FAST (PTY) LTD is in the business of manufacturing, importing, and selling chemical products. It has a catalyst division that is focused on manufacturing and selling catalytic converters (catalysts) which is used in the abatement of harmful exhaust emissions from motor vehicles. To produce the catalysts, FAST requires some metals known as the Precious Group of Metals (PGMs). It purchases the PGMs from a Swiss entity (FAST Zug). The PGMs are liquified and mixed with other chemicals to create coating for substrates, all being part of the manufacturing process. Once the manufacturing is complete, the catalysts are sold to customers in South Africa known as the original equipment manufacturers (OEMs). FAST (PTY) LTD and FAST Zug are connected parties as defined in section 1 of the ITA.
Following an audit carried out in 2014 the revenue service issued an assessment for FY 2009-2011 by an amount of R114 157 077. According to the revenue service the prices paid for the PGMs had not been at arm’s length. The revenue service set aside the CUP method and instead applied the TNMM method using ROTC as the Profit Level Indicator. The assessment was based on a detailed analysis of the total cost base incurred by FAST (PTY) LTD in acquiring the PGMs and other raw materials, including the manufacturing and distribution costs of the catalysts. The role played by FAST (PTY) LTD in purchasing and manufacturing the catalysts, the assets and the risks involved, which risks FAST had accounted for in its financial statement was also taken into account.
FAST (PTY) LTD filed a complaint in which it held that the South African arm’s length provision in section 31(2) of the ITA only permitted tax authorities to adjust the consideration in respect of the transactions between it and the Swiss Entity to reflect an arm’s length price for the purchase and supply of PGMs. It also stated that even if it had been found that it had not paid an arm’s length price for the PGMs, which it denies, the tax authorities was only entitled to adjust the price/consideration paid for the PGMs as between applicant and the Swiss Entity, not the consideration between applicant and third parties. In this regard, the tax authorities’ adjustment of profits pursuant to its application of the TNMM was not a legitimate exercise of transfer pricing power authorized by section 31(2). As a consequence, the additional assessment is legally impermissible. The issue which FAST seeks separated therefore, is whether the conduct of tax authorities fell within the powers set out in section 31(2).
FAST (PTY) LTD appeal was dismissed by the Tax Court. The judge referred to three recent international transfer pricing court cases (The Coca Cola Company (TCCC) and Subsidiaries v The Commissioner of Internal Revenue US, Canda v AgraCity Ltd and Denmark v ECCO A/S) and stated that these cases illustrated that regardless of what method has been used to determine the arm’s length consideration, ultimately, adjustments are made to profits of the taxpayer to ensure that tax is levied on the correct amount of taxable income.
An application for special leave to amend its statement was then filed by FAST with the Tax Court.
Judgment of the Court
This judgment concerns statements of the parties in regards of evidence before the Tax Court.
The first question before the court is: has the Commissioner, by amending his rule 31 statement, novated the whole of the factual or legal basis that underlies his assessment?
The court answered no to this question.
“The Commissioner, as pointed out, has not abandoned the basis of his assessment. It remains his primary case. The amendment does not detract from this. The Commissioner is not “replacing an old obligation with a new one”, he is not novating. He is not changing the facts of the tested transaction. He is simply introducing a different comparator – companies that “specifically document” the use of precious metals in the manufacturing process – to test the transaction. In so doing, the Commissioner may be introducing new “facts” in that he is scrutinising the profits of companies that did not feature in his initial assessment, but that is not the same as changing the facts of the tested transaction. The facts of the tested transaction are the facts upon which he based his conclusion regarding its arms-length nature. He is not changing the facts as to how much FAST paid for the purchase of the XYZs from FAST Zug, or about how much profit FAST made. Those are fixed, both in his assessment and in his amended – as well as in his unamended – rule 31 statement. The amended rule 31 statement does not alter the assessment.
[18] Furthermore, for the prohibition set out in sub-rule 31(3) to be applicable there must be “a novation of the whole factual or legal basis of the assessment”. Here he is not “novating the whole” of the facts of his assessment.
[19] In these circumstances, the application to amend the rule 31 statement should be allowed.”
The second question is: was the amendments made by FAST to its rule 32 statement prohibited?
The court also answered no to this question.
“A taxpayer is not faced with an absolute bar to raising a new ground. The taxpayer is only barred from raising a ground that is completely novel, one that was not at all raised in the objection filed in terms of rule 7. It is difficult to articulate the legal principle more precisely. The principle can only be clarified on the facts of each case. Such facts would be the only way of testing if the ground of appeal differs so radically from the ground of objection that it would fall foul of the prohibition. Some differences are minor and would therefore be allowed in terms of sub-rules 10(4) and 33(2), thus avoiding the prohibition contained in sub-rules 10(3) and 32(3). There must at least be a connection “between the amounts previously disputed and thus the subject to the disputed assessment, and the new ground”.8 The new ground in the appeal must not be “an entirely new case”.9
[29] Understood this way the apparent conflict between the two sets of sub-rules is resolved. At the same time, there is no departure from the common law referred to in [26] above.”
See the previous 2021 decision of the Tax Court in the case.