THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT

Reportable
Case no: 509/2019

In the matter between:

THE COMMISSIONER FOR THE SOUTH
AFRICAN REVENUE SERVICE

APPELLANT
and
LEVI STRAUSS SOUTH AFRICA (PTY) LTD          RESPONDENT

Neutral citation: Commissioner: SARS v Levi Strauss SA (Pty) Ltd
(509/2019) [2021] ZASCA 32 (7 April 2021)
Coram:
WALLIS, MBHA and SCHIPPERS JJA and EKSTEEN and
ROGERS AJJA
Heard:
4 March 2021
Delivered: This judgment was handed down electronically by circulation
to the parties’ representatives by email, publication on the Supreme Court
of Appeal website and release to SAFLII. The date and time for hand-down
is deemed to be 09h45 on 7 April 2021
Summary: Customs and Excise Act 91 of 1964 –  section 49(7) –  appeal
against origin determination – importation of goods from SADC countries
– certificates of origin in terms of Annex I to Rules of Origin to the Protocol
on Trade in the Southern African Development Community (SADC)

Region – validity – goods produced in a member state and sold to purchaser
in non-member state – purchaser on-selling goods to an end user in a
member state – goods dispatched by producer directly to end user –
whether goods consigned directly from one member state to another
member state – whether qualifying for favourable rate of duty in terms of
Protocol.
Valuation of goods for purpose of calculating customs duty –
determination of transaction value in terms of ss 65, 66 and 67, read with
s 74A(1), of the Act – inclusion of commissions other than buyer's
commission under s 67(1)(a)(i) of the Act – what constitutes buyer's
commission – international procurement process – manufacturing process
under agent's control – scope of purchaser's control of agent – whether
commission on purchases through a related company constituted buyer's
commission.
Transaction value – inclusion of royalties in terms of s 67(1)(c) of the Act
– whether royalties due directly or indirectly as a condition of sale of the
goods for export to South Africa.

ORDER

On appeal from: Gauteng Division of the High Court, Pretoria (Satchwell
J, sitting as court of first instance):
The appeal is upheld with costs, such costs to include those
consequent upon the employment of two counsel.
The order of the high court is set aside and replaced by the following
order:
'(a)
The appeal in terms of s 49(6) of the Customs and Excise Act 91 of
1964 succeeds in relation to the Commissioner's determination dated
25 March 2014 that the Certificates of Origin accompanying the bills of
entry for goods imported by Levi SA and consigned from countries within
the SADC area during the period from 1 July 2010 to 5 February 2014 were
invalid.
(b)
The determination and demand for payment of the sums of
R52 466 124.19 and R87 240 129.71 in consequence thereof are set aside.
(c)
The application and appeal in terms of s 65(6) is otherwise
dismissed.
(d)
The respondent is to pay the applicant's costs, such costs to include
those consequent upon the employment of two counsel.'

JUDGMENT

Wallis JA (Mbha and Schippers JJA and Eksteen and Rogers AJJA
concurring)

[1] The respondent, Levi Strauss South Africa (Pty) Ltd (Levi SA), is
locked in a dispute with the appellant, the Commissioner for the South

African Revenue Services (the Commissioner or SARS, as appropriate),
over the import duties and value-added tax (VAT) payable by it in respect
of clothing imports that at the relevant time made up some sixty percent of
its sales. After a protracted audit lasting over two years, SARS issued a
determination on 25 March 2014 in which it determined that the place of
origin certificates issued in respect of imports from countries in the South
African Development Community (SADC) and used to clear imports
emanating from such countries were invalid, and therefore disentitled Levi
SA from entering these goods at a favourable rate of zero percent duty
under the Protocol on Trade in the Southern African Development
Community (SADC) Region (the Protocol). This involved by far the
largest amount in dispute. The other disputes related to the determination
of the transaction value of the imported goods on which duty was payable.
SARS determined that certain commissions and royalties paid by Levi SA
to other companies in the Levi Strauss group fell to be included in
determining the transaction value.

[2] Levi SA launched the present application proceedings by way of an
appeal under s 49(7)(b) of the Customs and Excise Act 91 of 1964 (the
Act) against the origin determination and an appeal under s 65(6) of the
Act against the transaction value determinations. In pursuing those appeals
the determinations were presumed to be correct so that the onus rested on
Levi SA to show that they were incorrect.1 After a disputed reference to
oral evidence – Levi SA having contended that there was no dispute of fact
warranting such a reference – some evidence was led and the appeals were
argued before Satchwell J. She upheld them in their entirety, set aside the

1 Sections 49(7)(b)(i) in the case of the origin determination. Although there is no similar provision in
respect of the transaction value determination, on ordinary principles the onus rested on Levi SA to
satisfy the trial court that SARS' determination was wrong. In terms of s 65(4)(a)(ii)(bb) a transaction
value determination is operative from the date of the determination unless it is set aside by a court.

determinations and substituted them in terms proposed by Levi SA. This
appeal is with her leave.

Background and the issues
[3] Levi Strauss & Co (LS & Co) is the ultimate holding company of an
international group of companies. It is one of the world's largest brand-
name apparel marketers operating in more than 110 countries through three
divisions, the Americas, Europe and Asia Pacific. Clothing bearing its
well-known trademarks is sold in over 55 000 retail outlets, including a
number that are either company-owned or franchised and dedicated solely
to its brands. Levi SA is the wholly-owned subsidiary responsible for its
trading operations in Southern Africa. Apart from its manufacturing
activities, which do not feature directly in this appeal, its role is best
described as that of a wholesale distributor of clothing on behalf of LS &
Co.2

[4] During the period from 2010 to 2014, with which this appeal is
concerned, Levi SA manufactured approximately forty percent of the
clothing that it sold. It imported the rest, much of it from Mauritius and
Madagascar, both members of the SADC. Until about 2011 this clothing
was purchased directly from the producers in the SADC. The arrangements
with these producers to manufacture, or assemble,3 this clothing, in
accordance with the stringent requirements of LS & Co, were made by Levi
Strauss Asia Pacific Division Pte Ltd (Levi APD), a company incorporated

2 The description is that ascribed to subsidiaries performing the same role in the group in Transfer Pricing
Reports prepared by PricewaterhouseCoopers LLP on behalf of LS & Co for submission to the US
authorities under its Transfer Pricing Regulations. The same reports recorded that LS & Co conducted
its operations as a worldwide marketer of apparel through foreign subsidiaries owned directly or
indirectly by it. Counsel for Levi SA accepted the accuracy of these descriptions
3 It is not clear from the papers whether the producers in Mauritius and Madagascar produced clothing
from scratch, using designs and fabrics determined by LS & Co, or whether theirs was a CMT (cut, make
and trim) operation. It makes no difference so far as the issues in this appeal are concerned.

in Singapore. On 1 December 2005, Levi APD and Levi SA concluded an
agreement entitled ‘Buying Agent Agreement’ (the BAA) to regulate their
relationship. It was amended on 1 December 2010. The BAA initially
provided that Levi APD was to be paid an amount of seven percent of the
purchase price of the goods for its services. This was described as a buying
commission. Under the amendment in 2010 this increased to twelve
percent. I will refer to these arrangements as the Levi APD regime.

[5] From 2011 this system was altered. The aim was that instead of
purchasing directly from these producers, Levi SA would purchase them
from Levi Strauss Global Trading Company Limited (Levi GTC)
incorporated in Hong Kong. A Master Sales Agreement (the MSA), dated
1 January 2011, but only signed by Levi SA on 18 March 2011, provided
for Levi SA to purchase clothing from Levi GTC. In turn Levi GTC would
purchase the clothing from the same contracted suppliers in SADC
countries as before, and sell them to Levi SA at a mark-up of twelve
percent. The suppliers dispatched the garments directly to Levi SA. I will
refer to this as the Levi GTC regime. The manner in which I have described
it suggests a seamless transition from the one regime to the other, but this
did not necessarily occur in all instances.4 Some established producers
were unable to operate under the new system and accommodations were
made to deal with this. Nevertheless for the purpose of considering the
issues of principle in this case it is convenient to distinguish between the
two regimes in the manner I have done.

4 There was a dispute on the papers whether the transition from the one regime to the other was as smooth
as suggested in the founding affidavit, but at the end of the day nothing turns on this. If any producer
continued to supply Levi SA directly, the customs entries in relation to such supplies should have been
treated as if Levi GTC was fulfilling the functions previously performed by Levi APD.

[6] The transition to the Levi GTC regime gave rise to what was
conveniently described in argument as the origin issue. Article 2 of the
Protocol provided that 'originating goods' would qualify for favourable
treatment in accordance with the provisions of Annex I to the Protocol.
Levi SA contended that all the clothing it imported from producers in
Mauritius and Madagascar was consigned directly from Member States of
the SADC to it, as the consignee in another Member State, and were
accordingly originating goods that qualified for the favourable duty, which
at all times relevant to these proceedings was set at zero percent. SARS
contended that the position was not that simple. It argued that the purpose
of the Protocol was to promote trade between countries in the SADC
region. Under the Levi APD regime Levi SA had purchased clothing
directly from producers in Mauritius and Madagascar and that clothing had
been consigned directly to it in South Africa, thereby satisfying the origin
criteria in Rule 2.1. However, under the Levi GTC regime the producers in
Mauritius and Madagascar were selling the clothes to Levi GTC, which
was on-selling them to Levi SA from Hong Kong, but causing them to be
sent directly from the producers to Levi SA. SARS contended that this
undermined the purpose of the Protocol and that it should be construed as
requiring that the commercial relationship giving rise to the goods being
imported to South Africa needed to be between parties, both of whom were
based in SADC countries.

[7] The other two issues arose because s 65(1) of the Act, provides that
the value at which goods must be entered for customs duty purposes shall
be the transaction value thereof within the meaning of s 66. Section 66(1)
provides that:

‘Subject to the provisions of this Act, the transaction value of any imported goods shall
be the price actually paid or payable for the goods when sold for export to the Republic,
adjusted in terms of section 67 . . .’
The adjustments with which this appeal is concerned are dealt with in
ss 67(1)(a)(i) and 67(1)(c) respectively.

[8] Section 67(1)(a)(i) provides that 'any commission other than a
buying commission' is to be added to the price actually paid or payable for
the goods to the extent that it was incurred by the buyer and not included
in that price. Levi SA said that the commission it paid to Levi APD under
the BAA – initially seven percent and, after the amendment, twelve percent
– was a buying commission. SARS disputed this and determined that Levi
APD was not a buying agent, so that the commission paid to it was not a
buying commission and fell to be included in determining the transaction
value of these goods.

[9] Section 67(1)(c) of the Act provides that in determining the
transaction value of goods there shall be added to the price actually paid or
payable for the goods:
‘royalties and licence fees in respect of the imported goods, including payments for
patents, trademarks and copyright and for the right to distribute or resell the goods, due
by the buyer, directly or indirectly, as a condition of sale of the goods for export to the
Republic, to the extent that such royalties and fees are not included in the price actually
paid or payable, but excluding charges for the right to reproduce the imported goods in
the Republic . . .’
Levi SA pays a royalty to LS & Co at varying rates on every sale of
garments it makes, whether manufactured by it or imported. These are paid
in terms of a Trademark License Agreement (the TLA) dated 1 December
2010. The issue is whether the royalties payable by Levi SA were 'in
respect of the imported goods' and were due ‘directly or indirectly, as a

condition of sale of the goods for export to the Republic’. SARS
determined that they were and accordingly that the transaction value of the
clothing should be adjusted to take account of the royalty.

[10] If SARS is unsuccessful in its appeal on the origin issue, but
successful on the issues relating to the adjustment of the transaction value
of the clothing, this would have no effect as far as the payment of import
duty is concerned because the zero percent rate under the Protocol would
still apply. It would however affect the amount of VAT payable and to that
extent a decision on those questions would have a practical effect. It would
also provide guidance to SARS and other importers as to the correct
approach to the relevant provisions.

The origin issue
[11] Rule 2.1 in Annex I to the Protocol is the applicable rule for the
purpose of identifying originating goods. It provides that:
'For the purpose of implementing this Protocol, goods shall be accepted as originating
in a Member State if they are consigned directly from a Member State to a consignee
in another Member State.'5
Levi SA's approach was simple. It said that the goods were produced in
SADC countries and were sent – consigned – directly to it in South Africa,
also an SADC country, and were therefore originating goods. SARS
accepted that this construction was one that Rule 2.1 bore linguistically. It
argued that there was a further requirement that the commercial
relationship giving rise to the consignment had to be between parties in two
SADC countries. Levi SA submitted that there was no construction of the

5 Rule 2.1 also requires that the goods must have been wholly produced or sufficiently worked in a
Member State, but compliance with these local-production rules was not in dispute.

language used that could impose the qualification for which SARS
contended.
[12] Starting with the language of Rule 2.1 it says that goods shall be
accepted as originating in a Member State if they are consigned directly
from that state to another Member State. In ordinary parlance that is what
occurred with the goods in this case. They were produced or sufficiently
worked in Mauritius and Madagascar and were sent either by air or sea
directly from there to South Africa. Both the air waybills and the bills of
lading identify Levi SA as the consignee and the producer in either
Mauritius or Madagascar as the consignor. Each shipment constituted a
consignment as defined in Rule 1 of the Annex as having been sent 'from
one exporter to one consignee'. Each was accompanied by a declaration of
origin given under Rule 9.1 in the form of Appendix II to Annex I. The two
examples in the record, which I assume were typical, reflect the producer
of the clothing as the exporter.

[13] This is consistent with the structure of the Act, which is concerned
with the movement of goods in and out of South Africa, rather than the
commercial transactions underlying such movements. Indeed, in the case
of both there may be no commercial transaction, yet the movement of the
goods may attract duty. Customs duty is defined as a duty leviable on goods
imported into the Republic. The duty is leviable irrespective of the
commercial basis, if any, upon which the goods came into the country. An
importer, such as Levi SA, is simply a person who brings goods into the
Republic. Goods are deemed to be imported in the circumstances set out in
s 10 of the Act, but nothing in that section requires consideration to be
given to anything other than the physical movement of the goods. It is
unconcerned with any commercial relationship behind that movement.
Section 38 requires that the importer must make due entry of the goods

within seven days of their deemed entry into the Republic. The Protocol is
likewise concerned with the physical origin of the goods in a Member State
of the SADC, not with their commercial origins.

[14] This approach accords with the definitions of 'exportation' and
'importation' in the Glossary of International Customs Terms published by
the World Customs Organisation, of which South Africa and all other
SADC countries, with the exception of the Democratic Republic of Congo,
are members. It defines 'exportation' as 'the act of taking out or causing to
be taken out of any goods from the Customs territory'. Conversely
'importation' is 'the act of bringing or causing any goods to be brought into
a Customs territory'. A 'declaration of origin' is:
'An appropriate statement as to the origin of the goods made, in connection with their
exportation, by the manufacturer, producer, supplier, exporter or other competent
person on the commercial invoice or any other document relating to the goods.'
The focus is on the physical situation and transport of goods, not the
commercial dealings giving rise to them.

[15]  In its determination SARS took the view that Levi GTC was the
exporter because it placed the orders with the producers, paid for the goods,
bore the risk in them and sold them to Levi SA. SARS relied first upon the
definition of 'exporter' in s 1 of the Act. That definition reads as follows:
'exporter' includes any person who, at the time of exportation-

(a)   owns any goods exported;

(b)   carries the risk of any goods exported;

(c)   represents that or acts as if he is the exporter or owner of any goods exported;

(d)   actually takes or attempts to take any goods from the Republic;

(e)   is beneficially interested in any way whatever in any goods exported;

(f)   acts on behalf of any person referred to in paragraph (a) (b), (c), (d) or (e),

and, in relation to imported goods, includes the manufacturer, supplier or shipper of
such goods or any person inside or outside the Republic representing or acting on
behalf of such manufacturer, supplier or shipper'.

[16] SARS did not identify the portion of the definition on which it relied.
Before its amendment by s 1(1) of Act 112 of 1977, the definition consisted
only of the words appearing after 'in relation to imported goods'. It was
accordingly only concerned with identifying the exporter in relation to
imported goods. Presumably, in relation to exported goods, the ordinary
meaning of exporter, namely the person responsible for sending the goods
out of the country applied. The purpose of the amendment appears to have
been to clarify, and possibly broaden, the scope of the concept of an
exporter in relation to goods being exported from South Africa. There is
no indication of a need to alter the existing definition in relation to imported
goods. The new sub-sections correspond mutatis mutandis with the sub-
sections of the definition of an importer. They are couched in language apt
to apply to the removal of goods from South Africa and, in the case of sub-
sec (d), can only apply in that situation. They are not applicable to the
identification of the exporter in relation to imported goods.

[17]  The exporter in relation to imported goods includes any person who
would naturally be regarded as the exporter, as well as the manufacturer,
supplier or shipper of the goods. There is nothing unusual in this. The Act
is deliberately cast in broad terms in order to ensure that duty is paid. There
may be several people to whom SARS may look to recover duty or perform
functions in terms of the Act. Whether Levi GTC would fall within the
general understanding of an exporter, as the party securing the exportation
of the goods to South Africa, is irrelevant. The producers in Mauritius and
Madagascar were the manufacturers, suppliers and shippers of the goods.

In accordance with the definition, they were the exporters of those goods.
The statement in para 6.7.4 of the determination that they were not
regarded as the exporters to South Africa was incorrect. As exporters they
were permitted to provide certificates of origin under Rule 9 of the Origin
Criteria. It was no doubt convenient for them to do so as that obviated the
need to provide a separate certificate from them as producers of the goods
in terms of Appendix III to Annex I to the Protocol.

[18] SARS also relied in its determination on certain provisions of
Rule 49B.10(9) of the Rules promulgated under the Act,6 but this was
misconceived. Where the rule deals with exporters, it is concerned with
South African persons and entities that export goods to other SADC
Member States. It requires them to be registered as exporters
(Rule
49B.01(f)).
The
issue
of
certificates
of
origin
under
Rule 49B.10(9)1(h) referred to by SARS concerns the issue of certificates
by South African exporters. The rule requires Box 1 of the certificate
(identifying the exporter) to refer to a natural person ordinarily resident in
the Republic, or a person whose business or the place of business of which
is in the Republic. That has nothing to do with such certificates in the
context of the importation of goods into South Africa.

[19] SARS is correct to say that the Protocol's purpose is to encourage
trade within the SADC and it aims to do this by removing tariffs and other
barriers to trade. In dealing with barriers to trade caused by tariffs its aim
is to reduce the number of situations where someone in Member State A
could procure goods from Member State B, but tariffs make it
economically more sensible to procure them domestically, or from a non-

6 Rules published in GNR 1874 of 8 December 1995 (GG 16860), as amended.

Member State. Removing tariffs and encouraging trade is aimed at
stimulating productive activity in State B by enhancing competitiveness,
and providing the economic benefit of cheaper prices to businesses and
consumers in State A.

[20] SARS' argument focussed on the twelve percent mark-up paid by
Levi SA to Levi GTC. It contended that the economic benefits flowing
from the purchase of imported apparel from Levi GTC did not accrue to
the countries from which the goods were shipped to South Africa. This was
incorrect as is apparent from comparing the purchasing of goods under the
Levi APD regime, with the purchase of the same goods under the Levi
GTC regime. In each case the goods were procured from the same
producers in the same countries and shipped to Levi SA in South Africa.
Under the former regime, Levi SA paid twelve percent of the producer's
price to Levi APD and, in the latter, it paid Levi GTC a mark-up of twelve
percent on that price. The overall cost was the same and the cash flows
identical, save that the additional twelve percent accrued to a different Levi
Strauss group company outside the SADC. Commercially, the situations
were indistinguishable. The economic benefits to the producing countries
were unchanged, as were the economic benefits to Levi SA and South
African consumers. Yet SARS conceded – clearly correctly – that in the
case of the Levi APD regime the Origin Rules were satisfied, while
contending that under the Levi GTC regime they were not. There is nothing
in the evidence to show that any portion of the economic benefit which the
SADC manufacturers could commercially have expected to receive for
their input was diverted. The twelve percent ‘buying commission’ in the
Levi APD regime and the twelve percent mark-up in the Levi GTC regime
was compensation for services unrelated to anything done by the SADC
manufacturers.

[21] The basic flaw in SARS's contention is illustrated by the following
scenario. Instead of Levi GTC purchasing the clothes from the producer,
another Levi Strauss group subsidiary in, say Mauritius,7 did so at the same
price and sold the clothes to Levi SA. SARS accepted that this would
satisfy the Origin Rules, but was unable to point to the economic advantage
accruing to Mauritius in that situation. Twelve percent accruing to the
Mauritian entity would, after deducting any local expenses, still be remitted
to Levi GTC to cover the latter's costs.

[22] SARS argument misconceived both trade and the effect of the
relevant commercial relationships. Nothing illustrates this better than the
following passage from the answering affidavit:
‘By structuring the trade transaction in this manner, Levi ensures that the goods meet
the requirements of the rules of origin whereas a significant portion of the economic
benefits of the trade transaction are diverted to Hong Kong or Singapore at the expense
of the member states. The economic benefits of the trade transaction that accrue to the
manufacturing member state are limited to the amount of the invoice issued by the
contract-manufacturer to … Levi GTC. Similarly, the value for customs in the
importing member state (South Africa) is also limited to the same amount which attracts
customs duty at preferential rate (as opposed to the full rate).
Although the actual amount that is paid by the Applicant in South Africa is 12% more
than the amount that flows to the contract-manufacturer, the additional 12% is diverted
to … Levi GTC duty-free.’
The deponent recognised that the transactions satisfied the Origin Rules,
but then misunderstood their effect, leading to the erroneous conclusion
that the twelve percent was 'diverted … duty-free' to Levi GTC.

7 The example is not far-fetched. There is a wholly-owned subsidiary in Mauritius called Levi Strauss
Mauritius Ltd.

[23] For all those reasons there was no merit in the origin argument on
behalf of SARS. The words 'consigned directly from a Member State to a
consignee in another Member State' refer to the physical transport of the
goods from one Member State to another and not to the underlying
commercial transactions giving rise to that. The conclusion in the
determination that the certificates of origin presented by Levi SA in
support of its entry of goods from Mauritius and Madagascar were invalid
was incorrect and that determination was correctly set aside by the high
court.

The alternative origin argument
[24] A subsidiary issue concerning the validity of the SADC certificates
of origin was raised by SARS in argument. In the course of the audit, it
transpired that notwithstanding the change from the Levi APD regime to
the Levi GTC regime, some producers had continued to send invoices to
Levi SA as well as to Levi GTC and, in some instances, these had been
used when entering the goods, instead of the invoices rendered by
Levi GTC. The auditors provided Levi SA with a schedule reflecting
47 instances where this was discovered. Vouchers of correction were
prepared and lodged with SARS and any additional amounts due were paid.
One instance referred to in the answering affidavit was not reflected on the
schedule, but according to the evidence was dealt with subsequently.

[25] SARS submitted that the 47 cases in the schedule, plus the one
referred to in its affidavit, showed that the SADC certificates of origin were
'issued on the basis of declarations tainted by misrepresentation using
fictitious invoices' and were invalid. For this reason, it submitted that the
relevant imported goods did not qualify for SADC preferential rates. It
extrapolated these cases to the general body of such imports by claiming

that Levi SA did not establish, the onus being on it, that there were no other
cases and that none of the other invoices suffered from the same taint.

[26] I do not think this argument is open to SARS on these papers. An
appeal under s 49(7)(b) of the Act is an appeal against the determination.
While it is an appeal in the wide sense, involving a complete re-hearing
and determination of the merits,8 it remains an appeal against what was
determined in the determination and nothing more. It is open to SARS to
defend its determination on any legitimate ground, but it is not an
opportunity for it to make a wholly different determination, albeit one with
similar effect.

[27]  The determination in issue in this appeal was that the SADC
certificates of origin used to enter goods were invalid, because GTC was
not an exporter to South Africa from within SADC, but an exporter from
outside the SADC. The foundation for this was embodied in the following
paragraphs of the answering affidavit, which encapsulated the origin
argument:
'The economic benefits flowing from the purchases of imported apparel by the
Applicant from Levi GTC … did not accrue to the countries from which the goods were
shipped to South Africa. Accordingly, the main objective of the SADC Trade Protocol
is not achieved when the Applicant purchases the goods from sellers in Hong Kong or
Singapore but shipped from an SADC Treaty member state. Consequently, the goods
do not qualify for the preferential tariff treatment in terms of the SADC Protocol.
The purpose of the preferential rules of origin is to achieve genuine trade between
businesses of the member states where the economic benefits of that trade accrue to the
relevant member states. The interposition of non-member state entities between the
manufacturer and the importer is a stratagem aimed at defeating the very objective of

8 Pahad Shipping CC v Commissioner South African Revenue Service [2009] ZASCA 172; [2010] 2 All
SA 246 (SCA) para 14.

the SADC Treaty Protocol by diverting the economic benefits of the transaction from
the member states to a non-member state to the prejudice of the member states. The
state of export derives significantly less economic benefits from the transactions, higher
profits are diverted and the state of import suffers a loss on import duties.'

[28] Contentions that the certificates of origin emanating from the
producers in Mauritius and Madagascar were tainted by misrepresentation
and based on fictitious invoices, appear nowhere in the determination, or
indeed in the answering affidavit. Had they been the subject of the
determination the proceedings in the high court would have taken a very
different course. Levi SA would have been required to demonstrate not
only that it had properly and adequately responded to the 48 cases
identified by SARS, where an incorrect invoice had been used to enter the
goods and determine their transaction value, but that there were no other
cases where that had happened.

[29]  In any event there are three reasons why there is no merit in the
argument. First, under the Protocol, the certificates of origin are validated
by the country of origin of the goods. Such a certificate, once given, may
only be queried in exceptional circumstances in terms of Rule 9.3 in Annex
I to the Protocol. These certificates have never been queried by SARS and
it has accepted vouchers of correction and the payment of duties and VAT
in accordance with those vouchers. It is not open to it in those
circumstances to challenge them at this late stage.

[30]  Second, where the customs authority of a Member State asks that a
certificate of origin be verified, the verification consists of nothing more
than advising that the certificate was issued by the relevant Customs Office
or designated authority and that the information therein is accurate. There

is nothing to indicate that an inadvertently incorrect reference to the invoice
number invalidates the certificate, or that a reference to the invoice to Levi
GTC, would result in a certificate being withheld. On Levi SA’s version,
supported by affidavits from the SADC manufacturers, certificates of
origin were in the vast majority of cases issued on the strength of the
correct invoices issued by the SADC manufacturer to Levi GTC, indicating
that the use of an incorrect invoice in 47 or 48 instances did not mislead
the competent authorities in Mauritius and Madagascar into authenticating
certificates of origin for which they would otherwise have withheld
authentication.9 The essential facts to which the certificates attest are that
the goods emanated and were consigned from the state issuing the
certificate, after being produced or undergoing sufficient working or
processing there, and were consigned to the state seeking verification.
These certificates did that and there is no challenge to their correctness in
that regard.

[31] Third, SARS wanted us to extrapolate from the cases in the schedule
and the extra one referred to in the answering affidavit, to a conclusion that
all the certificates suffered from the same defect. It is impossible to do that,
not least because it is not apparent from the schedule that all the cases listed
involved imports from SADC countries. There are only four where the
preferential rate of duty of zero percent was charged. Save in one case
where the rate was 30 percent, the balance attracted duty at rates of 45
percent. The determination referred to both SADC and EUR1 certificates,
as had the original letter containing the prima facie audit findings. An
online search reveals that EUR1 certificates are issued by certain European

9 The exception was Aquarelle, where Aquarelle Madagascar (by whom the goods were produced)
invoiced Aquarelle International Ltd in Mauritius. Certificates of origin were obtained by Aquarelle
Madagascar on the strength of its invoices to Aquarelle International.

countries under a variety of pan-European trade entities, such as the
European Union or the European Free Trade Association. Levi SA's Global
Shipping Manual for imports to South Africa required that EUR1
certificates be provided for all shipments produced and loaded from
European Union member countries. It seems possible that the cases where
a duty other than zero percent was levied may not even have emanated
from an SADC member state. Given this confusion it is impossible to draw
the inference that SARS asked us to draw. It reinforces the point that the
determination had nothing to do with this issue and, as a result, the appeal
was not pursued by SARS on this basis. The argument falls to be rejected.

The buying commission issue
[32] Was the amount Levi SA paid to Levi APD under the BAA a buying
commission that fell to be excluded under s 67(1)(a)(i) of the Act in
determining the transaction value of the imported goods?10 A buying
commission is defined in s 65(9) of the Act, in accordance with para 1(a)(i)
of the Explanatory Notes to Article 8 of the Agreement on Implementation
of Article VII of the General Agreement on Tariffs and Trade 1994 (the
Implementation Agreement), as:
‘. . . any fee paid by an importer to the importer’s agent for the service of representing
the importer abroad in the purchase of goods being valued’.
Levi SA contended that Levi APD was appointed under the BAA as its
agent in order to represent it abroad in the purchase of the imported apparel
and the fee paid to it for these services was therefore a buying commission.
SARS contended that properly construed in the light of a complete

10 Because of the confusion during the transition between the Levi APD regime and the Levi GTC regime
it was suggested that some shipments involving Levi GTC were dealt with under the BAA. That is
irrelevant to whether the commission paid to Levi APD was a buying commission. Insofar as some
transactions involving Levi GTC may have been undertaken under the BAA and on the same basis as
those with Levi APD, the decision in relation to Levi APD will apply equally to that situation and any
issue concerning such cases must be resolved at a later stage in the light of the judgment.

understanding of the procurement process adopted by the Levi Strauss
group at the time, Levi APD was not the agent of Levi SA and accordingly
the commission was not a buying commission.

[33] Broadly speaking the principal functions of a buying agent are to:
find suppliers for the goods the importer wants; express the importer's
needs to the seller; obtain samples of the goods for the importer's inspection
and approval; assist the importer in negotiating prices; assist in arranging
the transportation of the goods from seller to importer; and perform
administrative functions. The functions may vary from case to case and be
more or less extensive. The range of functions undertaken by the
intermediary is not decisive of whether they are acting as a buying agent
and earning a buying commission. Of more fundamental importance is the
nature of the relationship between them and the importer. This is clear by
reference to the international approach to the issue of buying agents and
buying commission.

[34] The position under the Implementation Agreement is that buying
commissions should be excluded when determining the value of goods on
which duty is levied varies. It appears to have been a basic principle of
customs valuations in the United States of America for many years.11 Prior
to the conclusion of the Implementation Agreement in its current form the
position was unclear.12 Some countries contended that the value for
customs purposes should include all costs incurred in procuring the
imported goods, whether incurred by the seller or the buyer, and whether
or not included in the price. Others took the view that only costs that the

11 United States v Nelson Bead Co 42 C.C.P.A. 175 (1955); JC Penney Purchasing Corp. v United States
451 F. Supp. 973 (Cust. Ct. 1978) 983.
12 Sussan (Wholesalers) Pty Ltd v Collector of Customs [1978] AATA 92

seller would have to incur in order to complete the transaction by delivering
the goods to the importer should be included. On that basis a buying
commission incurred in the procurement of the goods, that is, their
identification, the negotiations for their acquisition and administrative
measures related thereto, would be excluded.13

[35] The reason for excluding buying commissions in determining the
transaction value of imported goods seems to be that in terms of Article 1.1
of the Implementation Agreement the starting point for determining the
transaction value is the price actually paid or payable for the goods when
sold for export to the country of importation. The inclusions under Article
8 seek to capture the total payment made by the buyer to, or for the benefit
of, the seller, whether in money or otherwise.14 In setting its price, the seller
is generally not concerned with the costs the importer incurs in order to
procure the goods. Nor is it concerned with whether the importer
undertakes the procurement itself or through a third party, or what costs
the importer incurs in doing so. It is only concerned with the price that
those goods would secure in a sale on commercial terms to another party.
Although payment of a buying commission may form part of the importer's
cost of sales the underlying assumption is that these are costs that would
otherwise have to be incurred by the importer and do not enure for the
benefit of the seller. The position is otherwise, however, where the
intermediary is acting for its own advantage or for the seller. The
assumption then is that were the intermediary not involved the seller would
demand a higher price for the goods if selling them on commercial terms,
so that the real commercial price should include the commission paid to
the intermediary.

13 Ibid.
14 Note to Article 1 of the Implementation Agreement.

[36] There is little guidance as to the meaning of the different terms in
the definition of a buying commission. The commission is described as a
fee paid by the importer to the importer's agent. It is not necessarily
expressed as a percentage of the price of the goods. It may be determined
on some other basis. While an importer is clearly identified in the Act, there
is no definition of 'importer's agent'. 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.15 This is consistent with the requirements of Articles 31(1) and (4)
of the Vienna Convention,16 which apply to the interpretation of the
Implementation Agreement. Accordingly, I do not think that we should
determine whether Levi APD would be regarded as an 'agent' in the
technical sense of our law of agency. In my opinion an agent is a
representative chosen by the importer to act on its behalf and in accordance
with its wishes in return for payment of a fee or commission.

[37]  The notion of representation necessarily implies that the agent acts
at the behest of the importer. While the agent may bring its own expertise
to bear in the recommendations it makes to the importer, the important
decisions must be those of the importer. Where the importer has little or no
freedom of action in regard to the actions of the intermediary the

15 Pan American World Airways Incorporated v SA Fire and Accident insurance Co Ltd 1965 (3) SA 150
(A) at 167H-168A. This is the approach in other jurisdictions. See, for example, Riverstone Meat Co Pty
Ltd v Lancashire Shipping Co Ltd (the Muncaster Castle) [1961] 1 All ER 495 (HL) at 513 (per Lord
Merriman) and 524-5 (per Lord Hodson); Integrity Cars (Wholesale) Ltd v Chief Executive of New
Zealand and Another [2001] NZCA 113 para 19 and the authorities there cited; and De Danske
Bilimportører v Skatteministeriet (Case C-98/05); [2010] BVC 132 para 40.
16 Vienna Convention on the Law of Treaties, 1969. The Treaty is applicable in South Africa as part of
our customary international law. Law Society of South Africa and Others v President of the Republic of
South Africa and Others [2018] ZACC 51; 2019 (3) SA 30 (CC) paras 35 and 36. While that judgment
concerned article 18 its terms extend to the Convention as a whole.

intermediary is not an agent in any realistic sense. It is for that reason that
the nature of the relationship between importer and 'agent' is of
fundamental importance. Commentary 17.1 issued by the Technical
Committee on Customs Valuation of the World Customs Organisation,
discusses buying commissions and says:
'Despite the existence of an agency contract, the Customs is entitled to examine the
totality of the circumstances to determine whether the so-called agent is, in fact, acting
on behalf of the buyer and not on the account of the seller, or even on his own account.'
Section 74A directs that our interpretation of the relevant provision of the
Act is subject to both the Implementation Agreement and the explanatory
notes and commentaries issued under it. The terms of the sections under
consideration are derived from the Implementation Agreement and
corresponding statutes internationally are broadly similar. It is therefore
helpful to examine the approach adopted in other countries to the
identification of a buying agent and buying commission.

[38]   The United States cases consistently hold that the relationship
between the importer and the intermediary is central, and the extent to
which the importer can control the actions of the intermediary in procuring
the goods is fundamental.17 A compliance document on buying and selling
commissions published by the United State Customs and Border
Protection,18 expands upon this in the following terms:
'Whether a person is a bona fide buying agent depends upon all the relevant facts of
each case and the totality of the evidence. The fact that a person is called a buying agent
does not mean that he/she is in fact a bona fide buying agent. Also, the fact [that] a
person enters into a buying agency agreement with the buyer does not mean that such

17 B W Wholesale Co v United States 436 F. 2d. 1399 (C.C.P.A. 1971).
18 Buying and Selling Commissions issued after revision in October 2006 by the US Customs and Border
Protection as a compliance publication, sv 'When is the intermediary a bona fide buying agent?' So far
as I can ascertain this remains applicable in the USA. It was treated as authoritative in New Zealand in
Integrity Cars (Wholesale) Ltd v Chief Executive of New Zealand and Another [2001] NZCA 113 op cit,
fn 15.

person is a bona fide buying agent. Having authority to act as a bona fide buying agent
is not the same as actually performing as one. What needs to be considered is whether
the services actually performed by the agent is what the parties agreed to and whether
such actions are consistent with a bona fide buying agency.
In order to be considered a bona fide buying agent, the purported agent must be acting
on behalf of and primarily for the benefit of the buyer, rather than for the seller or
himself/herself. The main factor which determines whether a party is a bona fide buying
agent is the right of the buyer to control the agent’s conduct with respect to those matters
entrusted to the agent. The buyer should control the purchasing process and the buying
agent should take directions from the buyer and act upon the buyer’s instructions. For
example, a buying agent usually does not control who the manufacturer is or what is to
be purchased. Normally, the buyer makes such decisions and the buying agent carries
them out. Also, a buying agent usually does not control the manner of payment and
other significant aspects of the purchase. While a buying agent may exercise some
discretion, the ultimate purchasing decisions should be made by the buyer and not by
the buyer’s agent. The more discretion a purported agent has, the less likely it is that
such person is a bona fide buying agent.’

[39]   The approach in the United Kingdom is the same. It asks whether
the intermediary acted as an agent on behalf of the importer when the
relationship is examined as a whole. The description of the intermediary as
an agent is not decisive, as it is capable of describing someone who acts as
a true agent in a representative capacity as well as someone acting on their
own behalf.19 The test is one of the substance of the relationship, not the
form.20

[40]  In my opinion neither the nature, nor the extent, of the services
provided by the intermediary are decisive. The primary question is whether

19 Potter and Another v Customs and Excise Commissioners [1985] STC 45 at 48.
20 Umbro International Ltd v Revenue and Customs [2009] EWHC 438; [2009] STC 1345 para 27. Here
the existence of a written agency agreement was held not to override the other indications that the
intermediary was acting as seller of the goods for its own account.

the intermediary is not only acting on behalf of the importer, but also in
accordance with the wishes and directions of the latter. If the intermediary
is the one making the decisions and acting of its own accord, or under
directions from a third party, it is not an agent in any realistic sense of the
word. The applicable principle is that: 21
'The essence of an agency relationship is the exercise of control by the principal over
the conduct of the agent as to those matters entrusted to the agent's care.'
This accords with the views expressed by commercial sources. One
commentator wrote:22
'The overriding characteristic marking a buying agent status is that the intermediate
party is acting under the direction and control of the buyer/principal essentially on
behalf of the latter.'
To similar effect, in another commercial publication,23 it was said:
'Although no single factor is determinative, the primary consideration is the right of the
principal to control the transactions vis a vis the agent's conduct with respect to those
matters entrusted to the agent. That is, the agent cannot act independently or without
the express authorization of the principal with respect to those matters.'
Approaching the issue in this way in the present case requires a close
examination of both the BAA and the totality of the circumstances,
including the manner in which the Levi Strauss group dealt with
procurement and the role of Levi APD in relation to purchases of imported
apparel by Levi SA.

[41] Levi SA's evidence and argument were based on the BAA. Other
than saying that Levi APD was based in Singapore, the founding affidavit
contained no information about it or its role in the Levi Strauss group. Nor

21 JC Penney Purchasing Corp. v United States op cit, fn 11; New Trends Inc v United States 645 F.
Supp. 957 (Ct. Int'l Trade 1966)
22 Mark K Neville Jr Buying Agency (Part 1) available at http://www.itctradelaw.com/articles/buying-
agency-part1.html, the website of a firm of trade lawyers.
23 'Buying Commission explanation' posted on 4 March 2016 on https://www.doing-business-
international.com/2016/03/buying-commission-explanation/.

did it explain how or why it came about that the BAA was concluded
between two wholly-owned subsidiaries of LS & Co. A more complete
picture emerged in response to the answering affidavit's description of the
global sourcing and supply system adopted by the Levi Strauss group.
Furthermore, when oral evidence was led before Satchwell J, three transfer
pricing reports, for the years ended 30 November 2010, 2011 and 2012,
prepared for submission to the appropriate US authorities under certain
Treasury Regulations by PricewaterhouseCoopers LLP on behalf of LS &
Co, were included in the bundle.24 I have resorted to all these sources in
what follows.

[42] LS & Co is an international marketer of apparel. It conducts its
operations outside the US through foreign subsidiaries, referred to as
affiliates, that it owns either directly or indirectly through other
subsidiaries. These are managed through its three divisions. LS & Co plays
the leading role in designing and developing products and is responsible
for the global marketing strategy of the products. It takes advantage of its
global infrastructure to implement new designs and developments by
licencing trademarks and trade names to its affiliates. It regards its
trademarks as its most critical and valuable assets. LS & Co licences its
trademarks and trade names to various subsidiaries, on terms that typically
grant them a licence to use the marks and names within certain regions. In
addition to specifying the scope of the uses to which the licensee may put
the marks and names, the agreements cover the consideration payable for
the use of the rights, payments, reporting, quality control, intellectual
property rights, confidentiality, length of licence and other general

24 These reports were introduced by Levi SA's counsel at an early stage in Mr Ettlin's evidence and
relevant passages from the 2011 report were put to and confirmed by him. Counsel for SARS cross-
examined Mr Ettlin on this without objection.

provisions. The licences may also regulate manufacturing activities. The
overall picture is one of extremely strict central control by LS & Co of the
use to which the marks and names are put.

[43] Consistent with this picture, the procurement process of the Levi
Strauss group was and is centrally controlled. Without challenge, SARS
summarised it in the following terms in its answering affidavit:
'The global sourcing and supply of Levi's® branded apparel and accessories is carefully
and systematically managed, globally planned and co-ordinated by Levi San
Francisco25 through an organised system called 'Global Sourcing Organisation (GSO).
Levi San Francisco closely controls and monitors the use of the Levi's trademarks on
the branded apparel, the design and development of apparel, sourcing and supply of
fabric and other materials used to manufacture the apparel, as well as the manufacturing
of branded apparel.'
SARS went on to say that each division managed the sourcing and supply
of goods in its region. In the case of the Asia Pacific division, in which
Levi SA fell at all material times, Levi APD was the company responsible
for the management of the division.

[44] The GSO is described in considerable detail in the transfer pricing
reports. It commenced in 2006. Prior to that there had been three regional
sourcing zones. The GSO replaced them and sourcing for all divisions was
then done centrally. Its headquarters were established in Singapore and, by
2011 at least, Levi APD was performing the GSO function for the entire
group. This changed in the second half of 2011 when Levi GTC assumed
the GSO function, coinciding with the change from what Mr Ettlin, the
Vice President, Global Supply of LS & Co, referred to as the change from
a BAA model to a 'buy/sell' model. The latter is not relevant to the buying

25 This is a reference to Levi Strauss International, California, one of the intermediate subsidiaries
between LS & Co and Levi SA.

commission issue as nothing was paid to Levi GTC as a 'commission', but
its role in the procurement of apparel under the GTC regime may, in due
course, have a bearing on the royalty issue.

[45] The function of the GSO was dealt with in detail in the 2010 transfer
pricing report and was largely repeated in the two subsequent reports, save
for a minor adaptation in 2012 to allow for the advent of Levi GTC in place
of Levi APD. It is helpful to set it out in full:
'The GSO serves as the merchandise sourcing arm for the LCAs.26 The GSO provides
the LS & CO Group with a set of procurement capabilities designed to deliver the right
product at the right time and at the right cost and quality. The LSAs27 assist the GSO in
executing the sourcing strategy devised by the GSO leadership team and work under
the GSO's direction and general overview to undertake the gamut of sourcing support
functions. The LSAs are located throughout the world and provide sourcing support to
the GSO in the nature of production monitoring, logistics, quality control and other
support staff.'

[46] The report went on to describe the functions performed by the GSO
in much greater detail. It said that they:
'… broadly include the following categories of functions:
 Sourcing strategy and planning.
 Pre-production sourcing functions, such as development of samples and
prototypes; identification of manufacturers for production; negotiation of
pricing and volume terms with manufacturers; product costing; consolidation
and placement of product orders, including purchase orders ("PO") issuance;
identification of fabrics and selection of raw material suppliers.
 Production and post-production sourcing functions, such as production
supervision and monitoring; demand and supply planning including inventory
management and production scheduling; quality and technical services

26 Local country affiliates such as Levi SA.
27 Local sourcing affiliates, that is, subsidiaries engaged in the sourcing of fabric and garments.

including product integrity ("PI"), quality assurance ("QA") technical
development and technical services; arrangements for logistics including
documentation, shipping, insurance and customs clearance and payment of
invoices to vendors.
 Other
sourcing
functions
including
social
and
environmental
responsibility/Terms of Engagement ("TOE") management; and BPI28.'

[47] A distinction was drawn between the Product Management (PM)
side of these activities and the Manufacturing Operations (MO).
'1
… The key PM functions … include:
i.
Development of product prototypes and samples;
ii.
Identification of fabrics and sundries – fabric and finish developers
(PM personnel) work with designers to identify ideal fabrics and with MO personnel to
locate the right mills;
iii.
Product costing using the global costing tool;
iv.
Negotiation of volumes and pricing with manufacturers, through collaboration
with MO personnel;
v.
Final selection of manufacturers;
vi.
Demand and supply planning including inventory management and production
scheduling; and
vii.
Consolidation and placement of product orders – PO Issuance.
… The key GSO MO functions include;
i.
Identification of third party manufacturers;
ii.
Negotiation of volumes and pricing with manufacturers, through collaboration
with PM personnel;
iii.
Assistance related to procurement of raw materials and negotiations with mills;
iv.
Production monitoring and supervision;
v.
Quality and technical services including PI, QA, technical development, and
technical services;
vi.
Arrangement for logistics …
vii
Social and environmental responsibility …'

28 Business process improvement.

[48] It is important to note that this allocation of functions within the Levi
Strauss group arose from decisions by LS & Co (or Levi San Francisco)
concerning the management of its business operations as a marketer of
apparel under its trademarks and name brands. Levi SA had no
responsibility for the decision to establish the GSO and the allocation of
functions to it. Nor is there any basis for thinking that as a subsidiary (a
local country affiliate), described in the transfer pricing reports as being
best categorised as a 'wholesale distributor', it had any ability to conduct
its own sourcing activities independently outside the ambit of the GSO.
The design and manufacture of apparel for the group was controlled by LS
& Co and Levi SA was constrained to act in accordance with the system it
ordained.

[49] This is reflected in the services to which the BAA related as
described in Exhibit B to the BAA. They were set out as follows:
‘SERVICES
1. advise Principal regarding prices and sources of Merchandise available for export to
South Africa from the Territory;
2. advise Principal of supply and manufacturing aspects of Principal’s proposed
purchases of Merchandise;
3. identify to Principal29 only manufacturers that can meet Principal’s requirements
(including, without limitation, LS & CO’s Global Sourcing and Operating Guidelines
and manufacturing standards) and have sufficient financial, production, labor and
administrative resources;
4. solicit offers from manufacturers to sell Merchandise to Principal, procure samples
of Merchandise and develop estimates of the manufacturer’s selling price to Principal;
5. assist Principal when Principal’s representatives visit suppliers to negotiate contracts
or review production;

29 This may be an error in that in the amended schedule this is replaced by 'contract'.

6. assist and advise Principal in the preparation and negotiation of purchase contracts
which shall remain subject to Principal's final approval;
7. in strict conformity with instruction issued by Principal, place orders with and/or
purchase for the account of Principal Merchandise from suppliers and ensure that the
invoices prepared in connection with such orders and purchases conform to the
provisions of Section 4;
8. inform in writing all suppliers that Principal is the entity for whom Agent is acting;
9. notify Principal of the name of each supplier and the total cost in both foreign market
currency and United States dollars of each item and obtain confirmation from Principal;
10. monitor and advise Principal of the status of all orders placed for Merchandise until
such Merchandise has been delivered to Principal under Principal’s purchase order;
11. inspect finished goods to ensure that such Merchandise (i) conforms to Principal’s
specifications as set forth in the applicable purchase order and is not defective in any
respect, (ii) meets the requirements of all United States and South Africa laws and
regulations as specified in the purchase order, (iii) is packaged, labeled, priced and
invoiced in accordance with the instructions set forth in the applicable purchase order,
and (iv) is packaged in a manner which will ensure its safe transportation to Principal’s
stores or warehouses, and Agent will advise Principal immediately of any
discrepancies;
12. at Principal's request, where appropriate, arrange for and supervise the consolidation
of shipments in order to reduce shipping costs;
13. at Principal’s request, arrange on behalf of Principal for the shipment of
Merchandise from the delivery point specified in Principal’s purchase order to each
South African port of entry Principal shall designate;
14. represent Principal in any claims against [it/Principal] including claims or requests
for refunds or allowances from suppliers in the event that defective or non-conforming
Merchandise is received in South Africa;
15. use its best efforts, consistent with its appointment as Agent, to ensure that
Merchandise which is eligible for duty-free treatment under South Africa law shall
qualify for such duty-free treatment;
16. procure and provide to Principal, in conformance with applicable South Africa
custom regulations, prior to exportation, all documentation, certificates, forms,
statements and information appropriate and/or necessary for exportation to and
importation into South Africa including, without limitation, all appropriate

documentation, certificates, forms, statements or information for the release and
liquidation of entries of Merchandise at the lowest tax and customs duty rates applicable
to the Merchandise or for exemption from such tax or customs duty assessments;
17. manage any general and administrative service contracts related to the above
Services as may be necessary, including services provided by Agent's contractors
through separate arrangements and agreements;
18. at Principal's request, and provided Agent in his sole discretion deems appropriate
or acceptable, advance payment for any Merchandise on behalf of Principal for orders
placed in connection with approved purchase order;
19. provide such other related Services as Principal may reasonably request from time
to time.’ (The insertion in items 14 is in line with changes in the amended schedule to
correct obvious errors.)

[50] The amendment of the BAA in 2010 contained an even more
extensive list of 33 services. The following were added to the existing list:
'1. advise Principal of development, sourcing, manufacturing, and supply aspects of
Principal’s proposed purchases of Merchandise;
2. advise Principal regarding prices and sources of Merchandise available for export to
the Principal’s Territory from Agent’s Territory;
3. provide Merchandise planning, including the identification of burgeoning fashion
trends, and developing Merchandise that are expected to be locally relevant and
popular, and priced within the contemplated budget of consumers;
4. provide development and implementation of fabric choices; review and edit initial
prototypes to ensure that Merchandise can be mass-produced on-budget & within a
given time period; work with Global Sourcing Organisation (‘GSO’) teams to re-
develop Merchandise when pricing or production-related challenges arise;
5. provide development of Merchandise prototypes & samples (eg, working with
designers and third party contract manufacturers to create and review initial
Merchandise samples, etc.);
6. oversee the quality testing procedures for Merchandise and acting as a liaison
between the product development team and the quality testing lab;
7. manage and provide costing estimates for Merchandise and related analysis;

8. oversee and develop global sourcing strategies (eg from which countries and
suppliers to obtain needed fabrics, etc), including the development of regional seasonal,
annual, and multi-year sourcing strategies;
9. prepare detailed manufacturing specifications which provide contract manufacturers
with specific blue prints to properly and efficiently manufacture Merchandise;
10. publish and distribute a detailed ‘Restricted Substance List’, which represents a
comprehensive study of all potential dangerous chemicals commonly used in the
manufacturing process;
11. publish and distribute a ‘Master Supply Agreement’ (‘MSA’), which sets the terms
of engagement that a suppliers and manufacturers must adhere to in order to produce
Merchandise for the Principal;
12. enter directly into a MSA on behalf of Principal relating to the manufacture and
supply of products as set forth in the applicable MSA;
13. provide supply chain planning associated with the mass-production of Merchandise
orders (eg how best to create economies of scale in the manufacturing process; when to
aggregate which orders and with which manufacturers, etc);
14-18 …
19. select the third party suppliers and manufacturers (eg evaluation and selection of
contract manufacturers to ensure production processes are of a sufficiently high quality
and that production methods and working conditions are consistent with extremely
strict internal sourcing guidelines and terms of engagement, etc);
20-23 …
24. ensure that manufacturers with whom orders were placed produces Merchandise
that properly adheres to the Agents global sourcing and operating guidelines, the
"Restricted Substance List", the MSA terms of engagement, and all other
manufacturing standards;'

[51] The extended list of services was accompanied by a fee increase
from seven to twelve percent. The 2011 transfer pricing report explained
the fee change on the basis of an alteration in the manner in which Levi
APD's 'pooled costs' were determined. Until November 2010 they included
the MO costs, but not the PM costs. With effect from the 2011 year, both

MO and PM30 costs were included in the GSO's pooled costs and this
resulted in the GSO charging the Local Country Affiliates a 'sourcing
commission' of twelve percent of the FOB price of merchandise. The
extended list of services reflected this change in the functions performed
by Levi APD.

[52] A comparison of the schedules to the BAA with the functions of the
GSO demonstrates that the BAA reflects the functions of the GSO as
services to be provided to Levi SA. Realistically those services would have
been provided to Levi SA in any event, because the GSO was established
by LS & Co to operate in that manner. Against that background the role
and purpose of the BAA is unclear. I turn to examine its terms.

[53]  Stripped of unnecessary detail, the key terms of the BAA, in which
Levi SA is described as 'Principal' and Levi APD as 'Agent', were the
following:
'1
Appointment of Agent
Principal appoints Agent to act as Principal's non-exclusive agent for the procurement
of the … "Merchandise" to be imported into South Africa from … [all countries in
which the Agent operates] during … the "Term". During or after the Term, Principal
may procure Merchandise directly and may appoint other agents for Merchandise and
the territory or otherwise, and Agent may act as representative or agent for other
purchasers for similar goods in the Territory or otherwise.
Services by Agent
Agent accepts the appointment described in Section 1 and shall perform the services
identified on Exhibit B with due care and in accordance with this Agreement and
applicable law.
Ordering and Payment

30 Sometimes referred to as PD&S – production, distribution and supply.

Principal shall be free to accept or reject proposals made by Agent. If Principal decides
to use a manufacturer proposed by Agent, Principal shall directly enter into supply
agreements with, and place orders with, the manufacturer, and shall be responsible for
paying the manufacturer for the Merchandise.'
(The interpolation in square brackets incorporates the definition of Territory from
Exhibit A.)

[54] A few points need to be made about these terms. While the
'Merchandise' is elsewhere defined as the merchandise determined by Levi
SA, there is no suggestion that this could be any merchandise other than
Levi Strauss merchandise sold under its various trademarks and brand
names. Given the structure of the Levi Strauss group and the operation of
the GSO, the appointment 'made' in clause 1 and 'accepted' in clause 2 can
hardly have been a voluntary arrangement freely entered into by the two
parties. The power reserved in clause 1 to procure merchandise directly and
to appoint other agents to undertake the procurement process on its behalf,
was entirely inconsistent with the operation of the GSO. The power in
clause 3 to accept or reject proposals by Levi APD in regard to the design,
source, price and identity of the manufacturers of apparel was likewise
inconsistent with the GSO. The notion, in the same clause, that Levi SA
had 'complete authority' over all the terms and conditions of purchases,
cannot be reconciled with item 11 of the amended schedule under which
Levi APD was to publish and distribute a Master Sales Agreement setting
the terms of engagement that suppliers and manufacturers had to adhere to.
Levi GTC's subsequent imposition of the Master Sales Agreement on Levi
SA makes it apparent where the power of decision lay.

[55]   Some of the clauses introduce an air of unreality into the
agreement. Thus, for example, clause 8.4 provided for Levi SA to provide
Levi APD with 'manufacturing standards, specifications, know-how and

other Principal Confidential Information.' This ignored the fact that
Levi APD through the GSO established the manufacturing standards and
specifications and was vested with all the know-how relevant to the
production of the apparel. Similarly, given its status as the head company
in the Asia Pacific division, the provisions of clause 9.1 providing that Levi
SA may make available to Levi APD manufacturing standards, designs,
specifications, know-how and other proprietary information, including
production volumes, production techniques, forecasts, sourcing strategies
(that is to source via the GSO) and financial information, are meaningless.
This was information that Levi SA was obliged to provide to Levi APD as
a matter of course.

[56]  It would be otiose to trawl through each and every anomaly in the
BAA and identify each and every inconsistency with the operations of the
GSO. The reality is that Levi SA was in a subordinate position with little
scope for independent action. That is illustrated by the provisions of clause
12 dealing with the termination of the BAA. The proposition in clause 12.1
that either party could terminate it at any time flies in the face of reality.
Any termination could only occur at the instance of Levi APD or LS & Co.
This is contrary to the basic principle that the authority of the agent is
always revocable at the instance of the principal.31

[57] Applying the test discussed earlier in this judgment, one asks
whether Levi SA exercised control over Levi APD in regard to the matters
entrusted to Levi APD under the BAA? Expressed differently, is the
overriding characteristic of the BAA that Levi APD is acting under the
direction and control of Levi SA in exercising its functions under the BAA?

31 LAWSA Vol 1 (3 ed, 2013) para 149; Bailey and Another v Angove's Pty Ltd [2016] UKSC 47 para 6.

Could Levi SA purchase from the manufacturers without using the services
of Levi APD? The answer to these questions is 'No'. It follows that Levi
APD was not acting as a buying agent on behalf of Levi SA. Levi SA did
not discharge the onus of showing that these payments were buying
commissions that fell to be excluded from the determination of transaction
value.

[58] During argument a member of the court asked counsel for SARS
whether, if that was the case, the payment to Levi APD was a commission
at all within the meaning of s 67(1)(a)(i), since if it were not a
‘commission’ it might not have had to be added to the price of the imported
goods to arrive at the transaction value. The postulate was that it might
simply be an amount to reimburse Levi APD for undertaking tasks that
Levi SA would otherwise have undertaken itself. Interesting though the
question was, it is unnecessary to explore this possibility. In entering the
goods, Levi SA said the payments to Levi APD were buying commissions.
SARS issued its determination on the footing that they were not. The only
basis advanced in support of the appeal was that they were buying
commissions. The high court agreed and this judgment concludes that the
high court erred. There is no basis for considering whether the
determination could have been attacked on a different basis. To this may
be added that counsel for Levi SA did not, after the question was raised,
seek to justify the trial court’s order on this alternative basis, and we did
not receive the assistance from counsel on both sides which would have
been needed to resolve it.

The royalty issue
[59] Levi SA pays royalties to LS & Co in terms of the TLA concluded
on 1 August 2011. Before that, according to the recitals in the preamble to

the TLA, they operated 'under mutual agreement of both parties'. I assume
that involved some kind of informal licence. The schedule to the TLA
reveals that LS & Co had registered, or was in the course of registering, its
trademarks under the Trade Marks Act 194 of 1993. The case was
conducted on the basis that the answer to the royalty issue would be the
same in the period prior to the conclusion of the TLA as it was thereafter.

[60] The dispute is about the ascertainment of the transaction value of the
imported goods under both the Levi APD and the Levi GTC regime and
whether an amount in respect of royalties is to be included in the
transaction value. The answer depends upon whether, in terms of s 67(1)(c)
of the Act they became due by Levi SA, directly or indirectly, as a
condition of sale of the goods for export to South Africa. There was no
dispute that royalties were paid under the TLA on the sale, and in respect,
of the imported goods.

[61] The expression 'as a condition of sale of the goods for export to
South Africa' is not easy to construe. The Glossary of International
Customs Terms published by the World Customs Organisation defines
'exportation' as 'the act of taking out or causing to be taken out of any goods
from the Customs territory'. The sale for export requirement is satisfied by
sales of goods for consignment to South Africa from outside South Africa.
The liability for duty must arise as a condition of those sales.32 However,
this does not resolve the question of what is meant by a 'condition of sale'
or the effect of the qualification 'directly or indirectly'.

32 The Commissioner for the South African Revenue Service v Delta Motor Corporation (Pty) Ltd 2003
(1) JTLR 15 (SCA); [2002] JOL 10207 para 23 (Delta). See also Note 2 to the Notes relating to paragraph
1(c) of Article 8 the Interpretation Agreement.

[62] The Supreme Court of Canada33 held that the words 'condition of
sale' had a settled legal meaning in the law of sale. It adopted the narrow
construction that:
'in its usual meaning a condition is a term which, without being the fundamental
obligation imposed by the contract, is still of such vital importance that it goes to the
root of the transaction'.
Based on that approach it said that unless the vendor was entitled to refuse
to sell licenced goods to the purchaser, or could repudiate the contract of
sale where the purchaser failed to pay the royalties, the corresponding
section of the Canadian legislation was not engaged. Levi SA argued that
this court in Delta34 adopted the same approach and submitted that, in any
event, it should be followed. I do not agree with either contention. As to
the first, there was no discussion in Delta about the interpretation of
s 67(1)(c), beyond the statement that all the requirements of the section had
to be satisfied for it to be applied. That cryptic, and trite, observation did
not address the questions arising in this case of the meaning of 'condition
of sale' and the implications of the words 'directly and indirectly'. Nor is it
possible to infer any definite conclusion in regard to these issues from the
discussion and resolution of the factual issues in that case.

[63]  As to the second, the Mattel SCC judgment has been followed in
Malaysia,35 but the New Zealand courts36 and the European Court of Justice
(ECJ)37 have adopted a broader view, as had the Federal Court of Appeal

33 Canada (Deputy Minister of National Revenue) v Mattel Canada Inc 2001 SCC 36; [2001] S.C.R 100
p 125 (Mattel SCC).
34 Op cit, fn 32.
35 Nike Sales Malaysia Sdn Bhd v Jabatan Kastam Diraja Malaysia and two others [2013] MLJ 21 (FC-
PJY). A similar conclusion was reached by the Supreme Court, Contentious - Administrative Chamber
in Spain in the matter of Adidas España S A Case No 7460/2005.
36 Adidas New Zealand Ltd v Collector of Customs (Northern Region) [1999] 1 NZLR 558 (CA) (Adidas);
The Collector of Customs v Avon Cosmetics Ltd [1999] NZCA 256 (Avon Cosmetics); Chief Executive
of the New Zealand Customs Service v Nike New Zealand Ltd [2003] NZCA 218; [2004] 1 NZLR 238
(Nike).
37 GE Healthcare [2017] EUECJ C-173/15 (GE Healthcare).

in Canada in Mattel FCA.38 The New Zealand decision in Nike dealt
expressly with Mattel SCC. The majority held39 that its approach was
inappropriately narrow in the context of the interpretation of an
international agreement. I agree with this criticism for the reasons
discussed in para 36 of this judgment. The point is particularly significant
in the context of South African law, where a condition is not the same as a
term of the contract. This illustrates the danger of construing an
international instrument in accordance with the narrow requirements of any
one legal system.

[64]  With respect, it seems to me that the Canadian approach suffers
from three further weaknesses. Firstly, the requirement that there be a
condition, in the sense of a term, attaching to the sale of the goods for
export, renders the words 'directly or indirectly' redundant, because the
obligation to pay royalties would arise directly or not at all.40 Secondly, as
Richardson P pointed out in Avon Cosmetics,41 a 'condition of sale of the
goods' is neither the same, nor as narrow, as a 'condition of the contract of
sale of the goods'. Thirdly, it is inconsistent with the acceptance in
Commentary 26.1 on Article 8 of the Implementation Agreement that the
obligation to pay the royalties may arise under an agreement between the
licensor and the importer, rather than the importer and the vendor, and that
the licensor and the vendor may be unrelated parties.

[65] As to the first of these, while the words 'directly or indirectly' are
adverbial and grammatically linked to the royalty becoming 'due' by the

38 Canada (Minister of National Revenue) v Mattel Canada Inc 1999 CanLii 7405 (FCA) (Mattel FCA).
39 Ibid, paras 57-59.
40 See, for example, Reebok Canada v The Deputy Minister of National Revenue for Customs and Excise
2002 FCA 133 para 12.
41 Avon Cosmetics Ltd op cit, fn 36. See also Mattel FCA op cit, fn 38, para 26.

importer, they cannot in my view be severed from the condition of sale that
renders them due. Royalties may be due directly as a condition of sale, or
due indirectly as a condition of sale. Royalties are due when they become
owing and payable under the agreement with the licensor. They will be due
directly if the fact of the sale to the importer is what gives rise to the
obligation to pay the royalty, as where the contract of sale stipulates for the
payment of the royalty, or a separate contract between the licensor and the
importer provides that the purchase of the goods gives rise to an obligation
to pay the royalty. They will be due indirectly where the fact of the sale is
a necessary condition for the obligation to pay the royalty to arise and the
sale would not take place in the absence of an obligation to pay the
royalty.42
.
[66]  I am not persuaded by the view expressed in Mattel FCA43 that the
purpose of the words 'directly or indirectly' is merely to extend the
application of the section to cover indirect payments, such as a price
reduction by way of set-off of a debt owed by the vendor to the importer,
or the settlement of a debt owed by the vendor to a third party.44 Those are
unusual situations that will only rarely arise in practice in implementing
agreements for the payment of royalties in return for the right to use or
exploit the intellectual property of another. In my view the more plausible
construction is that the words 'directly or indirectly' operate to extend the
situations in which the obligation to pay the royalty becomes due.

42 Factually, the sale to Mattel Canada by its United States parent company would have taken place
irrespective of whether Mattel Canada paid the royalty under its agreement with the independent third
party licensor.
43 Mattel FCA op cit, fn 38, para 28.
44 The adjectus solutionis gratia of our law. Stupel & Berman Incorporated v Rodel Financial Services
(Pty) Ltd [2015] ZASCA 1; [2015 (3) SA 36 (SCA) para 13.

[67] The second and third matters referred to in para 64 can be dealt with
together. Section 67(1)(c) refers to a condition of sale, not a condition of
the contract of sale. Consistently with the judgment in Mattel SCC the latter
would require that there be an express or tacit term for the payment of
royalties in the contract under which the goods were imported. Accepting
that this is not what is required and avoiding any technical meaning of the
words, I prefer the formulation by Létourneau JA in Mattel FCA45 that the
royalties must become due as a prerequisite or requirement of the export of
the goods, although that may arise under a contract other than the export
contract. A convenient practical test is to ask whether the goods would have
been exported in the absence of the obligation to pay the royalty.46

[68]  This approach is consistent with Commentary 25.1 to the
Implementation Agreement on 'Third Party Royalties and Licence Fees –
General Commentary'. Paragraph 7 provides that a key consideration in
determining whether the buyer must pay the royalty as a condition of sale
is whether the buyer is unable to purchase the imported goods without
paying the royalty. This calls for an analysis of the contractual documents
and all the facts surrounding the sale and importation of the goods. The
Commentary recognises that the royalty may be payable to a third party
unrelated to the seller, as in the case of the purchases made by Levi SA
from independent suppliers under the Levi APD regime.47 Where the
licensor is unable to interfere with a sale for export to the importer and
prevent it from taking place it is difficult to conclude that payment of the

45 Mattel FCA op cit, fn 38, para 26.
46 This is the approach of the US Customs and Border Service under General Notice, Dutiability of
Royalty Payments, Vol. 27, No. 6 Cust. B. & Dec. at 1 (February 10, 1993) ("Hasbro II ruling"), wherein,
Customs asks the following questions:
Was the imported merchandise manufactured under patent?
Was the royalty involved in the production or sale of the imported merchandise?
Could the importer buy the product without paying the fee?
47 Once the Levi APD regime was replaced by the Levi ATC regime all the parties were connected.

royalty is a condition of the sale. Factually, that was the situation in Mattel,
where the licensor was unrelated to the Mattel group of companies.
However, where the licensor is in a position vis a vis the importer to
exercise control over the process at every stage, the position is different.
As Blanchard J said in Nike:48
'… [W]here royalties are payable to a licensor which is a member of the same corporate
group as the licensee – and particularly where the buying is in practice conducted
through another member of the corporate group – the situation is throughout under the
parent company's control exercisable on behalf of the licensor.'
[69] The factual situation in GE Healthcare was similar to that under the
Levi GTC regime in the present case. The licensor, buyer and seller of the
imported goods were all members of the wider GE group of companies and
all were controlled by the parent company of the group. The court accepted
that the legal position was correctly summarised by the Advocate General
in his opinion as being that:49
'the payment of a royalty or a licence fee is a 'condition of sale' of the goods being
valued where, in the course of the contractual relations between the buyer, or a person
related to him, and the seller, the payment of royalty or of the licence fee is so important
to the seller that, without such payment the seller would not have concluded the sales
contract …'
The question posed to the ECJ was whether the payment of the royalties to
the licensor could be a condition of sale of the goods for export, where they
were payable to an undertaking related to both the buyer and the seller. It
said that it was necessary for the national court to determine whether the
licensor had any control over the buyer and seller such as to enable it to
ensure that royalties would be paid on the export of the goods.50

48 Nike op cit, fn 36, para 67. This is so in every case where courts have concluded that the royalty is to
be included in the transaction value of the goods. In Mattel FCA the court concluded on the facts that it
was not to be included.
49 GE Healthcare op cit, fn 37, para 60.
50 GE Healthcare ibid, para 68.

[70] The ECJ went on to cite the following commentary on customs
valuation issued by the European Commission: '51
'[W]hen goods are purchased from one person and a royalty or licence fee is paid to
another person, the payment may nevertheless be regarded as a condition of sale of the
goods … when, for example, in a multinational group goods are bought from one
member of the group and the royalty is required to be paid to another member of the
same group. Likewise, the same would apply where the seller is a licensee of the
recipient of the royalty and the latter controls the conditions of the sale.
The final conclusion in GE Healthcare was that royalties are a 'condition
of sale' of the goods being valued where, within a single group of
undertakings, those royalties are required to be paid to an undertaking
related to both the seller and the buyer and were paid to that same
undertaking. 52 This broader view of the position was also espoused in
Advisory Opinion 4.15 issued by the Technical Committee on Customs
Valuation53 and is reflected in the outcome of several decisions of the
Peruvian Tax Court, dealing with arrangements similar to those in this case
and the others to which I have referred.54

[71] I conclude that properly interpreted s 67(1)(c) is concerned with the
contract in terms of which the goods are imported into South Africa. It is

51 Compendium of Customs Valuation Texts of the Customs Code Committee: Customs Valuation
Section TAXUD/800/2002-EN issued by the European Commission para 13 of Commentary No 3
(September 2008). The same commentary appears in the current (2018) edition of the Compendium in
para 9 of Commentary 3.
52 GE Healthcare op cit, fn 37 para 71.
53 In the matter under consideration, the licensor and importer were related to each other but not to the
manufacturer. Payment of royalties by the importer to the licensor was not a term of the sales from the
manufacturer to the importer. However, the licensor had a supply agreement with the manufacturer to
manufacture goods bearing its trademarks and to sell those goods to the importer. The manufacturer had
to comply with the licensor's specifications and could sell the branded goods only to persons approved
by the licensor. The Technical Committee advised that payment of royalties was a condition of sale of
the goods for export to the importer because the latter would not be able to buy the goods if it failed to
pay royalties to the licensor. Non-payment of royalties would bring about a termination of the license
agreement and the withdrawal of the authority given by the licensor to the manufacturer to sell the goods
to the importer.
54 The decisions are referred to in summary form in Lux, Cannistra and Rodriguez Cuadros 'The Customs
Treatment of Royalties and License Fees with Regard to Imported Goods' Global Trade and Customs
Journal Vol 7, Issue 4, 2012, pp 120-142 at 139-141.

not a requirement of the section that the obligation to pay royalties should
be embodied, either expressly or tacitly, in that contract by way of a
contractual term. The royalty may be payable to a third party other than the
seller. It may become due directly, because the terms of the contract, either
expressly or tacitly, impose that obligation or where the terms of the royalty
contract inextricably link the payment of the royalty to sales for export to
the licensee. It may become due indirectly where the nature of the
relationships between exporter, importer and licensor when viewed as a
whole is such that the sale would not have occurred without an obligation
to pay a royalty becoming due.

[72] Turning then to the TLA, Article 2 granted to Levi SA exclusive,
non-transferable rights in the Trademarks and Trade Names55 identified in
schedules to the agreement. They were granted solely for use in the
Territory, in connection with the manufacture, advertising, promotion,
display of advertising commercials, distribution, sale and retailing of
Products; the operation of Levi's® and Dockers® stores; and in connection
with sales of Products to authorised Licensees and Sublicensees of
LS & Co. The Products were defined as meaning items of apparel and
accessories identified in a schedule and bearing one or more of the
trademarks. The Territory was defined as the Republic of South Africa and
twelve other African states, but excluding Mauritius and Madagascar, from
which much of this apparel was being imported. The rights were subject to
an express limitation that Levi SA could not, without the consent of LS &
Co, authorise any person or entity to affix any of the trademarks to any
product or sue them in relation to any product other than the Products or
affix any trademarks, trade names or logos other than the defined

55 These and other capitalised words are defined in the TLA.

Trademarks to any of the Products. Sub-licensing was only permissible
with the written approval of LS & Co and on terms approved by it.

[73] Article 3 provided for the payment of royalties. Its material terms
read as follows:
‘3.1 Royalties: In consideration of the rights granted to Licensee under Article 2.1 of
this Agreement, Licensee shall pay royalties to Licensor as follows:
(a) A royalty in an amount equal to nine percent (9%) of the Net Sales Price of all
Category "A" Products sold by Licensee;
(b) A royalty in an amount equal to nine percent (9%) of the Net Sales Price of all
Category "B" Products sold by Licensee;
(c) A royalty in an amount equal to fifty percent (50%) of the respective royalty rates
in Articles 3.1(a) and 3.1(b) for Category "A" Products and Category ‘B’ Products that
are second quality Products.
3.2 . . .
3.3 Time of Accrual of Royalties:
(a) Any and all royalties payable to Licensor under Article 3.1 of this Agreement will
accrue on the date on which the relevant Products are billed, invoiced, shipped or
delivered by Licensee or paid for by Licensee’s customers, whichever event occurs
first, and will be deemed to be held in trust for the benefit of Licensor until payment of
those royalties is actually received, in accordance with the provisions of Article 3.5
hereof; and
(b) Under no circumstances shall the royalties payable to Licensor under Article 3.1 of
this Agreement be considered a condition of (1) purchase of any Product by Licensee
or Sublicensee; (2) import of any Product by Licensee or Sublicensee; or (3) sale of any
product to Licensee or Sublicensee. Products may be procured by Licensee or
Sublicensee without regard to the royalty payments under Article 3.1 of the
Agreement.’

[74] The Net Sales Price referred to in this provision was defined as
meaning the invoice price at which Products were sold by the Licensee to
customers, other than LS & Co, its affiliates and specified Licensees and

Sublicensees, less deductions. The latter referred to customary discounts
and allowances granted by Levi SA in accordance with its standard
commercial practices; certain taxes; and credits on returns. In regard to the
sourcing and manufacture of products article 4.1 provided that:
‘Licensee shall manufacture Products at its own facilities or may obtain Products as
follows: i) by placing orders via the Licensor global sourcing organisation; or (ii) by
purchasing directly from Licensor, an Affiliate; or an Authorised LS & CO licensee.
The royalty payment requirements set out in Article 3 shall govern all sales of Products
regardless of how Licensee procures them.’

[75] Under Article 3 the royalty was payable in consideration of the rights
conferred under Article 2.1 Those rights were principally the advertising,
promotion, distribution and sale of clothing and accessories bearing the
trademarks and trade names. These items were imported by Levi SA in
order to be sold in terms of this licence. The sale of the goods for export to
South Africa for the purposes of sale therefore involved the exercise of the
rights under Article 2.1(b)(i). The imported goods included the Trademarks
and Trade Names and used the intellectual property covered by the TLA.
While no royalty payment would accrue under Article 3.3(a) of the TLA
until the goods were sold, the obligation to pay a royalty when that
occurred already existed in terms of Article 3.1 The amount of the royalty
and the date for payment still fell to be determined, but that does not detract
from the fact that the obligation to pay the royalty had already arisen under
the TLA. Adidas, Nike and GE Healthcare held that the fact that the royalty
would only become due after the goods had been sold – a customary feature
of royalty agreements, as pointed out by Blanchard J in Adidas – did not
mean that the obligation to pay the royalty was not a condition of the sale
for export.

[76] This conclusion is reinforced when examining these provisions in
the light of the buying arrangements under which Levi SA procured the
imported goods. Although Article 4.1 postulated two procurement options,
Levi SA was constrained by the manner in which the GSO functioned to
use only the first and place orders via the GSO. Under the earlier regime it
was compelled to purchase from manufacturers appointed by Levi APD on
the terms negotiated by Levi APD. After the change of regime, it was
constrained to order directly from Levi GTC. Under both regimes the
process of production and sale between Levi SA and the supplier was
entirely managed and controlled by the licensor, LS & Co. That is close to
the situation described in para 9(e) of Commentary 25.1 to the
Implementation Agreement as being an indication that the royalty is a
condition of sale, namely where:
'The royalty or licence agreement contains terms that permit the licensor to manage the
production or sale between the manufacturer and importer (sale for export to the country
of importation) that go beyond quality control.'
In this case there was no need for there to be a provision in the TLA because
of the complete control that LS & Co exercised over the entire production
and procurement process through the GSO.

[77] In each of the New Zealand cases cited earlier the court dealt with a
situation where the importer was the New Zealand subsidiary of an
international group of companies, and the importer's function was the
importation, sale and distribution of the group's products in New Zealand
and some nearby territories. In each case the royalties payable to another
company in the group were calculated on the value of domestic sales. In
Adidas56 the importer could only import goods supplied by manufacturers
approved by its holding company. The sole purpose of the imports was

56 Op cit, fn 36, p 563.

domestic sales, which would crystallise the obligation to pay royalties. In
those circumstances Henry J concluded that it could not import the
products without incurring the liability to pay royalty. That made the
payment of royalties a condition of the sale to it of the products in
accordance with the approach discussed earlier in this judgment. Blanchard
J pointed out in his concurring judgment, that it was inconceivable, had the
importer been an independent company under separate ownership, that
orders would have been placed on its behalf without ensuring that the
royalty was and would be paid.'

[78] In Nike,57 after recognising that the two views expressed in Adidas
might differ, the majority approach was formulated in the following terms:
'It seems to us that … there must be a combination of two features. First, the royalty
must be payable to the manufacturer or to another person as a consequence of the export
of the goods to New Zealand and, secondly, the party to whom the royalty is payable
must have a control of the situation going beyond the ordinary rights of a licensor of
intellectual property and giving it the ability to determine whether the export to New
Zealand can or cannot occur.'
The majority accordingly held that because the goods in question were only
exported to New Zealand because of the existence of the licence agreement
requiring the payment of the royalty and because of the control that the
holding company could exercise over the parties to the sale for export to
ensure payment of the royalty, the royalties were payable ‘as a condition
of the sale of the goods for export to New Zealand’.

[79] There is nothing in the TLA to distinguish those cases and
GE Healthcare from the present one. If anything, Article 3 is clearer in
linking the export of goods to South Africa directly with the payment of

57 Op cit, fn 36 para 67.

the royalty. In my opinion, therefore, SARS was correct in saying that the
royalty needed to be included in determining the transaction value of the
imported goods.

[80] I have considered whether the fact that the exact royalty cannot be
quantified until the goods have been sold affects the matter. I think not. All
that s 67(1)(c) requires is that the royalty be 'in respect of the imported
goods'. I agree with Blanchard J in Adidas58 that:
'It is unrealistic to contend that royalties are not payable 'in respect of the imported
goods' merely because they are fixed in relation to the price at which the importer sells
them and because nothing is payable [to the licensee] unless they are resold. In practice,
royalty payments are almost invariably calculated on sales by the licensee.'
The ECJ came to the same conclusion in GE Healthcare59 as did the
Federal Court of Australia in another case involving the Mattel group.60 All
recognised that the consequence of this was that adjustments to duty
already paid might have to be made either by way of further payments or
by way of refunds. Section 67(1)(d) of the Act indicates that the transaction
value of goods may be affected by later events.61 Section 65(5) empowers
the Commissioner to amend a value determination, and this would
represent at least one way in which an over- or under-estimate of royalties
at the time of importation could be adjusted.62

58 Op cit, fn 36, at 566.
59 Op cit, fn 37 para 54.
60 Mattel FCA, op cit, fn 38.
61 Section 67(1)(d) requires the inclusion in the transaction value of 'the value of any part of the proceeds
of any subsequent resale, disposal or use of the imported goods that accrues directly or indirectly to the
seller'.
62 The issue is discussed in greater detail along the lines suggested here in the article by Lux, Cannistra
and Rodriguez Cuadros op cit, fn 54, at 136-137. In an article for clients Bell Gully noted that the practical
position in New Zealand is that:
' One practical difficulty that importers face when calculating duty is that typically royalties are
calculated by reference to "net sales" and therefore the amount of the royalty for a particular good is not
known at the time of importation.
Customs' practice has been to require the importer to use the previous year's figures to estimate the
amount of royalty that is expected to be payable in relation to imports for the current year. This estimate
is expressed as a percentage of the import price which is added to the dutiable value of product imported

[81] Levi SA relied heavily on the provisions of Article 3.3(b) and the
express statement that the royalties payable should not be considered a
condition of purchase or import of any product by Levi SA or the sale of
any product to it. I would not go so far as to say that this provision carries
no weight as conveying the intention of the parties in concluding the TLA.
Clearly the aim was to avoid royalties being included in calculating the
transaction values of imported goods in terms of Article 8 of the
Implementation Agreement and legislation giving effect to that provision.
On the approach set out in this judgment, the obligations under the TLA,
seen in the light of the procurement policies of the Levi Strauss group under
the GSO, led to the conclusion that payment of the royalty was a condition
of the sale for export of the goods. Article 3.3(b) cannot then assist Levi
SA.

Result
[82] In the result the appeal must fail in respect of the origin issue, but
succeed in respect of the buying commission and the royalty issues. That
requires some amendment to the order of the high court. It read as follows:
‘1 The applicant’s appeal against the Respondent’s determinations made on 25 March
2014 are upheld.
2. The aforesaid determinations made by Respondent on 25 May 2014 are set aside:
2.1 That Levi Strauss Asia Pacific Division (Pty) Limited (‘Levi APD’) is not a buying
agent of the applicant and that consequently the buying commissions paid by the
applicant on goods sourced by Levi APD should have been included in the value of
those goods for duty purposes upon their importation.

for the current year. The uplift figure is then usually treated as an interim payment and at the end of each
year the position is reviewed to see whether additional duty is payable (or refundable).'
See
https://www.lexology.com/library/detail.aspx?g=3d20d017-17e5-4c08-b045-89d6f1b39065
accessed 29 March 2021.

2.2 That the royalties/licence fees paid by the applicant to LS & Co are to be included
in the value for duty purposes of the goods imported by the Applicant upon their
importation.
2.3 That South African Development Community Certificates of Origin were invalidly
used
in
respect
of
goods
imported
by
the
Applicant
from
SADC
manufacturers/suppliers contracted by Levi APD or Levi Strauss Global Trading
Company Limited ("Levi GTC") resulting in the applicant incorrectly claiming
preferential duty rates.
3. That the said determinations be substituted by determinations to the following effect:
3.1 That Levi APD is a buying agent of the Applicant and that the buying commission
paid by the Applicant on goods sourced by Levi APD is not to be included in the value
of those goods for duty purposes upon their importation;
3.2 That the royalties/licence fees paid by the Applicant to LS & Co are to be excluded
from the value for duty purposes of the goods imported by the Applicant; and
3.3 That Southern African Development Community Certificates of Origin were validly
used in respect of goods imported by the Applicant based in South Africa from SADC
manufacturers/suppliers contracted by Levi APD or Levi GTC and that preferential
duty rates are applicable to the importation of such goods.
4. That the demand accompanying the above determinations be withdrawn.
5. That the respondent shall pay the costs of this application, including the costs of two
counsel, such costs to include those attendant upon the interlocutory application heard
before Murphy J which resulted in the judgment of Murphy J of 2 May 2017.’

[83] I do not doubt that it is permissible for a court seized with an appeal
under either s 49(6) or s 65(7) in appropriate circumstances to substitute
the determination by the Commissioner with a fresh determination in
accordance with its judgment. That is appropriate where the determination
was that a sum of money was due and the court determines that a different
sum was due by the importer. However, where the determination of the
appeal involves a challenge to the principle upon which the determination
was made it may be inappropriate for the court to substitute the
determination with another. It is then preferable simply to set aside the

determination, or to refer it back to the Commissioner for reconsideration
in the light of the judgment. In my view it was inappropriate in the
circumstances of this case for the court to have been asked to substitute the
suggested determinations for those of the Commissioner. All three
potentially affected situations that were not before the high court when it
dealt with the appeals.

[84]  In my view the appropriate order would be to set aside the
determination in regard to the invalidity of the Certificates of Origin to the
extent consistent with this judgment and to set aside the corresponding
demand for payment of duty and VAT of R52 466 124.19 and
R87 240 129.71. There is no need to make a substitute determination and
if there are any other issues SARS is free to address them in such manner
as may be appropriate. As regards the determination in respect of
commissions paid to either Levi APD or Levi GTC in terms of the BAA
that these were not buying commissions the determination must stand.
Likewise, the determination that royalties due to LS & Co on the goods
imported, whether under the Levi APD or the Levi GTC regime must be
added to the purchase price of those goods must stand.

[85] There is a lack of clarity in the determination as to the basis upon
which the amounts claimed because of the inclusion of the commissions
and royalties were calculated. However, neither appeal was directed at
those calculations in the event that Levi SA's primary case failed.
Accordingly, the determination does not fall to be disturbed in that respect.
As regards the costs order in the high court, Murphy J made the costs of
the application before him costs in the cause in the application. There was
accordingly no need for any special order in regard to those costs.
.

[86] I make the following order:
The appeal is upheld with costs, such costs to include those
consequent upon the employment of two counsel.
The order of the high court is set aside and replaced by the following
order:
'(a)
The appeal in terms of s 49(6) of the Customs and Excise Act 91 of
1964 succeeds in relation to the Commissioner's determination dated
25 March 2014 that the Certificates of Origin accompanying the bills of
entry for goods imported by Levi SA and consigned from countries within
the SADC area during the period from 1 July 2010 to 5 February 2014 were
invalid.
(b)
The determination and the demand for payment in consequence
thereof of the sums of R52 466 124.19 and R87 240 129.71 are set aside.
(c)
The application and appeal in terms of s 65(6) is otherwise
dismissed.
(d)
The respondent is to pay the applicant's costs, such costs to include
those consequent upon the employment of two counsel.'

_________________
M J D WALLIS
JUDGE OF APPEAL

Appearances

For appellant:
C E Puckrin SC (with him N K Nxumalo)

Instructed by:
Macrobert Attorneys, Pretoria
Lovius Block Inc, Bloemfontein

For respondent:
J P Vorster SC (with him E Muller)

Instructed by:
Shepstone & Wylie, Johannesburg
Webbers, Bloemfontein.
THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
MEDIA SUMMARY OF JUDGMENT DELIVERED IN THE SUPREME
COURT OF APPEAL

FROM The Registrar, Supreme Court of Appeal
DATE 7 April 2021
STATUS Immediate

Please note that the media summary is for the benefit of the media and
does not form part of the judgment.

Commissioner: SARS v Levi Strauss SA (Pty) Ltd (509/2019) [2021] ZASCA
32 (7 April 2021)
The SCA today upheld in part an appeal by SARS against a decision by the
Gauteng Division of the High Court, Pretoria upholding an appeal by Levi
Strauss SA (Pty) Ltd against three determinations by SARS in relation to
customs duties and VAT payable on the importation of branded clothing for
sale in South Africa.
The successful appeals related to the determination of the transaction value
of the imported clothing in terms of s 65 of the Customs and Excise Act 91 of
1964. Section 67(1)(a)(i) of the Act provides for the inclusion in transaction
value of all commissions except buyers' commission. Levi Strauss claimed
that commission paid to an associated company in the international Levi
Strauss group of companies, Levi Strauss APD, based in Singapore, was
buyer's commission paid to an agent for the sourcing and procurement of the
imported clothing. The SCA held that as Levi Strauss APD was part of the
Group Sourcing Organisation of the Levi Strauss group and the company that
headed the Asia Pacific region of the group, of which Levi Strauss SA was a
part, its actions in procuring the manufacture of clothing for the group were
not those of a buying agent and the commission paid to it was not a buying
commission. Accordingly it had to be included in determining the transaction
value of the imported goods.

Section 67(1)(c) of the Act provides for the inclusion in the transaction value
of imported goods of royalties due directly or indirectly as a condition of sale
of the goods for export to South Africa. The SCA agreed with and approved
the broad approach to the determination of when the obligation to pay
royalties becomes due directly or indirectly as a condition of the sale of goods
for export that has been applied in a range of jurisdictions around the world.
This requires the court to examine all aspects of both the transaction under
which the goods were imported and the agreement under which the obligation
to pay royalties arises. Under a Trademark License Agreement concluded
between Levi Strauss SA and Levi Strauss & Co, the ultimate holding
company of the Levi Strauss group royalties were payable for the use of the
trademarks and trade names of Levi Strauss & Co, the amount of the royalties
to be calculated and to accrue when goods were sold. The court held that the
nature of the relationship between Levi Strauss & Co and Levi Strauss SA
was such that the obligation to pay royalties was inextricably part of the
transaction under which the goods were imported and therefore the royalties
had to be included in the transaction value of the imported goods.
The SCA dismissed SARS's appeal against the High Court's decision to set
aside a determination that goods consigned directly from SADC member
states to Levi Strauss SA were not entitled to claim country of origin status
under the Protocol on Trade in the Southern African Development Community
(SADC) Region. SARS contended that although the goods were sent directly
from Madagascar and Mauritius to Levi Strauss SA in South Africa, they did
not qualify for country of origin status, because they were purchased from the
manufacturers in those countries by a company in the Levi Strauss group
based in Hong Kong and sold by them to Levi Strauss SA at a mark-up of
twelve percent. The SCA held that the relevant provisions of the Protocol and
the Act were concerned only with the factual question of whether the goods
had been consigned from one SADC country to another and not with the
underlying commercial relationship in terms of which this had occurred. As the
goods emanated from two SADC member states and were sent directly from
those states to South Africa, another member state, the were entitled to claim
country of origin status and were entitled to enter the goods for customs
purposes at the favourable rates of duty provided in the Protocol.