The Commissioner for the South African Revenue Service v Delta Motor Corporation (Proprietary) Limited

Delta Motor Corporation (the respondent) is a motor vehicle manufacturer and distributor that has imported vehicle parts in the form of CKD (completely knocked down) kits from Adam Opel Aktiengesellschaft, Germany ('Opel') since 1987. For years, it paid customs duty calculated on the invoiced amount payable per kit. In 1997, a consultant advised that the invoiced amount had included not only the purchase price of the kit but also an unspecified charge by Opel for engineering, styling and tooling ('EST'). The respondent requested a refund of customs duty, claiming that the EST charge was not part of the price payable for a kit but rather a non-dutiable royalty. The appellant (SARS) refused the refund. The relationship between the parties was governed by three agreements: an assembly and distribution agreement, a trademark licence agreement, and a supply agreement. The EST charge remained relatively constant in amount and was not related to or calculated with reference to the cost, weight, number or value of components in a kit. It was payable in respect of every assembled vehicle actually sold, even if an assembled vehicle contained no components from an imported kit. A 1998 amendment to the agreements clarified that the EST charge comprised an engineering and styling portion (representing the royalty payable under the assembly and distribution agreement) and a tooling portion (covering rebilling of component tooling investment).

• Whether the EST charges formed part of the price of imported CKD kits for customs duty purposes
• Whether the EST charges constituted non-dutiable royalties or dutiable components of the transaction value
• Whether the EST charges were payable 'as a condition of sale' of the imported goods within the meaning of section 67(1)(c) of the Customs and Excise Act 91 of 1964
• The proper interpretation of sections 41(4)(a), 65, 66 and 67 of the Customs and Excise Act 91 of 1964
• Whether royalty payments that are related to assembled vehicles sold rather than imported kits are subject to customs duty

The appeal was dismissed with costs, including the costs of two counsel. The declaratory order by Botha J in the High Court at Pretoria that the EST charges were not part of the value of the kits for customs duty purposes was upheld.

The binding legal principles established are: (1) Charges that do not directly relate to imported goods are not part of the 'price actually paid or payable' for those goods within the meaning of section 65(9) of the Customs and Excise Act 91 of 1964, and therefore do not form part of the transaction value for customs duty purposes. (2) For a royalty or licence fee to be dutiable under section 67(1)(c) of the Act, all constituent elements of that provision must be present, including that the royalty or fee must be payable 'as a condition of sale' of the imported goods and must be paid 'in respect of' the imported goods. (3) Where royalties are payable under a separate agreement (such as an assembly and distribution agreement) rather than under the supply agreement governing the sale of imported goods, and where such royalties are payable in respect of assembled vehicles sold rather than in respect of imported components, and are payable even when no components are imported, such royalties are not payable 'as a condition of sale' of the imported goods within the meaning of section 67(1)(c). (4) Charges paid for the right to assemble vehicles, use technology, manufacture parts and sell assembled vehicles, which are calculated by reference to vehicles sold rather than components imported, do not directly relate to imported component kits and therefore fall outside the dutiable transaction value.

The Court made observations regarding the commercial reality of licensing arrangements in the automotive industry, noting that it is commercially realistic and common practice for a manufacturer to charge a royalty over and above the price of goods where a buyer is licensed to assemble vehicles and sell them for its own account without having incurred the design and development expenses, and is at liberty to obtain necessary parts from sources other than the licensor or to specify that kits contain only a relatively low percentage of total necessary components. The Court also commented on the appellant's failure to pursue cross-examination of the respondent's deponents despite having had access to relevant records, noting that this was significant in resolving credibility challenges. The Court observed that whilst section 41(4)(a) entitled the appellant to assess duty on invoiced amounts where particulars were not separately declared, nothing in that subsection prevented the respondent from afterwards establishing the correct state of affairs. The Court noted that generally it is for contracting parties alone to enforce compliance with their covenants, and this case did not constitute an exceptional situation in which SARS, as an outsider, could complain about alleged non-compliance with contractual provisions or non-variation clauses.

This case is significant in South African customs and excise law as it clarifies the distinction between the transaction value of imported goods (which is subject to customs duty) and royalty or licence fee payments made in connection with broader commercial arrangements. The judgment establishes important principles for determining when charges are part of the price 'actually paid or payable' for imported goods, and when they constitute separate royalties. It demonstrates that charges paid in respect of assembled vehicles sold, rather than imported components, and which are payable even when no components are imported, fall outside the scope of dutiable transaction value. The case provides guidance on the interpretation of sections 65, 66 and 67 of the Customs and Excise Act 91 of 1964, particularly regarding what constitutes a payment that 'directly relates to' imported goods and when royalties are payable 'as a condition of sale'. It is particularly important for the automotive industry and other sectors where manufacturers enter into complex licensing and assembly arrangements involving imported components.