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Another tax interpretation rule conundrum

By Pieter Faber 

The Supreme Court of Appeal (SCA) in CSARS vsDaikin, in a split judgment, tests the rules of interpretation again and creates further uncertainty on how to practically approach the rules of interpretation.


CSARS v Daikin Air Conditioning(185/2017)[2018] ZASCA 66 (25 May 2018) is an appeal to the SCA regarding theclassification of articles for customs duty, in this case air conditioners. The Commissioner contends that the productsare merely indoor units for machines that are ‘window or wall types,self-contained or “split-system”’. On the other hand, Daikin’s case is that theproducts are parts for ceiling type air conditioning machines that do not fallwithin the ambit of that subheading and are classifiable under ‘Parts: Other’.Therefore, the court had to answer the question under which subheading thecomplete machines consisting of the products and the appropriate outdoor unitsfall under. The answer lay in the interpretation of the words ‘window or walltypes, self-contained or “split-system”’.

The gist of the interpretative problem faced as elucidated by the majority judgment given by Van der Merwe JA was summarised as follows at [8]:

Both the terms ‘self-contained’ and ‘split-system’ may refer to what goes before them, that is, ‘window or wall types’. However, it is also a reasonable interpretation of the subheading that only the term ‘self-contained’ qualifies the preceding words, ‘window or wall types’. Therefore, the words of subheading 8415.10 may refer only to window or wall types of air conditioning machines, which may be self-contained or ‘split-system’ (as Daikin contends). They may also meanwindow or wall types of air conditioning machines that are self-contained or ‘split-system’ air conditioning machines (as the Commissioner contends).

In addressing this challenge, the majority judgment of the court refers to the Brussels Notes on tariff headings for insight as the normal meaning purportedly added very little assistance. In this regard, the majority concludes that the tariff headings clarify that the meaning given by SARS is more plausible. To further support its conclusion, the court states:

It is well established that a commercially sensible construction should be preferred.

Thepassage is of course from the judgment of NatalJoint Municipal Pension Fund v Endumeni Municipality2012 (4) SA 593 (SCA) (16 March 2012) at [18] which is the new locus classicus for interpretation of ‘documents’,that is, not just statutes. In the Natalcase the court states at [18−19] (own emphasis):

[18] Interpretation is the process of attributing meaning to the words used in a document, be it legislation, some other statutory instrument, or contract, having regard to the context provided by reading the particular provision or provisions in the light of the document as a whole and the circumstances attendant upon its coming into existence. Whatever the nature of the document, consideration must be given to the language used in the light of the ordinaryrules of grammar and syntax; the context in which the provision appears; theapparent purpose to which it is directed and the material known to thoseresponsible for its production … ”

‘[19] All this is consistent with the ‘emerging trend in statutory construction’.’

Dissenting minority

This scope, of what the Natal case judgment means above, and whether it is correct, is where the majority and minority judgments part ways. The minority judgment byMajiedt JA and Davis JA is quite adamant that, first, the majority misdirected itself by construing doubt in the literal meaning where there is none and then incorrectly using the Brussels Notes to supersede the clear language. The minority judgment also takes issue with the majority judgment’s approach of usingthe Natal case as a one-size-fits-allin relation to all documents, not just statutes, especially as to the ‘sensibilitytest’ of construction.

They note that in laying down the ‘sensibility test’, the judgment in the Natal case relies heavily on previous authority that there is in fact no difference in interpreting statute, contracts and other documents. In this regard, Wallis JA in the Natal case in footnote 14 of the judgment states:

‘That there is little or no difference between contracts, statutes and other documents emerges from KPMG Chartered Accountants (SA) v Securefin Ltd & another 2009 (4) SA 399 (SCA) para 39.’[1]

The minority judgment pours cold water on this reliance with Majiedt JA stating at [31] (own emphasis):

Contrary to Endumeni, above at 603 (fn14) which, on the authority of KPMG Accountants (SA) v Securifin Ltd 2009 (4) SA399 (SCA),suggests that there is no distinction in the interpretation of contracts, statutes and other documents, we can find nothing in the judgment of Harms DP in KPMG that prevents a drawing of the distinction that we have drawn between the interpretation of legislation and contracts or similar documents.

In supporting on what he believes to be a bizarre conclusion by the majority judgment he states (own emphasis):

Self-evidently, the legislative process which culminates in an enactment, and the subsequent interpretation of that enactment, are quite different from the preceding negotiations which lead to the conclusion of a contract and the subsequent interpretation of the contract. It is difficult to see how ‘commercialsensibility’, alluded to by Van der Merwe JA, can play any role in interpreting a statute. And a statute must apply to all equally – its interpretation can not be dependent on a particular contextual setting, nor can it vary from one factual matrix to the next. Context is fact-specific and can be applied in theinterpretation of contracts and like documents, but not of statutes.

The fallacy of the approach is further expanded on as Majiedt JA emphasises that this distinction between contract and statute reinforces the view that the interpretation of a statute cannot simply be equated that of a contract and that section 39(2) of the Constitution mandates a recourse to the spirit, purpose and objects of the Bill of rights in interpreting any legislation. Majiedt’s conclusion is inescapable at [35]−[36](own emphasis):

Applied to the present dispute, at best for the appellant the words employed may be considered to be open to the interpretation for which it argued. But as we have suggested, the application of speaker meaning as determined by the purpose of the provision, the background and production of the document which appellant seeks to call into aid, [Endumeni at para 18] is not easily applicable to legislative enactments, including a customs tariff.

Appellant contends that, even if the narrow meaning is plausible, it must give way to the more expansive interpretation of the header as contained in the Brussels Note. But, as is clear from the hypothetical analogy to cars and SUVs, the wording employed is far from ambiguous.

It is difficult to fault the approach of the minority judgment and not to come to the same conclusion that the majority judgment is difficult to reconcile with decades of authority by the SCA itself on determining what was the intention of the legislator, the contract parties or even the founder of a trust in interpreting different types of documents and that especially the ‘business-like’ requirement surely does not find equal application.

Where to from here?

It isironic that the warning as to the consequences of overstepping the ‘Rubicon’ in interpretation was itself laid out clearly in the Natal case at [18] (own emphasis):

Judges must be alert to, and guard against, the temptation to substitute what they regard as reasonable, sensible or businesslike for the words actually used. To do so in regard to a statute or statutory instrument is to cross the divide between interpretation and legislation. In a contractual context it is to make a contract for the parties other than the one they in fact made. The ‘inevitable point of departure is the language of the provision itself’, read in context and having regard to the purpose of the provision and the background to the preparation and production of the document.

So, given this express warning, which supports the previous approaches to interpretation of other documents, is this really what the court meant? It then justifies taking a moment to relook what the court in facts aid in its judgment in the Natalcase.

When more than one meaning is possible then per the Natalcase, ‘a sensible meaning’ is to be preferred to one that leads to insensible or unbusinesslike results or undermines the apparent purpose of the document’.

Clearly, the testis just sensibility, whereas the words ‘insensible, unbusinesslike or undermines the apparent purpose’ merely seem to denote types of thing that are not sensible and should be used appropriately based on the document being interpreted.

So, relooking at what the majority judgment of the court says in the Daikincase to justify its conclusion (own emphasis):

It is well established that a commercially sensible construction should be preferred.

Was that that what the court said in the Natalcase? Surely not.

It would seem that if a court misapplies the sensibility criteria by seeking for example, commercial justification to a statute that is commercially neutral, or similarly a business element to a trust that has none, the court will misdirect itself and transgress the Rubicon of interpretation by substituting the court’s words for those of the legislator, the trustees or the contract parties. This clearly seems to be what the majority judgment of the court has done in this instance leaving quite an interpretative conundrum going forward with the rules of interpretation now tainted with a one-size-fits-all approach that may never have been intended. 

Pieter Faber is a Senior Executive: tax at SAICA

This article was originally published in ASA.