd v The Commissioner for the South African Revenue Service and Others

Assmang (Pty) Ltd operates two mines (Khumani and Beeshoek) in the Northern Cape Province, mining iron ore, chrome, manganese ore and producing manganese alloy. Both mines are registered as 'users' and 'vendors' for tax purposes. Assmang employed various contractors (including Aveng Moolmans, Blue Sky Carriers CC, and Blue Chip Mining) to provide mining services including drilling, loading and hauling of waste material. Assmang claimed diesel refunds for fuel levies and Road Accident Fund levies in terms of the Customs and Excise Act 91 of 1964. In 2011, KPMG on behalf of Assmang approached SARS for a ruling on whether diesel refunds could be claimed in respect of the contractors. SARS conducted a broader diesel refund audit and on 4 July 2014 issued an amended letter of demand claiming repayment of diesel refunds, plus interest and penalties totaling R39,566,010.40. Assmang filed an internal administrative appeal on 9 October 2014 which was rejected. Assmang arranged for fuel to be supplied by Engen at a preferential rate which was dispensed on site at the mine. The fuel was used for Khumani's mine vehicles and by some contractors. Assmang paid Engen and deducted an amount for diesel from the invoices issued by the contractors. The contracts with Moolmans and Blue Sky expressly stated 'wet rates' with diesel capped at 33% and 31.3% of the total contract price respectively. These rates were adjusted monthly when diesel prices fluctuated. Blue Chip's contract provided for 'dry rates' but in practice the same deduction method was used. An incentive scheme permitted contractors to make a profit from diesel by being fuel efficient.

• Whether Assmang contracted with its contractors on a 'dry basis' in accordance with Note 6(a)(ii) of rebate Item 670.04 in Part 3 of Schedule 6 of the Act, thereby qualifying for diesel refunds
• Whether Assmang made 'eligible purchases' as defined in Note 6(a)(iii), namely purchases of distillate fuel by a user for use and used as fuel
• Whether the distillate fuel was purchased by the user for use and used as fuel for own primary production activities as provided for in Note 6(f)(ii) and 6(f)(iii)
• Whether there was compliance with the requirements of 'logbooks' as contemplated in Note 6(a)(xi) for the relevant period
• Whether there was compliance with the bookkeeping provisions contained in Note 6(q) for the purposes of the rebate item in respect of which refunds are claimed
• Whether sections 47(9)(c) and 75(1A)(f) of the Customs and Excise Act 91 of 1964 are constitutionally invalid for failing to provide for payment of interest on diesel refunds withheld or not paid

The appeal was dismissed with costs, including the costs of two counsel where so employed. The high court's determination confirming SARS' decision to disallow the diesel refunds was upheld. The constitutional challenge to sections 47(9)(c) and 75(1A)(f) of the Act was rejected as not properly before the Court.

The binding legal principles established are: (1) For purposes of diesel refund claims under rebate Item 670.04 in Part 3 of Schedule 6 of the Customs and Excise Act 91 of 1964, the economic substance of the contractual arrangement determines whether contracting is on a 'wet' or 'dry' basis, not the formal label applied to the contract. Where contractors bear the risk of diesel consumption and can profit from fuel efficiency through deductions from invoices, the arrangement constitutes a 'wet rate' that does not qualify for refunds, regardless of characterization; (2) Compliance with the record-keeping requirements in Note 6(q) requires detailed logbooks tracking fuel from purchase through to actual usage in specific activities. A system that merely records dispensing of fuel to equipment without documenting how, when, where and for what purpose the fuel was actually used does not constitute substantial compliance and disqualifies the claim; (3) Non-eligible purchases under Note 6(e)(iii)(aa)(B) must be deducted from refund claims. Where fuel is effectively sold to contractors through invoice deductions, even if calculated on spreadsheets rather than credit notes, these constitute non-eligible purchases; (4) A constitutional challenge to legislation must be properly pleaded with a complete factual and legal foundation from the commencement of proceedings. A Rule 16A Notice filed years after close of pleadings without laying proper evidentiary foundations renders the challenge impermissible; (5) Courts should not decide constitutional questions unless necessarily required to resolve the case. Where there is no live controversy because the applicant has failed on substantive grounds, abstract constitutional challenges will not be entertained absent compelling public interest or risk of grave injustice.

The Court made several non-binding observations: (1) It noted that the rationale behind the refund legislation is to make mining companies internationally competitive while preventing abuse of the refund system. The legislation permits use of contractors but requires mines to bear diesel costs without recovery to qualify for refunds; (2) The Court observed that the strict dry rate may not always be beneficial to mines as contractors unconcerned with diesel costs may be wasteful, leading to 'creative ways' to attempt to convert wet rates into dry rates; (3) The Court commented that it was 'somewhat perplexing' that Assmang sought determination on penalties when no penalty had been imposed and jurisdictional requirements under section 91 had not been met, as Assmang had not consented to abide by SARS' decision; (4) The Court noted that if Assmang had succeeded, questions would have arisen under section 172 of the Constitution regarding retrospectivity and just and equitable remedies in the event of a declaration of invalidity; (5) The Court observed that SARS has no right to inspect contractors' books and that the mine is in the best position to monitor diesel purchase, dispensing and usage for primary activities, which justifies the stringent bookkeeping requirements imposed on mines rather than contractors; (6) The Court indicated that even if the constitutional challenge had been properly pleaded, it would not constitute a matter of sufficient public interest to compel the Court to consider it given that Assmang was not entitled to diesel refunds in the first place.

This case is significant in South African tax law for several reasons: (1) It clarifies the distinction between 'wet' and 'dry' contracting rates for purposes of diesel refund claims under the Customs and Excise Act, confirming that substance prevails over form - the economic reality of the arrangement determines eligibility, not mere labeling; (2) It establishes strict compliance requirements for record-keeping obligations under Note 6(q), particularly the necessity of maintaining detailed logbooks that track fuel from purchase through to actual usage in specific activities - general tracking systems are insufficient; (3) It reinforces the principle from Canyon Resources that bookkeeping exercises (whether credit notes or spreadsheet calculations) cannot convert wet rates into dry rates for refund purposes; (4) It emphasizes procedural requirements for constitutional challenges in tax litigation, requiring proper pleading with factual foundations from the outset of proceedings - late amendments without evidentiary support will not be entertained; (5) It demonstrates the courts' reluctance to decide constitutional questions that are not live controversies essential to resolving the actual dispute before the court; (6) It confirms SARS' broad investigative powers under section 75(1C) to investigate refund applications and the consequences of failure to comply with documentary requirements.