Commissioner for the South African Revenue Service v United Manganese of Kalahari (Pty) Ltd

United Manganese of Kalahari (Pty) Ltd (UMK) is the fourth largest manganese miner in South Africa, conducting operations in the Northern Cape. UMK sells manganese both locally and overseas. Local sales are on FOR (free on rail) terms where purchasers take delivery at the mine. International sales are on FOB (free on board) or CIF (cost, insurance, freight) terms. UMK rendered royalty returns to SARS for the 2010 and 2011 tax years. In 2012 SARS commenced an audit of those returns, during which it became apparent that UMK and SARS had different approaches to determining UMK's gross sales for calculating royalties under the Mineral and Petroleum Resources Royalty Act 28 of 2008. The dispute centred on whether UMK could deduct transport, insurance and handling (TIH) costs incurred in international sales when calculating gross sales for royalty purposes, particularly where these costs were not separately specified in the sales price. In September 2016, UMK approached the Gauteng Division of the High Court seeking declaratory relief on the proper method of determining gross sales. Meyer J granted the declaratory order and refused leave to appeal. Leave to appeal was subsequently granted by the Supreme Court of Appeal.

• What is the proper interpretation of section 6(2)(b) read with section 6(3)(b) of the Mineral and Petroleum Resources Royalty Act 28 of 2008 in determining gross sales for royalty calculation purposes?
• What is the meaning of the phrase 'without regard to any expenditure incurred in respect of transport, insurance and handling' in section 6(3)(b)?
• Whether transport, insurance and handling (TIH) costs can be deducted from gross sales only when these costs are separately specified as line items in the sales price, or whether all TIH costs actually incurred are deductible regardless of how the sales price is structured?
• Whether it was premature for UMK to seek declaratory relief before the conclusion of SARS' audit process and exhaustion of internal remedies under the Tax Administration Act 28 of 2011?

The appeal was dismissed with costs, including costs for two counsel. Paragraph 1 of the high court order was altered to read: 'The applicant is entitled to calculate its gross sales (in terms of subsections 6(2) and 6(3) of the Mineral and Petroleum Resources Royalty Act 28 of 2008 (the Royalty Act)) in respect of manganese transferred by it in the 2010 and 2011 years of assessment, by deducting: 1.1 any expenditure incurred by it in respect of transport, insurance and handling of the manganese after the manganese had been brought to the condition specified in Schedule 2 of the Royalty Act; as well as 1.2 any expenditure incurred by it in respect of transport, insurance and handling to effect the disposal of the manganese; irrespective of whether, in the price charged by it to purchasers of manganese, any amount was separately specified for expenditure incurred by it in respect of transport, insurance and handling under either of paragraphs 1.1 or 1.2.'

The binding legal principle established is that under section 6(2)(b) read with section 6(3)(b) of the Mineral and Petroleum Resources Royalty Act 28 of 2008 (as it stood in 2010 and 2011), gross sales for royalty calculation purposes must be determined by deducting all expenditure actually incurred in respect of transport, insurance and handling of unrefined mineral resources, regardless of whether such expenditure is separately specified as a component of the sales price charged to purchasers. The phrase 'without regard to any expenditure incurred' in section 6(3)(b) requires that such expenditure be disregarded by way of deduction from receipts and accruals, irrespective of how the sales contract structures or presents the price. The section does not require that TIH costs be separately itemized or specified in the contract price as a precondition for their deductibility. What matters is whether such costs were in fact incurred by the mining company in the circumstances described in section 6(3)(b), not how the company structured its pricing to customers. This interpretation gives effect to the evident purpose of the provision, which was to ensure that mining companies do not pay royalties on amounts expended on TIH costs that are recovered as part of the mineral price.

The court made important observations about statutory interpretation methodology, particularly regarding the role of context. Wallis JA addressed and rejected suggestions in a recent minority judgment (SARS v Daikin) that context is not relevant to statutory interpretation, stating that this was a misconstruction of the Endumeni judgment. The court clarified that context is as fundamental to statutory interpretation as it is to contract interpretation, though the nature of context differs depending on the type of document. For statutes, relevant context includes: the constitutional interpretive injunction in section 39(2); the context of the entire enactment; reports from commissions of enquiry or specialized drafting committees; legislative history; and the general factual background including the nature of the area regulated and social purpose of the legislation. The court also made observations about the permissibility of referring to subsequent amending legislation as an aid to interpretation, confirming that where Parliament has clearly shown by later amending legislation what was meant by earlier legislation, and the amendment is explicitly for clarifying purposes, courts may have regard to the meaning ascribed by the later legislation to its predecessor. However, the court emphasized this does not permit courts to remedy the legislature's deficiencies if the prior version cannot bear the ascribed meaning. The court noted approvingly the analysis in the forthcoming judgment in Telkom SA SOC Limited v CSARS regarding the Daikin case. The court also observed on the nature of bulk mineral trading in South Africa, noting that such trade commonly occurs on FOB or CIF terms with prices denominated in US dollars, and that those drafting mineral royalty legislation would have been aware of these standard commercial practices.

This case is significant for providing authoritative interpretation of section 6 of the Mineral and Petroleum Resources Royalty Act 28 of 2008, particularly regarding the calculation of gross sales for royalty purposes. The judgment clarifies that mining companies may deduct all transport, insurance and handling costs actually incurred in disposing of minerals, regardless of how sales contracts are structured or whether such costs are separately itemized in the price. The case demonstrates the application of the Endumeni approach to statutory interpretation in the tax context, confirming that the same interpretive principles apply to tax statutes as to other legislation. It reinforces that statutory interpretation must focus on the actual language used, understood in its proper context, including the commercial realities of the industry being regulated. The judgment also addresses important issues regarding the relevance of context in statutory interpretation, rejecting suggestions that context is not relevant to statutes. It confirms that subsequent amending legislation and explanatory memoranda may be considered as aids to interpretation where they clarify the meaning of earlier provisions. The case has practical significance for the mining industry in South Africa, particularly for companies engaged in export of minerals, as it affects the calculation of their royalty obligations. It provides certainty regarding the tax base for royalty calculations in circumstances where minerals are sold on standard international trade terms such as FOB and CIF.