THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT

Reportable
Case No: 1123/2016

In the matter between:

VOLKSWAGEN SOUTH AFRICA (PTY) LTD                      APPELLANT

and

THE COMMISSIONER FOR THE                                        RESPONDENT
SOUTH AFRICAN REVENUE SERVICE

Neutral citation:  Volkswagen South Africa (Pty) Ltd v Commissioner for SARS
(1123/2016) [2017] ZASCA 190 (20 December 2017)

Coram:
Leach, Petse and Saldulker JJA and Plasket and Meyer AJJA

Heard:
9 November 2017

Delivered: 20 December 2017

Summary: Income tax – rebate paid to motor manufacturers to encourage
rationalisation of models – rebate dependent upon capital investment made by
manufacturers in order to rationalise – rebate of a capital nature and not taxable.

________________________________________________________________
ORDER
________________________________________________________________

On appeal from: The Tax Court, sitting at the Eastern Cape Local Division,
Port Elizabeth (Schoeman J and two assessors, sitting as court of first instance):

The appeal is allowed, with costs.
The order of the court a quo is set aside and replaced with the following:
„The appellant‟s income tax for the 2008, 2009 and 2010 tax years is to
be assessed on the basis that its PAA certificates valued at R83 651 677
for the 2008 tax year, R76 895 388 for the 2009 tax year and
R48 338 557 for the 2010 tax year are receipts of a capital nature.‟

________________________________________________________________
JUDGMENT
________________________________________________________________

Leach JA (Petse, Saldulker JJA and Plasket, Meyer AJJA concurring)

[1] The issue which arises in this appeal is whether the accrual of rebates
calculated with reference to capital expenditure, and to which the appellant
became entitled under a government scheme to support the local motor industry,
should be regarded as accruals of a revenue or capital nature. The Tax Court
concluded that they were revenue in nature and therefore fell to be included in
the appellant‟s gross income. The appeal directly to this Court is with leave of

the court a quo granted under s 135(1) as read with s 133(2)(b) of the Tax
Administration Act 28 of 2011.

[2] Section 1 of the Income Tax Act 58 of 1962 defines the „gross income‟ of
a person as being „. . . the total amount, in cash or otherwise, received by or
accrued to or in favour of such [person] . . . excluding receipts or accruals of a
capital nature . . .‟ (my emphasis). As appears from this, receipts or accruals are
either of a capital or of non-capital nature, the latter being commonly referred to
as income or revenue. Indeed this Court stated some 73 years ago that there is
no „half-way house‟ between capital and revenue – see Pyott Ltd v
Commissioner for Inland Revenue 1945 AD 128 (13 SATC 121) at 135 – and
although this has been the source of trenchant criticism,1 it remains the position
to this day. As a result, if an amount which accrues to a taxpayer is not of a
capital nature, it must be taken as being income or revenue and liable to tax, as
opposed to those of a capital nature which are not so liable.

[3] There is no dispute between the parties as to the facts to which regard
should be had in determining their dispute. The appellant is one of the largest
motor vehicle manufacturers in this country. It derives its income from the sale
of motor vehicles, not only those which it manufactures, many for export, but
also from motor vehicles imported from abroad for sale in this country.
Commencing as long ago as 1995, the government initiated a motor industry
development program (MIDP) aimed at an internationally competitive and
growing automotive industry. By June 2000 much had been achieved since the
MIDP had been introduced. Additional jobs had been created in the process and
it was felt that the potential for greater growth and an increase in yet further
employment opportunities was a reality.

1See eg A de Koker & R C Williams Silke on South African Income Tax Vol 1 Chapter 3 para 3.1 at 3-2 [2015
Service 56].

[4] In order to achieve this and to remain internationally competitive, South
Africa had to lower costs in its production of motor vehicles whilst maintaining
quality capable of competing with the products of manufacturers in other parts
of the world. One of the ways of achieving this was thought to be to reduce the
number of models being produced, as global trends had shown that common
platform engineering and the resultant benefits in improved economies of scale,
led to cost savings.

[5] Consequently, as a result of the undoubted advantages it had shown to the
economy of the country, the government was prepared to extend the MIDP with
one of its objectives being the rationalisation of models being produced in the
automotive industry. However, it is one thing to merely agree to rationalise the
number of models being produced; it is quite another to implement such a
process. Rationalisation of models would require plant upgrades and technology
enhancements to put this country‟s manufacturers on a par with the world‟s
best. This would involve substantial capital expenditure, inter alia, to provide
dedicated buildings, to expand production lines, to install robots used in the
production and assembly processes, and to update machinery and tooling.

[6] As an incentive for the automotive manufacturers to embark on such an
expensive capital programme, the Board on Tariffs and Trade, in its report no
4045 of 19 May 2000, made the following recommendation:
„To further encourage the global trend towards streamlining production of light motor vehicle
assembly plants into a limited number of models, the Board recommends the introduction of
a Productive Asset Allowance (PAA) to those manufacturers that have invested a certain
minimum value in dedicated productive assets for the assembly of light vehicles and
manufacture of automotive components to streamline their manufacturing base to
manufacture a limited product range for the domestic and export markets, thereby improving
their international competitiveness. The PAA recommended is in the form of a duty rebate
certificate to a maximum of 20 per cent of the total investment in qualifying productive

assets, spread equally over five years and may only be used to rebate duties on imported
motor vehicles.‟

[7] Pursuant to this, the Department of Trade and Industry announced the
introduction of a PAA with effect from July 2000. The form in which the
benefit was provided to participating manufacturers was by way of the issue of
PAA certificates as envisaged in a rebate item contained in a schedule to the
Customs and Excise Act 91 of 1964, providing for a rebate on customs duty on
certain categories of completely built-up imported light motor vehicles. The
amount of the certificate was to be calculated as a percentage of the value of the
„productive assets‟ approved by the Director-General: Trade and Industry for
purposes of this rebate provision. The „productive assets‟ referred to were
described in the rebate item as including: „[b]uildings erected for the sole
purpose of manufacturing specified motor vehicles or automotive components,
and new or unused plant, machinery, tooling, jigs, dies and moulds, in-plant
logistics, testing, design and production IT equipment and supporting software.‟

[8] Although the PAA scheme was initially administered by the Board of
Tariffs and Trade on behalf of the National Department of Trade and Industry,
its administration was later taken over by the International Trade Administration
Commission of South Africa (ITAC). Guidelines as envisaged by the tariff were
issued first by the Department of Trade and Industry and, later, by ITAC. The
2008 Guidelines in place at the time of the assessments for the tax years in issue
in the present case, were issued by the latter. Inter alia they provide for the
processes to be adopted in order to make applications of claims for such
benefits, and the verification of claims. Of particular relevance is para 9.1
thereof which reads:
„Only an applicant that demonstrates an investment in qualifying assets on an approved
project may claim for the PAA. The documented capital expenditure, as certified by the
appointed accredited consulting engineer, will form the basis of the PAA certificate. ITAC

will consider the report of the engineer who will verify the first claim of the applicant and
who shall further conduct an inspection on site.‟

[9] The „qualifying assets‟ referred to in the last paragraph (whose qualified
value was stated to be their value as capitalised according to generally accepted
accounting practice), included new buildings erected or used buildings
purchased for the sole purpose of housing approved productive assets, as well as
new and unused plant, machinery and tooling used for the sole purpose of
manufacturing the rationalised range of light motor vehicles. Such assets are
thus, essentially, those reflected as „productive assets‟ in the relevant rebate
item already mentioned above.

[10] In order for a PAA certificate to be issued, any claim for such benefits
had to be audited by external financial auditors using prescribed audit standards
in order to verify the investment in productive assets. Once that was done, an
engineer appointed by ITAC was delegated to conduct a physical on-sight asset
verification exercise which could lead to adjustments in their amount claimed.
Only once all of this had been done and the amount of the claim claimed
confirmed and agreed, would a PAA certificate be issued to a manufacturer. The
amounts received in this way would be 20% of the capital investment so audited
and verified.

[11] These PAA certificates could then be used by the manufacturer to offset
the duty which it became liable to pay on importing fully made up vehicles for
sale in this country. In this way, manufacturers were encouraged to invest in
procuring qualifying productive assets to rationalise their model production. Put
somewhat differently, as a result of their participation in the PAA scheme and
the rationalisation of the motor vehicles they were producing, they were
reimbursed to an amount of 20% of their capital expenditure incurred in the

rationalisation process by, effectively, paying less import duty than would have
been the case had they not participated in the scheme. This was an investment
incentive, not a trading incentive.

[12] To sum up, the PAA was introduced as an incentive for the automotive
manufacturing industry to make new capital investments in manufacturing
capacity in order to produce a rationalised range of light motor vehicles. Only
those manufacturers who committed to the process of rationalisation and made
the necessary investments in fixed capital to achieve rationalisation would be
entitled to benefits under the scheme. Without doing so, they would not receive
PAA certificates, each of which reflected as their benefit an amount calculated
in regard to the capital investment they had made in pursuance of the scheme.
The PAA certificates, in turn, could be used to reduce the amount of import
duty a manufacturer became obliged to pay on importing certain fully built-up
vehicles from abroad for resale.

[13] It is often said that there is nothing new under the sun. Certainly rebates
of this nature are nothing new. More than 200 years ago, Sir John Cradock, the
Governor of the Cape Colony, acting on the advice of the Cape Agricultural
Commission which in January 1808 had recommended that the indigenous fat-
tailed Cape sheep be replaced by the Spanish merino, sought to encourage the
merino breed by admitting, duty free, all merino wool brought from the interior
to the Cape and discontinuing the taxes levied on wool sheep in the country
districts. This rebate, it was hoped, would encourage farmers in the Cape‟s
interior to switch to the merino breed which it was felt had great economic
benefits for the country, inter alia from exporting wool.2 The similarities
between that scheme, designed to encourage farmers to „rationalise‟ their

2 Ben MacLennan A Proper Degree of Terror (1986 Ravan Press) at 141.

production by breeding merino sheep, with the PAA scheme in the instant case,
are striking.

[14] Be that as it may, the appellant duly applied in the prescribed manner
supported by the necessary business plan to participate in the PAA scheme. In
order to do so, it invested heavily in qualifying assets in three different capital
projects, namely, the Golf A4 project, the Polo (PQ24) project and the Golf A5
project. These investments ultimately led to it receiving PAA certificates which
were audited as required and approved by ITAC. The appellant also received
PAA certificates relating to investments made by two of its suppliers,
Shatterprufe (Pty) Ltd and PFG Springs (Pty) Ltd. These receipts were pursuant
to applications and claims they had made on their investment in qualifying
assets supported by documents furnished by the appellant identifying the
platform and project for which it had engaged them to manufacture components.
It is not suggested that these certificates should be excluded or that the appellant
was not entitled to their benefits.

[15] In its income tax returns for the years of assessment 2008-2010, the
appellant reflected the PAA certificates it had received as being accruals of a
capital nature. The amounts involved were substantial: R83 651 677 for 2008,
R76 895 388 for 2009 and R48 338 557 for 2010. The Commissioner refused to
accept that these amounts were of a capital nature, and assessed the appellant to
tax on the basis that they were income. The appellant‟s objection to such
assessment was overruled, which led to an appeal in the Tax Court whose
judgment is the subject of the appeal to this Court.

[16] As mentioned at the outset of this judgment, the fundamental question is
whether the PAA certificates are receipts or accruals of a capital nature. There is
no simple litmus test which can be applied to determine what is capital or

revenue – see eg Commissioner for Inland Revenue v Guardian Assurance Co
South Africa Ltd 1991 (3) SA 1 (A) at 19E-F – although over the years, various
guidelines have been laid down to assist in determining the nature of a
particular receipt or accrual. These include whether the accrual was forthcoming
from the realisation of a capital asset or whether it was received in the course of
carrying on business or in pursuance of a scheme of profit making – see eg the
seminal judgment of Corbett JA in Elandsheuwel Farming (Edms) Bpk v
Sekretaris van Binnelandse Inkomste 1978 (1) SA 101 (A) at 118A-F. Thus in
Commissioner for Inland Revenue v Pick ‘n Pay Employees Share Purchase
Trust 1992 (4) SA 39 (A) at 56H-57C Smalberger JA said:
„There are a variety of tests for determining whether or not a particular receipt is one of a
revenue or capital nature. They are laid down as guidelines only - there being no single
infallible test of invariable application. In this respect I agree with the following remarks of
Friedman J in ITC 1450 (1989) 51 SATC 70 (N):
“But when all is said and done, whatever guideline one chooses to follow, one should not be
led to a result in one's classification of a receipt as income or capital which is, as I have had
occasion previously to remark, contrary to sound commercial and good sense.”
The appropriate test in a matter such as the present is a well-established one. The receipts
accruing to the Trust will be revenue if they constitute “a gain made by an operation of
business in carrying out a scheme for profit-making”, in the words of the eminent
Scottish Judge . . . The corollary is that they will be non-revenue if they do not derive from
“an operation of business in carrying out a scheme for profit-making”.‟

[17] The necessity of using good sense to decide whether an accrual is capital
or revenue in nature, was echoed by this Court in W J Fourie Beleggings BK v
Commissioner, South African Revenue Services 2009 (5) SA 238 (SCA) para 7
where it was remarked that although common sense has been described as a
blunt intellectual instrument „it remains the most useful tool to use in deciding
the issue‟. In the light of this and the other principles already mentioned, I turn
to decide whether in the present case the rebates received by the appellant
should be regarded as capital or revenue.

[18] Para 3.2.3 of the South African Revenue Services Interpretation Note 59
of 10 December 2010, reads:
„A government grant will be of a revenue nature in the hands of a person carrying on trading
operations if it is a trading receipt. A grant is a trading receipt if its receipt is a normal
incident of a person‟s trading operations. The nature of the grant received and the relationship
which exists between the grant received and the recipient‟s activities needs to be examined.
A government grant will be a trading receipt when it is paid in order to assist in meeting a
person‟s trading obligations or in order to assist in carrying on trading operations. A grant of
this nature results in trading receipts being supplemented and accordingly is itself a trading
receipt.
By contrast, any amount received or accrued for the purpose of –

establishing an income-earning structure, or

as compensation for the surrender of such a structure,
is of a capital nature.‟

[19] As appears from this, the revenue authority regards the purpose of a
government grant of cardinal importance. That indeed is supported by the case
law. Thus in ITC 402 (1937) 10 SATC 111 the taxpayer, who carried on
business as a produce merchant and exporter, received a subsidy under the
Export Subsidies Act 49 of 1931. The Commissioner sought to levy tax against
the subsidy. The taxpayer contended that the amount of the subsidy was to be
viewed as a gift or an ex gratia payment. The Special Income Court held that the
subsidy arose out of the appellant‟s trade as a produce merchant, that it was
only payable to the appellant because he was an exporter, and therefore any
receipts he received on account of the subsidy should be regarded as a trade
receipt.

[20] A similar approach was adopted by this Court in Moolman v
Commissioner for Inland Revenue 1954 (2) SA 560 (A). The dispute in that
matter flowed from a wartime arrangement between the governments of this

country and the United Kingdom, under which the latter agreed to purchase
surplus wool from South Africa with the two governments sharing any profits
from its resale. After the end of the war, the wool was sold at a substantial profit
and, under a domestic statute, contributing wool producers became entitled to a
share in such profit. Pursuant to this, the taxpayer, a wool producer, had
received a lump sum which he claimed as capital and therefore not taxable. This
Court stated that while the taxpayer‟s entitlement to the sum was derived from
the Act in question „the question still remains why Parliament decided that he
should receive that sum‟. 3 It then went on to hold that as the sum was awarded
to the appellant under the statute simply because he had sold wool in the Union
to the government of the United Kingdom during the relevant period, the sum
he received was an addition to the purchase price which he had obtained when
he first sold his wool and, on that basis, was not of a capital nature. Again this
decision turned on why the grant had been paid to the taxpayer.

[21] In ITC 1435 (1987) 50 SATC 117, the taxpayer, a co-operative society of
dairy farmers, had purchased a machine for analysing milk at a sum of R26 222.
The following tax year, it received a grant-in-aid of R18 000 in respect of the
purchase price of this machine from the Milk Recording Central Co-operatives
Ltd. The Commissioner agreed that this was a receipt of a capital nature not
subject to tax. The Eastern Cape Special Court agreed. In doing so, its
President, Mullins J, said:4
„It is clear that in the present case, the amount of the grant-in-aid bears no relation to the
amounts claimed by way of wear and tear, nor is it suggested that it was intended in any way
to compensate appellant for the past or future reduction in the value of such machinery by
reason of wear and tear. It was specifically a grant to assist appellant with the capital
expenditure involved in the purchase of the machine and was therefore the grant of a capital
nature.‟

3 At 568A.
4 At 119-120.

[22] Relying on these cases, the learned authors of Silke express the view:5
„Subsidies or similar payments made by the government in terms of an Act of Parliament to
local merchants or producers for the production or export of certain commodities are, it is
submitted, on income account if they are paid to supplement the trading receipts derived from
the sale of such commodities.
. . . .
If a subsidy takes the form of a contribution towards the producer‟s cost of production of a
certain commodity, it is submitted that it is of an income nature. On the other hand, if the
subsidy is paid as a contribution towards the cost of fixed capital assets – for example, the
government may contribute towards the cost of a new factory or plant and machinery – it is
submitted that it partakes of the nature of capital and is not taxable.‟ (My emphasis).

[23] In the light of these authorities, counsel for the appellants, adopting a
phrase derived from Commissioner for Inland Revenue v Black 1957 (3) SA 536
(A) at 543B-C, contended that the court in each case had looked to the „real and
basic cause of the accrual‟ to determine whether it was capital or revenue in
nature. That being so, he submitted that the inquiry should resolve itself into
answering two questions: first, what was the real and basic cause of the accrual
(or put somewhat differently, why or in respect of what conduct or activity was
the grant made) and, secondly, whether that cause is, as a matter of fact, more
closely associated with the equipment of  the taxpayer‟s income producing
machinery (in which event it should be regarded as capital) or with its income-
earning operations (in which event it should be regarded as revenue).

[24] This indeed seems to me to be an appropriate approach in a case of this
nature. It also appears to be in line with certain English authorities. The
decisions of the Court of Appeal and the House of Lords in the matter of
Seaham Harbour Dock Company v Crook (HM Inspector of Taxes) are both
instructive. The taxpayer in that matter owned certain sea docks which it wished

5 A de Koker & R C Williams Silke on South African Income Tax Vol 1 Chapter 3 para 3.43 at 3-104 [2009
Service 40].

to extend. It did so by using a government grant which was motivated on the
ground that the extension would provide work at a time when employment was
scarce. The grant concerned was calculated by reference being had to the
notional interest on the approved expenditure over a period of two years.  In the
Court of Appeal,6 Lord Hanworth said the following:7
„What was the trade at that time which was being carried on by the Seaham Harbour Dock
Company in respect of this dock extension? How does the sum then being expended, how
does the contribution made to that expenditure, fall within the trade of the dock company? It
is very difficult to find any ground or any basis for holding that it was part of their trade. It is
quite true that the instalments of the grant have been credited to revenue in the accounts of
the company, but as has been said many times in this Court and in the House of Lords, one
has to look at the substance of the matter, and the accounts kept by the company neither inure
in their favour nor against them if the true effect and substance of the matter grants them
relief or imposes a liability.
We are therefore compelled to look at the substance of the matter; and it seems to me
Mr Cooper, who appeared for the company, was right when he made his claim: “(I) That the
grant was made by a Government body and was capital. It was not specifically made for the
purpose of meeting interest but was expressly made in respect of expenditure and for the
purpose of helping the company through with its cost of construction. (II) That the term
„equivalent to half the interest‟ was only a method of calculation for arriving at the amount of
grant to be paid.
. . . .
[I]t appears that this sum was a sum paid out and out by the Unemployment Grants
Committee for the purpose of adding to and completing the capital sum of which there was an
insufficient subscription before it was received. And the mere mode of payment or method of
accounting does not alter the character of the sums received; they were paid in order to
advance a capital expenditure to be made by the Seaham Harbour Dock Company, . . .‟
Similarly, Lord Justice Slesser said:8
„[B]ecause it becomes no more than this: a grant for an extension of a dock which is in itself
in respect of a capital expenditure. This company does not trade in dock construction; it

6 Seaham Harbour Dock Company v Crook (HM Inspector of Taxes) (1930) 38 Ll.L Rep 65 (CA).
7 At 67-68.
8 At 69.

trades in docking. They are not dock engineers engaged in building docks; they are engaged
in the utilisation of docks and they need this extension to cope with their trade.‟

[25] In the judgment of the House of Lords9, an appeal from the decision of
the Court of Appeal was dismissed on the basis that the grant was not a trade
receipt. Rather it had been made by a government department with „the idea that
by its use men might be kept in employment and it was paid to and received by
the dock company . . . simply to enable them to [construct docks] with the idea
that by so doing so people might be employed‟.10 In the parlance of this country,
the House of Lords held that the grant had been paid to enable the taxpayer to
invest in fixed capital, and was therefore a receipt of a capital nature.

[26] The decisions in Seaham Harbour Dock Company illustrate the
importance of the purpose for which a government grant is paid. This, too, is
stressed in para 3.2.5 of Interpretation Note 59, which provides as follows:
„A government grant which is designated as being made towards the cost of specified capital
expenditure is capital in nature because it is made in order to assist or compensate a person in
meeting costs of a capital nature.‟

[27] Essentially one can have no quarrel with this statement. The difficulty I
have, however, is why it appears not to have been applied to the appellant in the
present case. In disallowing the appellant‟s objection to the PAA certificates not
having been regarded as capital accruals, the respondent stated that „there is no
indication from the PAA Guidelines that the amount was received for the
purpose of establishing an income-earning structure . . .‟ It went on to state that
in calculating the PAA‟s certificates, the Department of Trade and Industry
„took into account the amount invested in qualifying plant and machinery,
however this was done for the purpose of calculating the allowance‟ which did

9Seaham Harbour Dock Company v Crook (HM Inspector of Taxes) (1931) 41 Ll. L Rep 95 (HL).
10 Per Lord Buckmaster at 96.

not imply that the appellant had been compensated „for the capital outlay in
respect of the plant and machinery‟.

[28] My reaction to this is similar to that of Davis AJA in Pyott Ltd v
Commissioner for Inland Revenue and I, too, see „insuperable difficulties in
holding anything of the kind‟.11 As appears from what I have said earlier in this
judgment, it is clear that PAA certificates were in fact issued in order to
compensate manufacturers for at least a portion of their capital outlay incurred
in respect of the plant and machinery required for rationalisation.  It was in this
way that they were encouraged to go along with the rationalisation scheme. To
suggest the converse is simply astounding. Indeed, the court a quo found that
„the grant was made due to capital expenditure.‟ That being so, why should it
not have been viewed as an accrual of a capital nature as envisaged in para 3.2.3
of the Interpretation Note?

[29] The court a quo answered that question as follows:
„[I]f the PAA certificate was not utilised, within a stipulated period, as payment for custom
duties on imported motor vehicles, the PAA certificate would lapse. The certificate was not
tradeable. The certificate was conditional and did not accrue until there were imports. If there
were no imports within the necessary time frame, the condition had not been fulfilled and the
certificate could not be used. The certificates only had value upon import of motor vehicles
and not when the capital expenditure was incurred. The grant was to assist the appellant with
the revenue expenditure, customs duty payable on imports.‟
In the light of this, the court a quo held that as PAA certificates could only be
redeemed by payment of customs duties, the diminished payment of customs
duty was clearly related to the gross income of the appellant so that the PAA
certificates were not of a capital nature.

11 At 129.

[30] With due respect, I find myself unable to agree with this conclusion.
Firstly, the PAA certificates did not only accrue once imports were made. Once
a certificate had been issued, it had immediate value which accrued to the
benefit of the taxpayer. The fact that it would lapse if not used within a
stipulated period does not mean that the benefit had not accrued, nor can it
change the nature of the accrual. As they were issued to compensate a
manufacturer for a percentage of its capital expenditure, they were clearly
capital in nature and the fact that they might lapse cannot change that position.

[31] Moreover that the PAA certificates were not „tradeable‟ speaks to me of
them being capital in nature rather than revenue. And as I have stressed, they
had accrued by reason of the taxpayer having invested in income producing
assets. The respondent‟s pleaded contention that the investment which had been
made was merely part of a formula to calculate the benefits under the PAA
scheme, ignores that fact. The making of a capital investment was at the centre
of the scheme and, without a manufacturer making such an investment, a PAA
certificate could not be paid. Had the government paid in cash rather than by
way of the PAA certificates, it clearly would have been a grant paid in respect
of that capital investment. As it instead allowed a rebate in respect of import
duties, this does not alter the fact that the benefit derived therefrom amounted to
a benefit received by the appellant in respect of capital expenditure.
Consequently, the diminished payment of customs duty was not „clearly related
to the gross income of the appellant‟ as found by the court a quo but, rather,
should be construed as a method of payment of a grant in respect of capital
expenditure.

[32] Accordingly, in my view, the respondent‟s contention that the PAA
scheme was not directly intended to support capital expenditure but merely to
allow the appellant to reduce the cost to it of imported vehicles and thereby

increases revenue, is groundless. PAA certificates were in no way received as
part of a scheme of profit making. They reimbursed the appellant in respect of a
percentage of its capital expenditure. The conclusion of the court a quo that the
PAA certificates should be construed as income rather than accruals of a capital
is clearly wrong.  The appeal must succeed.

[33] The following order will issue:
The appeal is allowed, with costs.
The order of the court a quo is set aside and replaced with the following:
„The appellant‟s income tax for the 2008, 2009 and 2010 tax years is to be
assessed on the basis that its PAA certificates valued at R83 651 677 for the
2008 tax year, R76 895 388 for the 2009 tax year and R48 338 557 for the 2010
tax year are receipts of a capital nature.‟

_______________
L E Leach
Judge of Appeal

Appearances:

For the Appellant:

M W Janisch SC
Instructed by:

Chris Baker & Associates, Port Elizabeth

Symington & De Kok Attorneys, Bloemfontein

For the Respondent:

R G Buchanan SC (with him R Tsele)
Instructed by:

The State Attorney, Port Elizabeth

The State Attorney, Bloemfontein
THE SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH AFRICA

MEDIA SUMMARY – JUDGMENT DELIVERED
IN THE SUPREME COURT OF APPEAL
From:
The Registrar, Supreme Court of Appeal
Date:
20 December 2017
Status:
Immediate
Please note that the media summary is intended for the benefit of the media
and does not form part of the judgment of the Supreme Court of Appeal.

VOLKSWAGEN SOUTH AFRICA (PTY) LTD
V
THE COMMISSIONER FOR THE SOUTH AFRICAN REVENUE
SERVICE

The appellant, a manufacturer of light motor vehicles, became entitled to
receive a productive asset allowance (PAA) in terms of a government scheme
designed to encourage motor manufacturers to rationalise the number of models
they were producing in order to remain internationally competitive. The form in
which the PAA benefit was provided was by way of the issue of certificates as
provided in a rebate item contained in a schedule to the Customs and Excise Act
91 of 1964. This provided for a rebate on customs duty on certain categories of

completely build-up imported light motor vehicles. The amount of this benefit
was calculated as a percentage of the value of the manufacturer’s capital
expenditure on items such as buildings erected or purchased, new plant,
machinery and tooling,  acquired in order to manufacture a rationalised range of
light motor vehicles.

Only those manufacturers who committed to the process of rationalisation and
made the necessary investments in fixed capital to achieve that end were
entitled to receive benefits under this scheme. Without doing so, they would not
receive PAA certificates which reflect an amount calculated in regard to the
capital investment they had made in pursuit of the scheme. The PAA
certificates, in turn, could be used to reduce the amount of import duty a
manufacturer became obliged to pay on importing certain vehicles.

The appellant duly applied and was admitted to the PAA scheme. In its income
tax returns for the years of assessment 2008-2010 it reflected certain PAA
certificates it had received as being accruals of a capital nature. The amounts
involved were substantial. The Commissioner for the South African Revenue
Service refused to accept that these amounts were of a capital nature, and
assessed the appellant to tax on the basis that they were income. The appellant’s
objection to such assessment was overruled. This led to an appeal in the Tax
Court which concluded that the PAA certificates should indeed be treated, as
the Commissioner contended, as income or revenue.

The appellant then appealed to the SCA against the Tax Court’s decision. The
appeal was today upheld. The court concluded that the PAA certificates had
been made due to contribute towards the appellant’s capital expenditure and

there was no reason to view it as a non-capital nature. The appeal therefore
succeeded and the order of the Tax Court was set aside and replaced with an
order that the appellant’s income tax for the applicable tax years is to be
assessed on the basis that the PAA certificates for those years are receipts of a
capital nature.