The Commissioner for the South African Revenue Service v Levi Strauss South Africa (Pty) Ltd

Levi Strauss South Africa (Pty) Ltd (Levi SA) imported clothing from SADC countries (Mauritius and Madagascar) for wholesale distribution. During 2010-2014, approximately 40% of goods sold were manufactured by Levi SA, with the remainder imported. Two procurement regimes existed: (1) The Levi APD regime (until 2011): Levi SA purchased directly from SADC producers, with Levi Strauss Asia Pacific Division Pte Ltd (Levi APD) arranging manufacture and receiving a commission (7% initially, increased to 12% in 2010) under a Buying Agent Agreement (BAA). (2) The Levi GTC regime (from 2011): Levi SA purchased from Levi Strauss Global Trading Company Limited (Levi GTC) in Hong Kong at a 12% mark-up, with goods shipped directly from SADC producers to Levi SA under a Master Sales Agreement (MSA). After a two-year audit, SARS issued a determination on 25 March 2014: (a) declaring SADC certificates of origin invalid under the Levi GTC regime, denying preferential zero percent duty rate; (b) determining that commissions paid to Levi APD were not "buying commissions" and should be included in transaction value; and (c) determining that royalties paid to LS & Co under a Trademark License Agreement (TLA) should be included in transaction value. Levi SA appealed under sections 49(7)(b) and 65(6) of the Customs and Excise Act 91 of 1964. The High Court (Satchwell J) upheld all appeals and set aside SARS's determinations. SARS appealed with leave.

• Whether goods purchased from Levi GTC but shipped directly from SADC producers to Levi SA were 'consigned directly' from one SADC Member State to another, qualifying for preferential duty rates under the SADC Protocol on Trade
• Whether the commission paid to Levi APD under the Buying Agent Agreement constituted a 'buying commission' excludable from transaction value under section 67(1)(a)(i) of the Customs and Excise Act
• Whether royalties paid to LS & Co under the Trademark License Agreement were payable 'directly or indirectly, as a condition of sale of the goods for export to South Africa' and therefore includable in transaction value under section 67(1)(c) of the Act
• The proper interpretation of 'consigned directly' in Rule 2.1 of Annex I to the SADC Protocol on Trade
• The test for determining whether an intermediary is a 'buying agent' for customs valuation purposes
• The meaning of 'condition of sale' and 'directly or indirectly' in section 67(1)(c) of the Act

The appeal was upheld in part with costs, including costs of two counsel. The order of the High Court was set aside and replaced with: (a) The appeal under section 49(6) succeeded regarding the determination that Certificates of Origin for goods imported from SADC countries during 1 July 2010 to 5 February 2014 were invalid; (b) The determination and demand for payment of R52,466,124.19 and R87,240,129.71 in consequence of the origin determination were set aside; (c) The application and appeal under section 65(6) regarding transaction value (buying commissions and royalties) was otherwise dismissed, meaning SARS's determinations on these issues stood; (d) Levi SA was ordered to pay SARS's costs, including costs of two counsel.

The binding legal principles established are: (1) Under Rule 2.1 of Annex I to the SADC Protocol on Trade, goods are "consigned directly from a Member State to a consignee in another Member State" based on the physical transportation and consignment of goods, not the underlying commercial relationships or the location of the parties to the commercial transaction. The rule is concerned with the physical origin and movement of goods, not their commercial origins. (2) For purposes of section 67(1)(a)(i) of the Customs and Excise Act 91 of 1964, an intermediary is only a "buying agent" (whose commission is excludable from transaction value) where the importer exercises control over the intermediary's conduct regarding matters entrusted to the intermediary, and the intermediary acts under the direction of and primarily for the benefit of the importer. The test focuses on the substance of the relationship, not its form or documentation. The overriding characteristic must be that the intermediary acts under the direction and control of the importer. Where procurement is controlled by a parent company through a centralized system and the importer has little independent decision-making power, the intermediary is not a buying agent. (3) Under section 67(1)(c) of the Customs and Excise Act, royalties are payable "directly or indirectly, as a condition of sale of the goods for export" where: (a) the royalties become due directly when the terms of the import contract or royalty agreement inextricably link payment to sales for export to the licensee; or (b) the royalties become due indirectly where the nature of the relationships between exporter, importer and licensor, viewed as a whole, is such that the sale for export would not have occurred without an obligation to pay royalty. The test is whether the goods would have been exported in the absence of the obligation to pay the royalty. This applies even where the royalty is calculated on domestic sales prices rather than import values, and where the exact amount cannot be quantified until after importation and resale.

The Court made several non-binding observations: (1) The Court noted that while section 65(9) defines "buying commission" in accordance with international guidelines, courts must be cautious not to import narrow domestic legal concepts of agency when interpreting international agreements, as uniformity among nations is desirable and consistent with the Vienna Convention on the Law of Treaties. (2) The Court suggested that even if the commission to Levi APD was not a "buying commission," there might be a question whether it was a "commission" at all within section 67(1)(a)(i), as it might simply be reimbursement for tasks Levi SA would otherwise have undertaken itself. However, the Court declined to decide this as it was not argued and would require assistance from counsel on both sides. (3) The Court observed that the Buying Agent Agreement between Levi SA and Levi APD contained provisions that introduced "an air of unreality" and were inconsistent with the actual operations of the Global Sourcing Organisation, suggesting the agreement may have been structured for customs purposes rather than reflecting the genuine commercial relationship. (4) Regarding the alternative origin argument based on incorrect invoices being used in some entries, the Court noted that even if this argument had merit, it was not the basis of SARS's determination and therefore not properly before the court on appeal. An appeal under section 49(7)(b) is against what was determined, not an opportunity to make a wholly different determination with similar effect. (5) The Court noted that the lack of clarity in SARS's determination regarding calculation of amounts claimed meant that if there were disputes about calculations (rather than principles), these would need to be addressed separately, as the appeals were not directed at calculations. (6) On the practical issue of quantifying royalties at importation when they are calculated on future sales, the Court noted that section 67(1)(d) indicates transaction value may be affected by later events, and section 65(5) empowers the Commissioner to amend value determinations, providing mechanisms for adjusting over- or under-estimates. (7) The Court acknowledged that Article 3.3(b) of the Trademark License Agreement, which expressly stated royalties should not be considered a condition of purchase or import, conveyed the parties' intention to avoid customs duty implications, but held that this contractual provision could not override the legal effect of the obligations when properly analyzed.

This case provides important guidance on South African customs and excise law in three key areas: (1) SADC Origin Rules: The judgment clarifies that Rule 2.1 of the SADC Protocol focuses on the physical movement and consignment of goods between Member States, not on the commercial relationships underlying such movements. The commercial structure (whether goods are purchased directly from producers or through intermediaries) does not affect origin determination provided goods are physically consigned directly between Member States. (2) Buying Commission: The judgment establishes that for customs valuation purposes, determining whether an intermediary is a "buying agent" requires examining the totality of the relationship and the extent of control exercised by the importer over the intermediary. The decision emphasizes that formal documentation (such as agency agreements) is not determinative; courts must examine the substance of the relationship. Where procurement is centrally controlled by a parent company through a global sourcing organization, with the purported "principal" having little independent decision-making power, the intermediary is not a buying agent and commissions paid are includable in transaction value. (3) Royalties as Condition of Sale: The judgment adopts a broader international approach to determining when royalties constitute a "condition of sale" for customs valuation, rejecting narrower interpretations. The court held that royalties may be a condition of sale even when payable to a third party (not the seller), calculated on domestic sales rather than import value, and not expressly required by the import contract. The critical factors are: (a) whether the imported goods incorporate the licensed intellectual property, (b) whether the licensor controls the procurement and sale process, and (c) whether the import would occur absent the royalty obligation. This is particularly significant in multinational corporate group structures. The case demonstrates the application of international customs valuation principles under the WTO Agreement on Implementation of Article VII of GATT 1994, showing South African courts' willingness to adopt international approaches while avoiding overly technical domestic law concepts in interpreting international agreements. The decision has significant implications for multinational companies structuring their procurement and intellectual property arrangements, clarifying that corporate restructuring to separate buying functions from intellectual property licensing does not necessarily achieve customs duty advantages if the parent company retains ultimate control over the entire supply chain.