The Commissioner for the South African Revenue Service v SA Silicone Products (Pty) Ltd

SA Silicone Products (Pty) Ltd (respondent) acquired the business of DB Silicones CC (DBS) in February 1995 for a total purchase price consisting of R183,000 for fixed assets, stock on valuation, R14.5 million for trade mark rights, and R650,000 for goodwill. DBS had operated a silicone products business under licence from Dow Corning Corporation of Michigan since 1988. The respondent obtained tax advice suggesting that the intellectual property component of the business could be structured to claim tax benefits. The trade mark licence agreement between Dow Corning and DBS provided for a non-assignable, non-exclusive right to use the trade marks, with ownership and goodwill remaining with Dow Corning. The agreement was backdated to 1988 but concluded in late 1994 or early 1995. Dow Corning consented to assignment to the respondent on 27 February 1995, subject to all rights and obligations. The respondent claimed a deductible allowance of R14.5 million under s 11(gA)(iii) of the Income Tax Act 58 of 1962 in its 1995 tax return, which was disallowed by SARS. The respondent argued the payment covered both the trade mark licence and the 'customer connection' (distribution network, customer lists, know-how).

• Whether a licence to use trade marks constitutes 'property similar in nature' to a trade mark for purposes of s 11(gA)(iii) of the Income Tax Act 58 of 1962
• Whether the conclusion of a licence agreement constitutes 'acquisition' of property for purposes of s 11(gA)(iii)
• Whether the customer connection was property that could be transferred by DBS to the respondent
• Whether expenditure of R14.5 million was actually incurred in acquiring property contemplated by s 11(gA)(iii)

The appeal was upheld with costs of two counsel. The judgment of the Income Tax Special Court was set aside and the assessment by SARS was restored, thereby disallowing the R14.5 million deduction claimed by the respondent.

A licence to use a trade mark does not constitute 'property similar in nature' to a trade mark for purposes of s 11(gA)(iii) of the Income Tax Act 58 of 1962. 'Property similar in nature' requires fundamental characteristics common to the specifically identified intellectual properties (patents, designs, trade marks, copyrights), including intellectual origins, potential for commercial exploitation creating a justifiable monopoly, and legal recognition according ownership rights and protection. A mere licence confers only a temporary right of use without proprietary interest, monopoly, or the legal protection accorded to ownership. Section 11(gA) requires acquisition of a proprietary interest in intellectual property, not merely a right of use (which falls under s 11(f)(iii)). Where a trade mark licence agreement vests ownership and goodwill in the licensor, the licensee cannot transfer such goodwill to a third party as it has no proprietary interest in it.

Heher JA noted that the appellant had submitted that the apportionment of R14.5 million to trade mark rights was a sham based on several factors: the licence was unnecessary for the repacking and resale business; it was only concluded seven years after DBS commenced operations and during sale negotiations; DBS paid nothing for it yet it was valued at R14.5 million three months later; and the distribution agreement (to which no purchase price was attributed) was the really valuable asset. The Court found this 'an attractive submission' but stated it was unnecessary to decide the point given the other conclusions reached. Cloete JA expressed his preference not to embark on statutory interpretation and indicated the case could be decided on factual grounds alone, stating that the amount was not 'expenditure actually incurred' in acquiring the relevant property because the licence was non-assignable and the customer information was not part of the Dow Corning agreement.

This case established important principles regarding the interpretation of s 11(gA)(iii) of the Income Tax Act in South African tax law. It clarified the distinction between intellectual property itself and mere licences to use such property for tax deduction purposes. The judgment reinforces that tax allowances for intellectual property acquisitions require the acquisition of proprietary interests, not merely contractual rights of use. The case demonstrates the courts' willingness to look beyond the form of transactions to their substance when evaluating tax claims, and emphasizes that tax benefits under intellectual property provisions are intended to stimulate investment in property with enduring economic advantages. It also illustrates the importance of proper structuring of business acquisitions where intellectual property licences are involved, and the limitations on retrospective characterization of transactions for tax purposes.