Silverback Technologies CC & Others v CSARS: The importance of the Combined Nomenclature Explanatory Notes

Introduction

On 9 October 2023 the Supreme Court of Appeal ("SCA") handed down judgment in Silverback Technologies CC & Others v Commissioner, South African Revenue Service (301/2022) [2023] ZASCA 128. This case dealt with the proper classification for the purposes of customs duty, certain bicycle parts imported into South Africa which would ultimately be used to assemble bicycles.

Section 47(1) of the Customs and Excise Act 91 of 1964 ("the Act") says that customs duty is chargeable on goods imported into the country in accordance with Part 1 Schedule 1 ("the Schedule") of the Act. Tariff subheading 8712.00 in the Schedule includes for the purposes of customs duty incomplete bicycles having the essential character of the complete bicycle and charges a duty of 15% on the total value of the imported goods. 

The chapter, section, and explanatory notes to the Schedule further explain that an incomplete bicycle will be chargeable with customs duty, whether or not it is assembled, so long as it comprises of at least the following components - 

(a) The frame; plus 

(b) Any three of the following major components:

     (i) One or both wheels,

     (ii) The steering unit,

     (iii) The brake set,

     (iv) The drivetrain,

     (v) The fork.

This test will hereinafter be referred to as the "frame plus components test".

The Schedule also explains that, insofar as the components listed under (b) above are incomplete and/or unassembled, General Rule of Interpretation 2 will find application. The General Rules of Interpretation ("the general rules") govern the classification of goods and are therefore of importance. General Rule 2(a) in particular says that if an article is complete or incomplete, and even if it is assembled or dissembled, it will attract customs duty as if it were the complete article, provided that on importation the unfinished article has the essential character of the complete article - in this case, a bicycle. 

In contrast, Tariff subheading 8714.9 says that frames and forks, and parts thereof are duty free. 

In summary, if the imported parts do not have the essential character of a complete bicycle or if the imported parts do not meet the frame plus components test, they will lack the essential character of a bicycle and will be exempt from customs duty. This was the issue that needed deliberation in this case - whether imported parts were exempt from customs duty.

The facts

The Appellants in the matter were entities that conducted the business of importing bicycle parts into the country for local distribution. The parts that were imported which were the subject of the dispute were: The Frame; fork; front derailleur; handlebar; complete brake set (ie. brake levers, cables, brake blocks and callipers); stem; grip; crank set (chainwheel and the two pedal arms); shifters; bottom bracket parts; saddle, seat posts; cables and or complete gear and brakes.

Importantly, the imported parts did not contain bicycle wheels.

The arguments

The argument of the Appellants was captured at paragraph 25 of the judgment, and it was that wheels are an essential character of a bicycle and that absent the wheels, the essential character of a bicycle would be lost. The Appellants bolstered this argument by relying on Toyworld Ltd and the Collector of Customers 1984 (7) ALD 67, an Australian customs case which echoed their view, and further argued that the court should follow this authority in terms of section 233 of the Constitution of the Republic of South Africa, 1996 ("the Constitution") which says that when considering legislation courts must follow an interpretation that is consistent with international law.

SARS' argument was that the collection of the parts imported by the Appellants were undoubtedly an embodiment of the essential character of a bicycle. In its argument, SARS relied on the Combined Nomenclature Explanatory Note made by the World Customs Organisation ("the explanatory notes") to which South Africa is a signatory.

The explanatory notes read: '8712.00 Bicycles and other cycles (including delivery tricycles), not motorised...This heading includes incomplete bicycles that have essential characteristics of complete bicycles (general rule 2(a) for the interpretation of the Combined Nomenclature).  An incomplete bicycle, whether or not assembled, is to be classified under heading 87 12 00 if it consists of the frame, the fork and at least two of the following components:  – a set of wheels; – a crank-gear (see the explanatory note subheading 87 14 96 30); – a steering unit (including handlebar and handlebar stems); – a brake system.' 

In relying on the explanatory notes to the Harmonised System SARS effectively brought the imported parts within the ambit of customs duty.

The decision

The court's first port of call was section 47(8)(a) of the Act which says that the Schedule and the general rules are subject to the explanatory notes. The same explanatory notes relied on by SARS. 

Whilst advancing the applicability of the explanatory notes, the court did warn that the explanatory notes are there to supplement the headings in the Schedule, not to override them, and in doing so noted the authoritative and long standing SCA case (known as the Appellate Division at the time) of Secretary for Customs and Excise v Thomas Barlow and Sons Limited.

In applying the principle above the court held that the explanatory notes relied on by SARS speak of parts that have the essential characteristic of a bicycle. The court further held that:

"Significantly, [general rule] 3(b)(viii) provides that the 'factor which determines essential character will vary as between different kinds of goods'. And by way of examples, it proceeds to, inter alia, state that this may be determined by the nature of the component, quantity or the role of the consistent material in relation to the use of the goods. Implicit in what [general rule] 3(b)(viii) says is that the nature and characteristics of the relevant goods must be determined. Thereafter, the most appropriate heading (and relative section and chapter notes) must be selected and applied."

In applying the above the court then held that what constitutes a bicycle as a finished article and what constitutes the essential character of a bicycle is self-evident. In relation to the former, a collection of parts, once assembled, produce a bicycle. However, a collection of parts which do not produce the complete bicycle may still have the essential character of a bicycle. The court held, in simpler terms, at paragraph 41 that: 

"...whilst bicycle wheels, in combination with other parts, collectively make up a bicycle as a finished or complete article, their absence does not have the consequence that the remaining parts will necessarily lack the essential character of a bicycle."

Therefore, the decision of the court was that the imported parts, collectively, which did not include wheels, bore the essential character of a bicycle and thus attracted the customs charge. 

Key takeaways

The explanatory notes are products of an international agreement (The International Convention on the Harmonized Commodity Description and Coding System done in Brussels on 14 June 1983) entered into by the Republic of South Africa in terms of section 231(5) of the Constitution. All members that are part of the agreement classify goods in the same manner thus making trade easier between member states. 

The explanatory notes are thus part of the body of international law that applies to the Republic of South Africa. Therefore, in terms of section 47(8) (a) of the Act read with section 233 of the Constitution, when the general rules for the interpretation of the Schedule are applied in the process of the classification of goods under the appropriate tariff heading, the explanatory notes apply to the extent that “every court must prefer any reasonable interpretation of the legislation that is consistent with international law over any alternative interpretation that is inconsistent with international law. 

This is supported by the SCA case of SARS v Levi Strauss SA (Pty) Ltd (509/2019) [2021] ZACSA 32 at par 36 where the court held:

"When dealing with an international agreement, one must always be cautious not to import domestic legal concepts into its construction that may not be internationally recognised. It is desirable that there should, so far as possible, be uniformity among nations."

In Silverback the court recognised the importance of the explanatory notes, however, the court was also able to balance the application of the explanatory notes with domestic legislation. The classification process was also restated. 

In our view, the Silverback judgment is a well-reasoned one that adds value to the complex area of classification disputes for customs purposes. 

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