THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT

Reportable
Case No: 923/2017

In the matter between:

SASOL OIL PROPRIETARY LIMITED                                                   APPELLANT

and

THE COMMISSIONER FOR THE SOUTH
AFRICAN REVENUE SERVICE                                                          RESPONDENT

Neutral citation:  Sasol Oil v CSARS (923/2017) [2018] ZASCA 153 (9 November
2018)

Coram:
Lewis, Ponnan, Cachalia and Makgoka JJA and Mothle AJA
Heard:
21 August 2018
Delivered:
9 November 2018

Summary:   Contracts for the sale of crude oil by one entity within the Sasol Group,
to another, and the back to back sale of the same oil to yet another entity in the group,
were not simulated in order to avoid a liability to pay tax; nor were they entered into
solely for the purpose of avoiding the payment of tax for the purpose of s 103(1) of the
Income Tax Act 58 of 1962.

____________________________________________________________________

ORDER

On appeal from: Tax Court, Johannesburg (Mali J sitting with two other members):

1 The appeal is upheld with the costs of two counsel.
2 The order of the Tax Court is set aside and is replaced with the following order:
‘The appeal against the additional assessments issued to the appellant on 30 April
2010 by the Commissioner for the South African Revenue Service for the 2005, 2006
and 2007 years of assessment is upheld and those assessments are set aside.’

JUDGMENT

Lewis JA (Ponnan and Cachalia JJA concurring)

[1] In this appeal against the decision of the Tax Court sitting in Gauteng (Mali J
and two other members), there are two main issues. First, whether two contracts for
the sale of crude oil sourced in the Middle East, acquired by a company in the Sasol
Group in the Isle of Man, sold to another company in the Sasol Group based in London,
and in turn sold and shipped to Sasol Oil (Pty) Ltd (Sasol Oil), the appellant, in Durban,
were simulated transactions and should be disregarded by the Commissioner for the
South African Revenue Service, the respondent, in the assessment of taxation in
2005, 2006 and 2007. I use the term ‘Sasol Group’ loosely to include all the holding
companies and subsidiaries that are relevant to this appeal.

[2] Second whether, if the transactions were not simulated, they fell within the
provisions of s 103(1) of the Income Tax Act 58 of 1962, and were thus to be
disregarded for the purpose of assessing liability for income tax in the hands of Sasol
Oil. The Commissioner issued additional assessments in the years in question, against

which Sasol Oil appealed. The amounts in dispute are in excess of R68 million,
penalties in terms of s 76 of over R68 million and interest in terms of s 89 quat.

[3] The two contracts in issue before the Tax Court were entered into between
Sasol Oil and Sasol International Services Ltd (SISL), and between SISL and Sasol
Oil International Ltd (SOIL). In terms of these, SISL agreed to sell crude oil and deliver
it to Sasol Oil on a DES (delivered ex ship) basis, and SOIL agreed to procure crude
oil and deliver it to SISL on an FOB (free on board) basis.

[4] The Tax Court found that the impugned transactions were simulated and did
not therefore consider the implications of s 103(1). It upheld the Commissioner’s
assessments and confirmed the imposition of penalties and the obligation to pay
interest. This appeal is with the leave of the Tax Court. I shall deal with the relevant
provisions of the Act in due course. It is important first to describe the Sasol Group
entities and the roles they played at various times.

Sasol Oil
[5] Sasol Oil was at all times a subsidiary of Sasol Ltd. The business of Sasol Oil
was the refining of crude oil and the marketing of fuels produced from coal. It did this
at a refinery inland. It made its profits by buying crude oil at a lower price than the
refined products that it sold and supplied throughout South Africa. Before oil sanctions
were lifted in 1991, Sasol Oil purchased its crude oil from the State’s Strategic Fuel
Fund. When sanctions were lifted, Sasol Oil started sourcing and importing crude oil
from a number of suppliers in the Middle East, mostly from Iran, Saudi Arabia and
Kuwait. It had in place term contracts for the supply of crude oil, which gave it security
of supply and lower prices than were available in the open market, for crude oil bought
on the spot.

Other corporate entities in the Sasol Group
[6] From 1991 to 1997 Sasol Oil purchased and shipped crude oil from the
suppliers in the Middle East, and spot oil from Western African suppliers. At that time

as well, the Sasol Group started to ‘globalize’. There were companies established in
different locations, the relevant ones being Sasol Trading International Ltd (STI),
incorporated in November 1997 in the Isle of Man. Sasol Trading Services Limited was
incorporated in the United Kingdom, based in London, in December 1997. Its name
was changed to Sasol International Services UK (SISL) in February 1998. STI and
SISL were wholly owned subsidiaries of Sasol International Holdings (Pty) Ltd (SIH),
incorporated in South Africa in September 1997.

The period from December 1997 to July 2001
[7] The Sasol Group undertook a major restructuring of entities within the group.
The restructuring resulted in a change of oil procurement functions. From 1997 STI,
rather than Sasol Oil, started procuring from Middle Eastern suppliers, and sold the
crude oil acquired in terms of term contracts to Sasol Oil. It shipped the oil to the
Durban port on a DES basis (delivered ex ship). Sasol Oil paid STI for the oil and its
services.

The period from July 2001 to July 2004
[8] STI procured crude oil from the Middle Eastern suppliers in terms of their term
contracts and sold it to SISL, delivering on an FOB basis (Free on Board). SISL in turn
sold the crude oil to Sasol Oil, delivering it to Sasol Oil at the Durban port on a DES
basis. The name of SIH was changed to Sasol Investment Company (SIC) in June
2002. In April 2004, Sasol Oil International (SOIL) was established in the Isle of Man,
as a wholly owned subsidiary of Sasol Oil. STI and SISL remained wholly owned
subsidiaries of SIC.

The implication of the changes from 2000 to July 2004
[9] The Sasol Group, from 1997, had one office in the Isle of Man, the business
establishment of STI, which procured crude oil for on sale to Sasol Oil. And there was
an office in London where SISL performed shipping and marketing services, mostly
for STI. By the end of 2000, the people running the businesses of STI and SISL were
concerned about the duplication of office accommodation and staff required. The

principal players were Mr Desmond Gird, who had joined the Sasol Group in 1981 and
Mr Henri Loubser, a chemical engineer, who joined the Group in 1982. Gird was Sasol
Oil’s trading manager. He moved to SISL in London in February 1998, where he was
the head of the company and from 2000 also a director. Loubser oversaw the chemical
processes in Secunda, South Africa, and the refinery in Sasolburg – Natref. In May
2001 he was appointed as a director of SISL.  I shall discuss their evidence in more
detail later.

[10] In brief, Gird testified about oil trading and the need for crude oil to be procured
for Sasol Oil. He and Loubser, who was his immediate manager, had discussed
rationalization of the offices in the Isle of Man and London. When the Sasol Group had
started the internationalization project, they had envisaged a base in London, which
was the leading oil trading and financial centre, and which had excellent shipping
infrastructure. But because of UK tax rates they had also needed to set up a business
establishment on the Isle of Man which was considered to be a ‘tax haven’, and the
decision had been made to locate the trading function there, hence STI’s incorporation
in the Isle of Man in 1997.

[11] This evidence is supported by an application made through Investec Bank to
the South African Reserve Bank (SARB) in September 1997. It was anticipated that
the profits made by STI would serve as capital for foreign expansion and would not be
subject to South African exchange control regulation.

[12] In September 1998, STI and Sasol Oil entered into a crude oil supply
agreement (the Original Supply Agreement) in terms of which STI would procure crude
oil and sell and ship it to Sasol Oil on a DES basis. STI would be near London and
would therefore benefit from SISL’s expertise in marketing intelligence in tracking
crude oil prices and from introductions to other traders operating in London.

[13] In 2000 the Sasol Group made a bid to acquire a German chemicals group,
Condea. The board of directors of SIH (the holding company of STI and SISL)
requested a review of the SIH structure in anticipation of the acquisition of Condea.

Gird was instructed to review the operations of STI and SISL and to submit a
restructuring proposal, after a professional firm’s review of it, to the board in February
2001. Pursuant to this, Gird prepared a proposal in early December 2000, suggesting
that the crude oil trading function be relocated from STI in the Isle of Man to SISL in
London.

[14] Loubser presented the proposal prepared by Gird to the Sasol Oil Board on
8 February 2001. The essence of the presentation was that there was an ‘unavoidable
duplication of effort by STI, SISL and Sasol Oil’; the costs of maintaining their offices
and business contacts was too high in the light of lack of growth of the business; and
the costs of commuting between the Isle of Man and London should be avoided. The
cost saving of rationalizing the respective functions of STI and SISL was estimated to
be R3 million per year. Gird’s proposal, presented by Loubser, further suggested that
the oil and products trading be relocated to SISL in London. Any South African
products trading would be relocated from STI to Sasol Oil.

[15] On 20 February 2001, the board of Sasol Oil resolved that the Gird proposal
should be considered by the Group Executive Committee (GEC) of the Sasol Group.
Pursuant to this, Loubser who was a member of the Sasol Oil Board and was present
at the meeting, requested Gird, who was in London at the time, to obtain a legal opinion
on the UK tax implications of the proposed restructuring, which Gird did. He consulted
Mr Kevin Ashman of the solicitors’ firm Lovells shortly thereafter. Gird and Ashman
met on 21 February 2001.

The Lovells advice
[16] On 7 March 2001, Ashman wrote to Gird setting out his advice. He confirmed
that the proposed relocation of the crude oil trading function from the Isle of Man to
London would not have any adverse UK implications for SISL, save that there would
be an increase in SISL’s UK tax as a result of the increase in the ambit of the business.
The proposal put to him was that while STI would remain in the Isle of Man to continue
its other activities there, the crude oil trading function would be moved to London. That
had staffing and office implications for SISL and STI. SISL would need additional staff

in London, and Mr Jan Bredenkamp of STI, as the principal oil trader at STI, with
considerable experience and many contacts in the crude oil trading market, would
have to move to London.

[17] Bredenkamp’s move to London, as part of the Gird proposal, was a key
component of the proposed new structure. But it transpired, after Gird had taken
advice from Lovells, that Bredenkamp was not willing to move away from the Isle of
Man, as I shall discuss shortly. It was partly for this reason that the Sasol Group
decided not to follow the Lovells advice in its entirety. Equally importantly, Ashman
suggested that a clean break be made between the STI contracts for the purchase of
crude oil with Middle Eastern suppliers and new contracts to be negotiated by SISL
with the suppliers.

[18] Sasol Oil’s chief concern expressed to Ashman was that historical profits made
by STI in the Isle of Man might be taxed by UK Inland Revenue since there was a
possibility that SISL might be regarded as a branch of STI: if this were so, historical
profits made by STI could be exposed to UK corporation tax.

[19] The commercial reasons for relocating the STI operation to London –
rationalization of staff and proximity to the London trading market – had thus to be
weighed against the disadvantages of relocating the crude oil supply there as well.
The particular problem that the Sasol Group anticipated was the cancellation of the
term contracts – that might give the Middle Eastern suppliers the opportunity not to
renegotiate contracts with the Sasol Group and to find other purchasers. Gird testified
that the Sasol Group had been fortunate in securing these term contracts as there
were many entities waiting in line for the allocation of crude oil on a term contract.

[20] The second problem not anticipated by Loubser and Gird when they made the
original proposal to the Sasol Group was that, after receiving the Lovells advice, they
ascertained that Bredenkamp was not willing to move to London – thus achieving the
clean break that Lovells suggested was necessary. Bredenkamp had established a
presence on the Isle of Man and had bought a home there. He wished to remain on

the Isle of Man. His skills and contacts were essential to the acquisition of crude oil.
He was also needed on the Isle of Man for other Sasol Group businesses he
conducted there, such as a chemical business. Bredenkamp, who died some years
before the additional assessments were issued by the Commissioner, wrote a
memorandum for the Sasol Group dated 14 June 2001.

[21] Bedenkamp recommended that the crude oil trading function (acquisition from
the Middle Eastern suppliers) remain with STI, and all other business, such as
shipping, be moved to SISL in London. As Bredenkamp said in his proposal ‘This will
entail SISL buying the crude oil on a FOB basis, arrange the shipping insurance,
inspections etc and assume the risk’. He said also that it would entail cancelling the
supply agreement between STI and Sasol Oil.

[22] Bredenkamp’s proposal was accepted by the STI board of directors on 23 June
2001. Gird’s evidence was that the only change to the original proposal that he and
Loubser had conceived was that the crude oil procurement would remain with STI on
the Isle of Man, which, having bought it, would sell it in turn to SISL, and SISL would
sell the oil, and ship it to Sasol Oil. That is the chief element in the structure that the
Commissioner complains of. There was no reason, he contended, for STI, having
procured the crude oil, to sell it to SISL and for SISL to sell it (back to back) to Sasol
Oil in South Africa. The ‘interposition’ of SISL was an element that could not be
explained other than as a stratagem to avoid the payment of tax in South Africa. That
is the Commissioner’s chief reason for the argument that the sales of crude oil by STI
to SISL and then from SISL to Sasol Oil were simulated.

[23] The policy of the Sasol Group was to submit proposals and draft agreements
to the tax department in the group for approval. Gird accordingly sent the modified
proposal for the relocation of shipping to London by SISL to Mrs Beulah van Wyk, who
at the time was the chief financial officer of Sasol Oil. She in turn sent it to Mr Eric
Louw who was in the Group Tax department of Sasol Ltd for advice on whether the
proposed structure was optimal from a tax point of view. Louw was formerly a tax
director at the accounting firm Price Waterhouse Coopers (PWC). He issued an

opinion on 5 July 2001 confirming that the modified proposal was tax compliant and
optimal. He asked PWC for a confirmatory opinion, which was provided on 16 July
2001.

[24] Mr Okkie Kellerman (the senior tax manager) and Mr Mark Badenhorst (the tax
partner) of PWC repeated the structure of the modified proposal in their written advice.
They pointed out that SISL already had access to oil market information which, before
the relocation, had been transmitted to STI in the Isle of Man. SISL also had
‘experience and expertise in managing volatile shipping rates, oil losses during
transportation, insurance, demurrage, deadfreight, loss control and inspection costs
and negotiating co-freight arrangements and other oil companies’. STI, they said, ‘has
experience and expertise in the negotiation of contracts for the supply of crude oil on
the open market. It does not have the expertise to arrange shipping of the purchased
oil’.

[25] However, PWC cautioned that there had to be ‘sufficient commercial
justification for SISL to sell the crude oil to Sasol Oil and to undertake the shipping of
the crude oil’. If not, the use of SISL could be seen as a scheme to avoid tax in SA
and the new structure could be disregarded for SA tax purposes, they said. They also
advised that ‘sufficient real risks and functions should be transferred into SISL to
provide sufficient commercial justification and to limit the UK and SA transfer pricing
risks’.

[26] The GEC approved the modified structure presented at a meeting by Loubser
on 5 July 2001. The minutes of the meeting record that:
‘A presentation by Mr Henri Loubser emphasised the need to review Sasol’s structure in light
of certain legislative changes.
The proposal was to cease the contract between STI and Sasol Oil and move is to [SISL].
This would optimize the tax regime.’

[27] The Commissioner’s contention both in the Tax Court and on appeal is that the
scheme was devised by Gird and Loubser in order to avoid the payment of a newly

introduced residence tax in 2001. Gird and Loubser denied that this was so. Loubser
denied that the minutes correctly reflected his presentation. He pointed out that he had
made the presentation to the GEC but had said nothing about the tax implications of
the transactions proposed. He was a chemical engineer and not a tax expert, he said,
and would never have presumed to advise on legal or tax matters. I shall return to their
evidence and the cross examination of them in due course.

Tax advice in South Africa
[28] The argument by the Commissioner that the back to back sales were simulated
transactions, or abnormal in the sense of s 103(1), is based not only on the advice that
PWC gave in respect of the structure in response to the Gird and Loubser proposal
that was sent to PWC by Van Wyk. He also relied on tax advice given by PWC to the
Sasol Group on 14 March 2001 in respect of the change of the income tax regime from
being source based to being residence based, which came into effect in June 2001.
The advice was recorded in a letter to the directors of Sasol Ltd written on 3 April 2001.
This followed a meeting of the GEC (for the whole Sasol Group), the minutes of which
recorded that ‘Mr Louw of PWC made a presentation on Residence Tax Legislation,
which would be introduced for Sasol on 1 June 2001’. Mr Rynhart van Rooyen ‘stated
that Sasol is currently very weak on tax planning and that urgent actions are required
to remedy the situation.’

[29] That was why the Sasol Group, through Van Wyk, approached PWC and
consulted them on 14 March 2001. Kellerman and Louw advised on 3 April 2001 that
a UK based company should be used for oil trading activities in order to avoid
residence based tax. They suggested that STI should sell crude oil that it had sourced
to a company in the UK, the UK resident company, and that the UK company should
sell that oil to Sasol Oil, which is what Loubser and Gird had proposed earlier in the
year. Their evidence was that the proposal evolved because of the Lovells advice, and
the realization subsequently that STI needed to keep Bredenkamp on the Isle of Man,
and that it would be foolish to terminate the term crude oil contracts with the Middle
Eastern suppliers.

The residence based tax introduced in 2001
[30] The Act was amended in 2001 to insert a new s 9D. The purpose of the
amendment was explained in an explanatory memorandum issued by the National
Treasury in 2002.
‘Under the residence (ie worldwide) taxing system [introduced by the amendment], South
African residents are subject to tax on their income earned domestically and abroad. One
important facet of this system is how to address income earned by South African owned
foreign companies and other South African owned foreign entities of a similar nature. If this
latter form of income goes untaxed, South African residents can avoid tax simply by shifting
their income to foreign entities, and the income earned by foreign entities will be taxed only
once repatriated as a dividend. . . This failure to impose immediate tax is of great significance
because taxpayers often delay repatriation for years or never repatriate funds at all.
Section 9D is designed to prevent deferral through South African owned foreign entities.
However, international law only allows South Africa to tax foreign residents on their South
African source income. International law does not allow South Africa to directly tax foreign
entities on their foreign source income, even if those foreign entities are completely owned by
South African residents.
However, in order to remedy the problem of deferral while complying with international law,
section 9D (like other internationally used regimes of this kind) taxes South African owners on
the foreign income owned by their foreign entities as if those foreign entities immediately
repatriated their foreign income when earned.’

[31] The Commissioner’s additional assessments attributed the income of SOIL
(which had stepped into STI’s shoes in the Isle of Man) to Sasol Oil in 2005, 2006 and
2007, invoking s 9D in order to do so, on the basis that the sales from SOIL to SISL
and then on to Sasol Oil were simulated transactions, in fraudem legis. The
Commissioner’s contention is that the structure conceived by Gird and Loubser in
2001, which changed after the Lovells advice, was designed to avoid the implications
of the new residence based tax, and was not as a result of the factors that Gird and
Loubser adverted to (the importance of maintaining term contracts for the supply of
crude oil, and the fact that Bredenkamp was determined to remain on the Isle of Man).

[32] Before dealing with the PWC presentations and the advice that it had given to
the Sasol Group, it is convenient to set out the relevant provisions of s 9D as they
were in the tax years under consideration.
‘Net income of controlled foreign companies
(1) For the purposes of this section—
‘business establishment’ in relation to a controlled foreign company, means-
(a) a place of business with an office, shop, factory, warehouse or other structure
which is used or will continue to be used by the controlled foreign company for a
period of not less than one year . . . .
‘controlled foreign company, means any foreign company where more than 50 per cent
of the total participation rights in that foreign company are held, or more than 50 per
cent of the voting rights in that foreign company are directly or indirectly exercisable,
by one of more residents’ ….
(2A) For the purposes of this section the ‘net income’ of a controlled foreign company is
respect of a foreign tax year is an amount equal to the taxable income of that company
determined in accordance with the provisions of this Act as if that controlled foreign company
had been a taxpayer, and as if that company had been a resident for purposes of the definition
of ‘gross income’. . . .
(9) In determining the net income of the controlled foreign company in terms of subsection
(2A) there must not be taken into account any amount which –
…
(b) is attributable to any business establishment . . . of that controlled foreign company
in any country other than the Republic: Provided that the provisions of this
paragraph shall not apply to any net income that is attributable to –
…
(ii) any amounts derived from –
(aa) any sale of goods by that controlled foreign company to any connected person (in
relation to that controlled foreign company) who is a resident, unless—
(A) that controlled foreign company purchased those goods within the country of
residence of that controlled foreign company from any person who is not a
connected person in relation to that controlled foreign company;’ (My emphasis.)
Section 1 of the Act defines a ‘connected person’, in relation to a company as its
holding company, or its subsidiary or any other company where both such companies
are subsidiaries of the same holding company.

[33] It is common cause that in the years of assessment (2005 to 2007) SOIL was
a controlled foreign company of Sasol Oil. SOIL was resident in the Isle of Man and
had a foreign business establishment there. SOIL (as STI had done prior to SOIL’s
incorporation in 2004), received amounts of money (or the rights to it accrued) from
the sale of crude oil; these amounts would have fallen within the taxable income of
SOIL if it had been a resident and these amounts were attributable to the foreign
business establishment. Accordingly, unless such amounts were derived from sales
of crude oil to a person connected to SOIL, the connected person being a resident of
South Africa, those amounts were not to be taken into account in determining the net
income of SOIL for the purposes of s 9D.

[34] SISL too was not resident in South Africa, but in the UK. Thus if the crude oil
was sold by SOIL to SISL, the foreign business exclusion would apply and these
amounts would not be taken into account in determining the net income of SOIL for
the purpose of s 9D. On the other hand, if SOIL had sold the crude oil directly to Sasol
Oil, which was both a connected person and a South African resident, the foreign
business exclusion did not apply (in terms of the proviso in (ii)(aa) of 9D(9)(b)). If SOIL
had purchased crude oil within its country of residence from any entity that was not a
connected person, the subparagraph (A) exclusion would apply.

[35] The back to back sale of crude oil by SOIL, which procured it from the Middle
Eastern suppliers, to SISL, and the sale and the supply then by SISL to Sasol Oil in
South Africa were attacked by the Commissioner as being simulated, designed only
to achieve the avoidance of residence based tax in the hands of Sasol Oil. He
considered that he was entitled to disregard the sales from SOIL to SISL and to regard
the sales as having been directly to Sasol Oil.

[36] There were essentially two grounds for this assessment. The first was that the
real substance of the supply agreements was a sale of oil directly to Sasol Oil, and
that SISL’s role was a sham – the substance over form principle. The alternative
ground was that s 103(1) applied as the transactions were abnormal and had the effect
only of avoiding a tax liability. Mali J in the Tax Court found that the transactions were

indeed simulated and that SISL’s role in the scheme was a sham such that the
Commissioner was entitled to disregard it in his assessments for the 2005 to 2007 tax
years. Mali J also found that the exclusion in 9D(9)(b)(ii)(aa)(A) did not apply. And
having found that the sale to SISL and the sale to Sasol Oil were sham transactions,
she did not consider it necessary to consider the application of    s 103(1). The Tax
Court held that Sasol Oil was liable for s 76 penalties and s 89quat interest. These are
the issues that require consideration by this court in the appeal.

Substance over form and the evidence led for Sasol Oil
[37] The appeal by Sasol Oil to the Tax Court was based on the contention that the
transactions in question were genuine. Five witnesses testified about the reasons for
the sale of crude oil to SISL, and the implementation of the transactions, and Sasol
Oil led the evidence of an expert in procuring and shipping crude oil, Mr Harvey
Forster. No evidence was led for the Commissioner, but that is hardly surprising as it
would not have had access to the internal workings of the Sasol Group. All the
witnesses were rigorously cross examined and the Commissioner was very critical of
the evidence, labeling it inconsistent and unreliable. Mali J found that the testimony
for Sasol Oil was not credible, a serious finding with which I shall deal in due course.
But first I shall set out the essence of the testimony for Sasol Oil.

[38] Gird testified that the new supply agreements – between STI and SISL and
between SISL and Sasol Oil – were implemented once the GEC had approved them,
in July 2001. The agreements were signed only in December of that year, but the
effective date of each was agreed to be 1 July 2001. There was no agreement of sale
between STI and Sasol Oil. The Sasol entities had intended that once STI had
procured crude oil, it would sell it to SISL, which acquired ownership of the oil while it
was shipped to Sasol Oil. In turn SISL transferred ownership pursuant to its supply
agreement to Sasol Oil in South Africa. Gird relied on invoices between the respective
parties to show the sales figures and prices at which STI sold to SISL and SISL sold
to Sasol Oil. SISL issued quarterly credit notes to Sasol Oil to account for losses borne
by it – differences in actual volumes delivered and demurrage.

[39] Acting as both owner and shipper of the crude oil, SISL issued instructions to
STI regarding the detail for the bills of lading and STI issued instructions to the crude
oil suppliers. Bills of lading were issued to STI and then endorsed by STI to SISL. SISL
thus had the right to claim delivery of the crude oil. The Middle Eastern suppliers had
different requirements as to credit arrangements between them and STI. One, the
Saudi Arabian Oil Company, referred to as Aramco, required a standby letter of credit
for every purchase of crude oil. It would issue bills of lading at load port directly to STI,
which would endorse them in favour of SISL.

[40] Mr Philip du Toit of STI, later a director of SISL, and when SOIL was
incorporated, of SOIL, testified that he personally endorsed the bills of lading on behalf
of STI to SISL. Du Toit had taken over the procurement function of the Sasol Group
from Bredenkamp. At the time of giving evidence, Du Toit was employed by SISL in
London and had assumed responsibility for the procurement of crude oil for the
refinery.

[41] Another supplier, Naftiran Intertrade Company Limited, required documentary
letters of credit for every purchase of crude oil. The issuing bank required from the
seller the bills of lading, invoices, certificates of quantities and of quality before it issued
the letter of credit. After reviewing the documents and confirming compliance the bank
would endorse the bills of lading to STI. Du Toit then endorsed them to SISL.

[42] Gird testified that the SISL annual financial statements accorded with the supply
agreements and reflected their implementation. The 2002 statement described SISL’s
principal activities in the year as ‘the provision of market information to the Sasol
Group’ and added that ‘from July 2001 the company participated in inter-group oil
trading and shipping of crude oil’. The same statement reflected SISL’s ownership of
the crude oil while being shipped and reflected the oil in its balance sheet as trading
stock in transit.

[43] Gird’s view was that as owner of the crude oil in transit, SISL bore the risk and
losses in respect of the oil. (The supply agreement to Sasol Oil in any event provided

that this was the case.) his evidence accorded with the description of SISL’s business
by Ernst and Young in a study on Sasol Limited’s transfer pricing. The study stated
that while SISL took ownership of the oil and sold it on to Sasol Oil, SISL was
‘essentially a distributor of oil and [it] has no sophisticated procurement function’. Its
primary function was the arrangement of shipping to Sasol Oil.

[44] Gird was asked to deal with the term of the supply agreement that SISL bore
the risks in respect of the crude oil being shipped. He explained that the risks were
real: SISL did not necessarily deliver the same quantity of crude oil to Sasol Oil that it
had bought from STI. In the majority of cases the quantity that was loaded was less
when it reached South Africa and was pumped off the vessel onto which it had been
loaded. This was because of evaporation, clingage of oil to walls, and the vessel
needing to depart before all the oil had been pumped out. Secondly, loss could be
incurred with demurrage charges – exceeding the number of hours allocated, in which
case the vessel owner would charge for ‘standing time’. It was standard, he said, when
offloading at Durban, that there would be standing time. Another loss factor was what
Gird termed ‘dead freight’ – using less capacity than a vessel could hold, but for which
SISL would be charged. The changing price of crude oil, in a notoriously volatile
market, was another factor that can affect the risk. Yet Sasol Oil was not obliged to
pay for the lesser quantity of oil than that reflected on the bill of lading. Gird outlined
further risk factors but there is no need to deal with them all.

[45] Mr Harvey Foster testified as an expert in crude oil trading and shipping. It was
his view that it was commercially advantageous for the shipper of oil to South Africa –
SISL – to be based in London. At the time, London was the hub of the shipping world.
The people with the skills in crude oil trading and with the expertise in shipping were
based in London. Personal interaction between traders was essential. London was the
choice location for oil trading houses.

[46] Foster also testified about the risks involved in shipping. These included finding
a suitable vessel for both the load port and the discharge port; availability within the
loading window; the quality and quantity loaded; piracy along the West and East

coasts of Africa; and arrival and discharge times, and the types of losses that Gird had
described. While conceding that most of these risks were insured against, he
considered that there was nonetheless risk where the insurer repudiated the policy on
the basis that the shipper had not acted reasonably in guarding against the risk
foreseen.

[47] When cross-examined on the risk it was put to him that in the transfer pricing
study undertaken by KPMG for the Sasol Group, it was stated that the risk of losses
during transit were minimal because SISL was fully insured. The shipping fees earned
by SISL were therefore justifiably low. The study indicated that the losses incurred by
SISL were less than 0.5% of the volume of oil shipped. Foster maintained, however,
that there was nonetheless risk of loss that was not insurable and that if the shipper
used people who were not experts in the field the risks were very high. Although the
fees charged per barrel by SISL were low, the total sums earned when millions of
barrels of crude oil were shipped were not to be underestimated.

[48] The other point of contention related to whether the shipper necessarily needed
to acquire ownership of the crude oil while it was in transit. This is important to the
Commissioner’s argument that the right that SISL acquired in respect of the crude oil
was a hollow one, since it could do nothing with the oil but ship it to Sasol Oil. It did
not have the normal entitlements of ownership. I shall thus return to the issue when
applying the general principles of the law to the facts. Suffice it to say for the moment
that Foster testified that it was more efficient for the shipper to acquire ownership of
the crude oil while it was in transit since it was then able to manage its own risks. This
practice, which was common according to Foster, also ensured that the shipper had
an insurable interest and that the insurer would indemnify it against the losses
incurred.

[49] Foster also testified that crude oil procurement and crude oil shipping required
different skills, and were performed by some traders using different teams of people.
It was common to have one procuring entity (in this case STI and later SOIL) and one

shipping entity (SISL). SISL’s lack of a sophisticated procurement function, and STI’s
continued procurement role, was consistent with general practice in the industry.

Incorporation of SOIL
[50] It will be recalled that SOIL took over the functions of STI when it was
incorporated in 2004. The Sasol Group had undergone considerable restructuring as
a result of the introduction, in November 2000, by the Minister of Minerals and Energy
of a Liquid Fuels Charter which required all South African companies dealing with
petroleum and liquid fuels to enable the empowerment of historically disadvantaged
people in the country. The Sasol Group, in implementing its obligations under the
charter, sought to enter into mergers with non-South African entities. In the
rearrangement, SIH’s interest in STI was transferred to Sasol Oil.

[51] STI continued with its other businesses on the Isle of Man, and the procurement
of crude oil was moved to SOIL, when it was incorporated, also in the Isle of Man.
SOIL was a wholly owned subsidiary of Sasol Oil. When the Reserve Bank approved
the new structures, STI assigned to SOIL the supply agreements with the crude oil
suppliers. Invoices issued by SOIL to SISL showed that SOIL started on-selling crude
oil to SISL in 2004. The bills of lading issued by the Middle Eastern suppliers were
endorsed by Du Toit on behalf of SOIL in favour of SISL. The annual financial
statement of STI in 2004 reflected that the functions of the procurement of crude oil
and its sale to SISL were transferred to SOIL.

The substance over form argument
[52] The assessments in question and the arguments of the Commissioner before
the Tax Court and on appeal are that the impugned transactions were devised by Gird
and Loubser, and approved by the GEC, in order to tailor the Sasol Group’s liability
for tax when s 9D was introduced. The apparent transfer of the shipping function to
SISL by STI and the sale to SISL and the onward sale to Sasol Oil were transactions
that were simulated in order to avoid Sasol Oil paying tax on income earned by an
entity that was resident in South Africa. A key component in the argument is that in the

advice given by PWC to the Sasol Group in April 2001, before the transactions were
concluded in July 2001, Louw and Kellerman stated:
‘The following ultimate modus operandi is recommended to minimize Sasol’s tax liability on its
oil trading activities:

A company is incorporated in the UK (“SUK”) with 100% of its shares being held by
SIH.

STI continues to purchase oil on the open market at market-related prices but sells the
oil to SUK at a market-related margin that will reflect the risks assumed and the
functions performed by STI.

SUK owns the oil but it only bears the shipment risk, which it is insured against. The
product and all other risks involved in oil trading remain with STI, which earns a market-
related margin for the acceptance of such risks. The existence and use of SUK must
have commercial justification. (My emphasis.)

SUK then on-sells the oil to Sasol Oil, adding a small margin for bearing only the
shipment risk.

SUK buys oil, drilling fluids, solvents and other chemicals from Sasol Oil and other SA
group companies and on-sells them to STI. Again, SUK only bears the shipment risk
for the product delivered to STI while the product and all other risks involved in selling
the product are accepted by STI. A small profit margin for bearing only the shipment
risk is realized by SUK in the UK.

STI on-sells the products in the open market at a market related price to earn a market-
related margin for the acceptance of all the other risks and functions.’
The advice continued:
‘To ensure that the use of SUK is not seen as a scheme to avoid tax in SA it is important to
ensure that commercial justification exists for the use of SUK. The transferring of real risks
and functions into SUK could provide sufficient commercial justification.’

[53] The opinion, the Commissioner argues, is what informed the entire stratagem.
There was no real reason for the sale of the oil by STI, and then SOIL, to SISL and no
intention to transfer ownership of the oil while it was in transit to SISL. The substance
of the transactions was in reality a sale by SOIL to Sasol Oil. SISL’s real role was as
a shipper. While conceding that the passing of ownership is not an essential element
of a contract of sale, the Commissioner contends that Sasol Oil’s entire case is based
on the contention that the crude oil was transferred to SISL, and that it did not

discharge the onus of proving that it was STI’s, and later, SOIL’s intention to pass
ownership to SISL rather than to Sasol Oil, and that the supply contracts were
simulated dishonestly. It must be recalled, however, that when the back to back supply
agreements were first concluded, in 2001, neither STI nor SISL were subsidiaries
(foreign controlled companies) of Sasol Oil: Sasol Oil would not have been liable, at
that stage, and until 2004, for residence based tax on STI’s income. The transactions
thus did not have the effect of avoiding liability for tax. And so the Sasol Group could
not have anticipated, in 2001, that subsequently a subsidiary of Sasol Oil itself would
have earned income for which it would become liable for tax.

The test for simulation
[54] This court has held on several occasions that the mere production of
agreements does not prove that the parties genuinely intended them to have the effect
they appear to have. In Erf 3183/1 Ladysmith (Pty) Ltd v CIR 1996 (3) SA 942 (SCA),
Hefer JA, dealing with a contention that agreements should be given effect in
accordance with their tenor (form), said (at 953B-D):
‘This is plainly not so. That the parties did indeed deliberately cast their arrangement in the
form mentioned, must of course be accepted; that, after all, is what they had been advised to
do. The real question is, however, whether they actually intended that each agreement would
inter partes have effect according to its tenor. If not, effect must be given to what the
transaction really is.’
And similarly in CIR v Conhage (Pty) Ltd 1999 (4) SA 1149 (SCA) Hefer JA confirmed
that a taxpayer must show on a balance of probabilities that the agreements reflect
the actual intention of the parties. (See also CSARS v NWK Ltd [2010] ZASCA 168;
2011 (2) SA 67 (SCA) para 40.

[55] The principle urged upon us by Sasol Oil, on the other hand, is that stated more
than a century ago in Zandberg v Van Zyl 1910 AD 302 at 309.
In Zandberg Innes JA said:
‘Now, as a general rule, the parties to a contract express themselves in language calculated
without subterfuge or concealment to embody the agreement at which they have arrived.  They
intend the contract to be exactly what it purports; and the shape which it assumes is what they

meant it should have. Not infrequently, however (either to secure some advantage which
otherwise the law would not give, or to escape some disability which otherwise the law would
impose), the parties to a transaction endeavour to conceal its real character. They call it by a
name, or give it a shape, intended not to express but to disguise its true nature. And when a
Court is asked to decide any rights under such an agreement, it can only do so by giving effect
to what the transaction really is: not what in form it purports to be.  The maxim then applies
plus valet quod agitur quam quod simulate concipitur. But the words of the rule indicate its
limitations. The Court must be satisfied that there is a real intention, definitely ascertainable,
which differs from the simulated intention. For if the parties in fact mean that a contract shall
have effect in accordance with its tenor, the circumstances that the same object might have
been attained in another way will not necessarily make the arrangement other than it purports
to be. The enquiry, therefore, is in each case one of fact, for the right solution of which no
general rule can be laid down.’ (My emphasis.)

[56] This very famous statement was repeated in Commissioner of Customs and
Excise v Randles, Brothers and Hudson Ltd 1941 AD 369 at 395 by Watermeyer JA
where, referring to the passage cited, he said:
‘I wish to draw particular attention to the words “a real intention, definitely ascertainable, which
differs from the simulated intention”, because they indicate clearly what the learned Judge
meant by a “disguised” transaction. A transaction is not necessarily a disguised one because
it is devised for the purpose of evading the prohibition in the Act or avoiding liability for the tax
imposed by it. A transaction devised for that purpose, if the parties honestly intend it to have
effect according to its tenor, is interpreted by the Courts according to its tenor, and then the
only question is whether, so interpreted, it falls within or without the prohibition or tax.’ (My
emphasis.)

[57] In NWK I pointed out the difficulties inherent in applying this test. The test itself
is uncontroversial. We must ascertain the intention of the parties having regard not
only to the terms of the impugned transactions but also to other factors, including the
improbability of the parties intending to give them effect. Applying the same test, the
judges in that case were divided in their approach to the application of the principle to
the facts.

[58] I suggested in NWK that
‘[T]he test to determine simulation cannot simply be whether there is an intention to give effect
to a contract in accordance with its terms. Invariably where parties structure a transaction to
achieve an objective other than the one ostensibly achieved they will intend to give effect to
the transaction on the terms agreed. The test should thus go further, and require an
examination of the commercial sense of the transaction: of its real substance and purpose. If
the purpose of the transaction is only to achieve an object that allows the evasion of tax, or of
a peremptory law, then it will be regarded as simulated. And the mere fact that parties do
perform in terms of the contract does not show that it is not simulated: the charade of
performance is meant to give credence to their simulation.’

[59] The judgment in that matter was apparently thought to have changed the law.
It did not. It pointed out merely that in order to establish simulation one could not look
only at the terms of the disputed transaction. And it suggested that simulation was to
be established not only by considering the terms of the transactions but also the
probabilities and the context in which they were concluded.

[60] Wallis JA has twice explained the passages that have apparently given rise to
confusion. He explained in Roshcon (Pty) Ltd v Anchor Auto Bodybuilders CC 2014
(4) SA 319 (SCA) paras 35 to 37 what the misconceptions had been and said:
‘The notion that NWK transforms our law in relation to simulated transactions, or requires more
of a court faced with a contention that a transaction is simulated than a careful analysis of all
matters surrounding the transaction, including its commercial purpose, if any, is incorrect. The
position remains that the court examines the transaction as a whole, including all surrounding
circumstances, any unusual features of the transaction and the manner in which the parties
intend to implement it, before determining in any particular case whether a transaction is
simulated.’

[61] And in CSARS v Bosch [2014] ZASCZ 171; 2015 (2) SA 174 (SCA) Wallis JA
said, referring (in para 40) to Roshcon:
‘There I stressed that simulation is a question of the genuineness of the transaction under
consideration. If it is genuine then it is not simulated and if it is simulated then it is a dishonest
transaction, whatever the motives of those who concluded the transaction.  . . . .Tax evasion

is of course impermissible and therefore if a transaction is simulated, it may amount to tax
evasion. But there is nothing impermissible about arranging one’s affairs so as to minimize
one’s tax liability, in other words in tax avoidance.’

The pillars of the Commissioner’s argument as to simulation
The PWC advice
[62] One of the pillars of the Commissioner’s argument in respect of simulation is
that the Sasol Group followed PWC’s advice on the ‘ultimate modus operandi’. The
purpose of that advice was to minimize the Group’s tax liability, and in particular the
newly introduced residence based tax in effect from June 2001. There is nothing
sinister in that.

[63] As I said in NWK (para 42)
‘It is trite that a taxpayer may organize his financial affairs in such a way as to pay the least
tax permissible. There is, in principle, nothing wrong with arrangements that are tax effective.
But there is something wrong with dressing up or disguising a transaction to make it appear
to be something that it is not, especially if that has the purpose of tax evasion, or the avoidance
of a peremptory rule of law.’
And see the statement of Wallis JA in Bosch above.

[64] Much was made by the Commissioner of the fact that Sasol Oil had not alluded
to the PWC letter of 3 April 2001. And Gird and Loubser were cross-examined as to
whether they had been aware of this advice when proposing the back to back sales in
2001. They denied knowledge of PWC’s April 2001 opinion at the time of concluding
the STI, SISL and Sasol Oil transactions. They were not legal or accounting
professionals, and did not sit on the boards of the companies that eventually
concluded the transactions. Loubser, as I have already said, denied having referred
to tax legislation when he made his presentation to the GEC on 5 July 2001. The
minutes had mistakenly attributed this to him, but he had not seen the minutes before
the additional assessments were issued.

[65] Loubser was firm in testifying about his role at the GEC meeting. He said that
it was not the practice in the Sasol Group for the management, as business people, to
make recommendations as to tax. That was the function of the members of the GEC,
following advice taken by them. The Commissioner put to him that he was not being
truthful, which he denied. The Commissioner continues to argue that Loubser must
have known of the PWC advice and structure. In my view, it is perfectly plausible that
Loubser knew only of the advice that Van Wyk and Louw obtained from PWC in July
2001, after his presentation to the GEC. And the fact that he was aware that there
would be tax implications in respect of the placing of SISL in the supply chain is neither
here nor there. He knew the structure had to be approved from a tax compliance point
of view, and that was why he had asked Van Wyk to get approval from PWC.

[66] In any event, the mere fact that parties have followed professional advice (in
this case from PWC) in order to minimize the tax payable by them is not wrong nor
does it point to deceit. The real question is whether they actually intended a sale by
STI (then later SOIL) to SISL and whether SISL intended to acquire ownership of the
crude oil from STI (SOIL). Or did they dishonestly purport to do so solely for the
purpose of avoiding the tax that would be payable by Sasol Oil?

Ownership of the crude oil by SISL
[67] Apart from attacking the credibility of Gird and Loubser in particular, the
Commissioner argues that the right SISL purported to acquire in the crude oil while
shipping it to Durban was a hollow one. It was not ownership in the true sense. SISL
could not freely dispose of the crude oil: it had to deliver it to Sasol Oil in Durban. That
was in terms of the supply agreements between the Middle Eastern suppliers and STI
(SOIL). The port of destination had to be known to the suppliers. So SISL could not
change the destination of the oil once it was on board. Moreover SISL did not need or
use the oil – it was but a shipper. And SISL’s requirements met those of Sasol Oil
exactly. SISL did not determine either the quantity or quality of the crude oil that would
be sourced by STI (SOIL). In addition, the price that would be paid by Sasol Oil to
SISL was agreed in advance by a guaranteed price formula.

[68] And although SISL bore the risk in the crude oil while it was in transit, this was
provided for in the supply agreement between SISL and Sasol Oil. The Commissioner
argues that this provision in the contract would not have been necessary if in fact
ownership was transferred to SISL. As owner, SISL would have borne the risk. As
pointed out by Sasol Oil, however, the fact that the normal consequences of a transfer
of ownership are spelled out in a contract is a result of the caution exercised by the
drafters of the contract, rather than being necessary to give effect to the contract.

[69] Sasol Oil points out that this is very little different from the issue in Randles.
I discussed the facts in that matter in NWK, as did Wallis JA in Bosch, and there is no
reason to repeat the detail. In summary, the parties to a number of contracts had
agreed that ownership of material would be passed by the importer of the material to
manufacturers of garments. But the terms of their contracts took all the entitlements
of ownership, including to use and dispose of the material, away from the
manufacturer. The contract was agreed so that the importer could obtain a customs
rebate. Watermeyer JA said, however, in Randles, that there was no requirement that
the parties intended to transfer an untrammeled right. He found that the parties had
intended ownership to be transferred, and thus it had been.

[70] Was SISL’s right to the crude oil comparable to that of the manufacturer’s rights
of ownership in the material? It is true that SISL’s right in the crude oil was fettered. It
could not do with it what it chose. In Randles the majority was clear that the parties
had so much wanted ownership to pass that they must have intended that as a
consequence of their contract. Sasol Oil, on the other hand, is in a stronger position
than was the importer in Randles. Indeed, Sasol Oil is able to show commercial
justification for the sale of the oil to SISL in London, which the importer in Randles
could not do. And there were reasons for SISL controlling and managing the risk as
owner while the oil was in transit, as described by Gird and Foster.

Delivery to SISL
[71] The Commissioner contends that the Sasol Oil witnesses were not clear on how
the oil was delivered to SISL. Loubser testified that actual delivery took place at the

load point both to STI and then to SISL where the connecting hose from the Middle
Eastern supplier was linked to the vessel that SISL had chartered. Loubser considered
that delivery to STI and SISL took place simultaneously, which the Commissioner
argues is a false construction. Du Toit, on the other hand, considered that delivery had
taken place when the bill of lading was endorsed first to STI and then to SISL. If that
were the case, since the vessel would already have sailed when the bill of lading was
sent to the vessel, SISL would only have acquired ownership when the oil was already
in transit.

[72] The supply agreement between STI (and later SOIL) and SISL did not expressly
cater for the manner of delivery. The Commissioner argues that it is inconceivable, if
the parties had genuinely intended that ownership would pass to SISL, that their
contract made no provision for the mode of delivery. Sasol Oil argues, however, that
there was constructive delivery to STI and then to SISL in both the Isle of Man and
London, and actual delivery to Sasol Oil in Durban. Whether there is actual or
constructive delivery is a matter of law. There was no need to provide for the mode of
delivery in the contracts of sale.

The complexity of the structures proposed by PWC
[73] The Commissioner argues that the introduction of SISL into the supply chain
resulted in a more complicated structure than was originally envisaged by Gird and
Loubser. After reviewing the work of STI and SISL in late 2000, it will be recalled, their
proposal was to simplify the structures within the Sasol Group and to save costs. They
had anticipated that one entity would procure crude oil and ship it to Sasol Oil. That
proposal did not work, because they needed the services of Bredenkamp, and needed
to keep the term supply agreements in place, so that STI’s functions could not be
transferred to SISL in London. After obtaining the Lovells advice, they proposed
bringing SISL into the supply chain as well as STI. That complicated the structures
rather than simplifying them, as they had intended to do.

[74] This argument does not take into account the evidence of Gird and Loubser as
to the reasons for not following the Lovells advice. It is true that the proposal they had

made initially was different from that ultimately adopted. But they both explained the
changes in a perfectly plausible fashion, and no evidence was led to controvert the
reasons for STI remaining in the supply chain. There was a good commercial reason
for SISL, in London, taking over the supply of crude oil to Sasol Oil, and the fact that
the estimated savings in costs anticipated by the rationalization of the Isle of Man and
the London offices were lost, was probably justified by the profits that Sasol Oil would
make and the fees that SISL would earn in terms of the supply agreements.

Inconsistencies in documents
[75] The Commissioner contends that in a number of documents extraneous to the
supply agreements, such as filings with the United States Security and Exchange
Commission, Sasol Ltd described SISL as a ‘services company’ and STI as a ‘trading
company’. So too in the KPMG transfer pricing study of 2002 and 2003, it was stated
that SISL’s primary function was ‘to provide shipping services’ and that it took on a
‘small level of risk in connection with the provision of these services’. This shows, he
argues, that SISL was in fact nothing more than a shipper of crude oil to Sasol Oil, and
that the purchase by SISL of crude oil was nothing more than a charade – a shipping
contract dressed up to look like a sale. These documents show, he argues, that Sasol
Oil could not keep up the pretence of buying oil directly from STI and later SOIL, and
in general regarded SISL simply as a shipping company. He also relies on a report to
the UK Revenue Authority, in 2004, in which SISL indicated that although SISL took
ownership of the crude oil that it shipped, it bore minimal risk. The revenue authority
queried this, asking why it took ownership of the oil that it was shipping and why it bore
minimal risk. SISL’s response was that there were three risks that it bore, two of which
were unlikely to occur and the third, discharging less oil than it had taken on board in
the first place, was insured against. I have already dealt with the loss of oil and Foster’s
evidence. Suffice it to say that it was a risk, and that over a period the losses might be
considerable.

[76] The documents referred to by the Commissioner must of course be considered
as part of the factual context in which the transactions were disregarded in the tax
years in question. But they must also be weighed against the evidence of the Sasol
Oil witnesses as to the reasons for SISL acquiring ownership in the crude oil that it

shipped, advanced by Gird, Loubser and Foster, the expert witness. Although that
evidence was labeled as unreliable and not credible by the Commissioner, I consider
that evaluation to be unwarranted.

Artificial features of the transactions
[77] The Commissioner contends that several features of the supply agreements
between STI, SISL and Sasol Oil have an aura of artificiality, and that there was no
commercial justification for them. He argues that the interposition of SISL in the supply
chain served no commercial purpose. The requirements of Sasol Oil would have been
met had STI continued to supply the crude oil it had procured directly to Sasol Oil. The
fact that the crude oil was sold at the same price to SISL and then to Sasol Oil, and
SISL made no profit, is also regarded as artificial. And the fact that the effective date
of the agreements was agreed to be I July 2001 (which coincided with the introduction
of residence based tax) rather than when the agreements were signed, later in that
year.

Sasol Oil’s response to the argument on substance over form
[78] Sasol Oil refutes all of these contentions as I have already explained in relation
to ascertaining the intention of the parties. In addition, Sasol Oil argues that the
documents prepared before, and for years after the supply agreements were
concluded, demonstrate that there was no artifice in the arrangements. Minutes of
board meetings would have to have been falsified and reports to the GEC deliberately
disguised. False documentation would have to have been consistently produced from
the beginning of 2001 until the end of 2007, the last year of the additional
assessments. Financial statements for STI and SOIL would have to have been false
and bills of lading fraudulently endorsed. On the Commissioner’s contentions, senior
staff in a major conglomerate would have been complicit in an elaborate fraud over
years.

[79] There is not a shred of evidence that this was the case. The evaluation of Sasol
Oil’s witnesses as untruthful and unreliable is simply not fair. It is premised on the
argument that the key to the whole restructuring in 2001 was the PWC advice in April

2001. Sasol Oil’s witnesses denied this. They plausibly explained the genesis of the
proposal and its development. And the adoption of PWC’s advice is not wrong or
dishonest. It was repeatedly put to them that the structure served no purpose other
than tax avoidance. They explained why the structure was commercially beneficial and
why they intended that SISL would take delivery of the crude oil from STI, then SOIL,
and in turn sell and transfer it to Sasol Oil in Durban. It is irrelevant that PWC advised
on the transactions in anticipation of their being concluded. And as I have already said,
Sasol Oil, until 2005, would not in any event have been liable for residence based tax
on income received by STI since it was not a controlled foreign company of Sasol Oil.

[80] In conclusion on the substance over form argument, I consider that Sasol Oil
has discharged the onus of proving that the supply agreements between STI (SOIL),
SISL and Sasol Oil were genuine transactions, which they implemented from 1 July
2001 through to the years of assessment being 2005, 2006 and 2007. The
transactions had a legitimate purpose. There was nothing impermissible about
following the PWC advice, and so reducing Sasol Oil’s tax liability. The transactions
were not false constructs created solely to avoid residence based taxation. There was
good commercial reason for introducing SISL into the supply chain, as explained by
the witnesses for Sasol Oil, and SISL had, from the beginning of 2001, been envisaged
as the oil trader and shipper in the supply chain. The PWC advice was not the trigger
for the transactions.

The subparagraph (A) exclusion
[81] Sasol Oil argues that the effect of s 9D(9)(b)(ii)(aa)(A) is that its liability for tax
on SOIL’s net income is excluded. The argument is based on the premise that if SOIL
purchased crude oil within its country of residence (the Isle of Man) from any person
who was not a connected person in relation to SOIL, the net income of SOIL would
not be attributable to Sasol Oil. The Commissioner did not contend that SOIL did not
have a foreign business establishment on the Isle of Man. (The Tax Court wrongly
held that it did not.) The question that immediately comes to mind is whether SOIL
purchased crude oil from Middle Eastern suppliers in the Isle of Man, or in the Middle
East. Where were these contracts concluded?

[82] Du Toit, who had taken over the procurement function from Bredenkamp,
testified about the contract renewal processes that occurred annually. SISL would
indicate to SOIL what was needed by the refinery. SOIL would request a renewal of
the contract, specifying the crude oil grades and quantities for the following year. The
request could be made at a meeting, or over the telephone, or fax, or telex, and later
email. The crude oil producer, if it accepted the request, would issue a new contract
to SOIL, and send it by telex or fax to the office in the Isle of Man. Sasol Oil thus argues
that the ‘goods’ were purchased in the Isle of Man, hence the exclusion of liability to
tax in the hands of Sasol Oil.

[83] The Commissioner takes the view that the exclusion in para(A) does not apply
as Du Toit’s evidence as to where the supply contracts were concluded was
inconclusive as to where the contract was concluded. Moreover, he contends that the
exclusion applies only to goods purchased within the country of residence, not to oil
sourced in the Middle East, purchased in the Isle of Man. This interpretation is
consistent with the Treasury’s explanation of the exclusion, which is that the controlled
foreign company must have a nexus with the place in which the goods are produced.
It is, however, not necessary to decide this in view of my conclusion that the supply
agreements were not simulated.

Section 103(1) of the Act
[84] The provisions of s 103(1) of the Act read as follows in the years of assessment.
‘Transactions, operations or schemes for purposes of avoiding or postponing liability for or
reducing amounts of taxes on income
‘Whenever the Commissioner is satisfied that any transaction, operation or scheme (whether
entered into or carried out before or after the commencement of this Act, and including a
transaction, operation or scheme involving the alienation of property) –
(a)
has been entered into or carried out which has the effect of avoiding or postponing
liability for the payment of any tax, duty or levy imposed by this Act or any previous
Income Tax Act, or of reducing the amount thereof; and
(b)
having regard to the circumstances under which the transaction, operation or scheme
was entered into or carried out –
(i)
was entered into or carried out -

(aa)   in the case of a transaction, operation or scheme in the context of business, in a
manner which would not normally be employed for bona fide business purposes, other
than the obtaining of a tax benefit; and
(bb)
in the case of any other transaction, operation or scheme, being a transaction,
operation or scheme not falling within the provisions of item (aa), by means or in a
manner which would not normally be employed in the entering into or carrying out of a
transaction, operation or scheme of the nature of the transaction, operation or scheme
in question;
(ii)    has created rights or obligations which would not normally be created between persons
dealing at arm’s length under a transaction, operation or scheme of the nature of the
transaction, operation or scheme in question; and
(c)
was entered into or carried out solely or mainly for the purposes of obtaining a tax
benefit,
the Commissioner shall determine the liability for any tax, duty or levy imposed by this Act,
and the amount thereof, as if the transaction, operation or scheme had not been entered into
or carried out, or in such manner as in the circumstances of the case he deems appropriate
for the prevention or diminution of such avoidance, postponement or reduction.’

[85] The Commissioner argues that, even if the supply agreements are found to be
genuine, they nonetheless must be disregarded in the assessment of Sasol Oil’s
income tax liability. For the section to be applied by the Commissioner he must be
satisfied that a transaction, operation or scheme has been entered into; if so, did it
have the effect of avoiding, postponing or reducing the liability for the payment of tax;
if so, it must have entered into the transaction, operation or scheme solely or mainly
for the purposes of obtaining a tax benefit (the purpose requirement) and it must have
been abnormal in one of the respects referred to in para (b).

[86] If so satisfied, the Commissioner’s remedy was to disregard the transaction,
operation or scheme, or to determine Sasol’s Oil’s tax liability in such a way as to
prevent the avoidance, postponement or reduction which was the effect of the
transaction, operation or scheme. Section 103(4) provided that if it was proved that
that the transaction, operation or scheme resulted in the avoidance of liability for tax,
it was presumed, until the contrary was proved, that it was concluded solely or mainly
for the purpose of avoiding a tax liability. Sasol Oil would then bear the onus of proving

that avoidance of tax was not the sole or main purpose of the transaction, operation
or scheme. However, the Commissioner would still bear the onus of showing that the
effect requirement was met and that it was abnormal.

[87] The Commissioner contends that the relevant transactions are the supply
agreement between SOIL and SISL, and the supply agreement between SISL and
Sasol Oil. I shall refer to them as the ‘impugned transactions’. Did they satisfy the other
requirements of s 103(1)? And if so, which remedy should be invoked?

[88] Sasol Oil argues that the impugned transactions must, in order to fall foul of
s 103(1), have the effect of getting out of the way of, escaping or preventing, an
anticipated tax liability (Smith v CIR 1964 (1) SA 324 (A) at 333E and Hicklin v SIR
1980 (1) SA 481 (A) at 492H). Thus it must have anticipated liability for tax, which it
avoided through the impugned transactions. If the parties had not entered into the
impugned transactions, would Sasol Oil have had a liability for tax that it avoided, or
escaped from, by entering into them?

[89] In answering this question one must determine what liability for tax Sasol Oil
had avoided by entering into the impugned transactions. The Commissioner stated in
his Rule 10 Statement that the impugned transactions ‘had the effect of avoiding
liability for the payment of tax imposed’ under the Act. This was because if the oil had
been sold to Sasol Oil by SOIL, the amounts received by or accrued to SOIL from such
sales would have been included in determining the net income of SOIL for the
purposes of s 9D. Such inclusions would have resulted, in terms of 9D(2), in amounts
being included in the income of Sasol Oil for the 2005 year of assessment.

[90] Sasol Oil points out that this proposition is flawed: after the conclusion of the
impugned transactions, the controlled foreign company in the Isle of Man was STI; STI
was wholly owned by SIH; STI did not sell oil to Sasol Oil directly; even if it had, STI’s
net income would not have been included in Sasol Oil’s income. This is because the
shares in STI were held by SIH. Thus Sasol Oil did not have any participation rights in
STI. Accordingly, it was not obliged to include the net income of STI in its income for

income tax purposes. In addition, Sasol Oil argues, the foreign business exclusion
applied.

[91] In July 2001, when the supply chain including SISL was created, Sasol Oil had
no anticipated liability for tax based on the application of s 9D. This did not change in
2004 when SOIL was incorporated and took over the procurement function. There was
never an intention that SOIL would have sold crude oil to Sasol Oil, and the
Commissioner did not prove that there was. If Sasol Oil had done nothing to avoid an
anticipated tax liability it would still have not had a tax liability as a result of the
application of s 9D. There was no imminent tax liability in respect of SOIL’s income
anticipated in 2001. And of course there was no evidence as to what was contemplated
by the Sasol Group in relation to its restructuring that resulted from the adoption of the
Liquid Fuels Charter: we do not know who conceived of the change of shareholding
between 2001 and 2004 and how that was implemented.

[92] The Commissioner has not shown that the impugned transactions had the
effect of avoiding liability for tax or that there was anything abnormal about them. The
fact that STI could have sold the crude oil directly to Sasol Oil does not mean that it
was abnormal for STI to sell to SISL and then for SISL to sell to Sasol Oil.

[93] The Commissioner’s assessments for the 2005 to 2007 years were based on
the incorrect assumption that Sasol Oil had participation rights in STI. It quite simply
did not. In 2001 the participation rights in STI were held by SIH. It was only from 2004
and onwards that the participation rights in SOIL were held by Sasol Oil. It is
accordingly not necessary to consider the other requirements of s 103(1) in any detail.
The application of s 103(1) by the Commissioner in the additional assessments was
therefore unfounded.

Interest and penalties
[94] The Tax Court confirmed the imposition of s 76 penalties and s 89quat interest
on Sasol Oil, having determined that the impugned transactions were simulated. In

view of my findings that the transactions were not simulated and that the application
of s 103(1) was ill-founded, it follows that Sasol Oil should not be required to pay these
sums.

[95] In the result—
1 The appeal is upheld with the costs of two counsel.
2 The order of the Tax Court is set aside and is replaced with the following order:
‘The appeal against the additional assessments issued to the appellant on 30 April
2010 by the Commissioner for the South African Revenue Service for the 2005, 2006
and 2007 years of assessment is upheld and those assessments are set aside.’

_________________________
C H Lewis
Judge of Appeal

Mothle AJA dissenting (with Makgoka JA)

[96] I have read the judgment of Lewis JA (the first judgment) wherein she upholds
the appeal. I am of the contrary view that the supply agreements defining the supply
chain for crude oil to Sasol Oil in South Africa are a simulation. I therefore respectfully
disagree with the analysis of the evidence and the conclusion reached in that
judgment. In my view the appeal should be dismissed with costs.

[97] A summary of the background facts appear in the first judgment and will not be
repeated in this judgment. Only the salient points will be referred to for purposes of
context.

[98] The litigation giving rise to this appeal concerns additional tax assessments for
the years 2005, 2006 and 2007 issued by SARS against Sasol Oil. The total additional
tax from the assessment, excluding interest, was R 68 644 584.

[99] It is common cause that Sasol Oil was in the business of acquiring and refining
crude oil. Prior to 2001, it received its supply of crude oil from Sasol Trading
International Limited (STI), a subsidiary company of Sasol Investment Holdings (SIH).
STI was based in the Isle of Man, strategically positioned to purchase crude oil from
the Middle East sources for sale to Sasol Oil in South Africa. The transaction was
expressed in a Supply Agreement (the original agreement) concluded between STI
and Sasol Oil.

[100] The crude oil purchased from the Middle East sellers, was transported by STI
with the assistance of a shipping and marketing company, Sasol International Services
UK (SISL), another subsidiary of SIH. Both Sasol Oil and SIH were members of the
Sasol Group of Companies (Sasol Group).  I shall revert to this important relationship
later in this judgment.

[101] During the year 2000 and through to 2001, the Sasol Group recognised the
need to restructure the foreign based enterprise (FBE) so as to avoid duplication of
costs between the subsidiaries, STI and SISL. This duplication was said to be the
primary reason for the expenditure of R3 million per year. The restructuring process
was driven by Mr Gird (Sasol Oil’s trading manager and director of SISL) and
Mr Loubser (SISL’s director and Sasol Oil’s manager: manufacturing, supply and
trading). During February 2001 Mr Loubser and Mr Gird produced a restructuring
proposal, in which the following is stated:
‘Unavoidably there is a duplication of effort between STI, SISL and Sasol Oil on the
international oil and products trading side. The cost to these parties to maintain their offices
and business contacts in the international oil and products market is simply too high in view of
the lack of growth in business as discussed above. It should be mentioned that the cost of an
air ticket between Johannesburg and UK is not much higher than a ticket from the Isle of Man
to London. It is estimated that rationalising the trading activities could save around R3 million
per year cost duplication.’

[102] This proposal was approved by the Sasol Oil board of directors, subject to
approval by the Group Executive Committee (GEC), and an opinion on the United
Kingdom (UK) tax implications. The GEC approved the proposal. On 7 March 2001
the tax advice was received from Lovells Solicitors, who advised that the proposal
would not have any adverse UK tax consequences, other than an increase in SISL’s
UK tax liability.

[103] I pause here to mention that during the same period, Sasol Group became
aware that new tax legislation would apply to the group as from 1 June 2001. It sought
advice from PricewaterhouseCoopers (PwC) in this regard. PwC’s advice was
contained in three letters dated 3 and 18 April 2001 and 16 July 2001. In its letter of 3
April 2001, PwC mentions that towards the end of 2000, it was requested by Sasol Oil
to consider and advise on the tax implications of the mooted restructuring. The letter
is co-signed by Mr Eric Louw, in his capacity as a tax partner at PwC. Later Mr Louw
appears as the addressee of the third PwC letter of 16 July 2001 and referred to as
being in the employ of Sasol Limited in the division of Group Tax.

[104] PWC recommended an ‘ultimate modus operandi to minimize Sasol’s tax
liability on its oil trading activities’. This entailed the interposition of SISL in the oil
supply chain between STI and Sasol Oil.

[105] From the content of the opinion letter of PwC, it was evident that the advice
expressed therein was in response to the anticipated change in tax legislation
concerning FBEs. The letter also recommended the establishment of a new company
(SUK), with trading functions, to be located in the UK and interposed between STI and
Sasol Oil. It also recommended the retention of STI in the Isle of Man and not its
transfer (as was the original intent in terms of the proposal by Mr Gird and Mr Loubser).
Sasol Oil, through its Board of Directors and the GEC accepted this proposal by PwC.
It implemented it by concluding two supply agreements.

[106] The supply agreements provided that STI in the Isle of Man would purchase
crude oil from sources in the Middle East and sell it to SISL in the UK with SISL in turn
on-selling the crude oil and ensuring its delivery to Sasol Oil in South Africa. The one
supply agreement provided for the first leg of the sale transaction between STI and

SISL and the other for the sale and delivery transaction between SISL and Sasol Oil.
Unlike before, STI no longer supplied the crude oil directly to Sasol Oil.

[107] This arrangement attracted the attention of SARS. Acting in terms of s 76 of the
Income Tax Act 58 of 1962 (the Act), SARS in April 2010, issued the additional
assessments against Sasol Oil. Section 9D, quoted in the first judgment, provides in
essence that SARS may levy tax in relation to income that is due to a South African
resident company, from a controlled FBE, in accordance with the residence-based tax
system. By 2005, STI had been replaced by another company in the Sasol Group,
Sasol Oil International Limited (SOIL), where STI assigned SOIL the role of purchasing
the crude oil from the Middle East sources for sale to SISL.

[108] On 14 July 2010, Sasol Oil raised an objection against the additional
assessments, which SARS disallowed on 24 June 2011. Sasol Oil appealed to the
Tax Court (Mali J, sitting with two members) which ruled in favour of SARS and upheld
the additional assessments. It is against the Tax Court’s judgment and orders that
Sasol Oil appeals to this Court.

[109] The two main questions raised by SARS as its main contention for
consideration by the Tax Court, were:
(a) Whether the substance of the supply agreements differed from their form, in which
event whether the relevant amounts were excluded from SOIL’s net income for
purposes of s 9D, on the basis that the requirements of paragraph (A) of subsection
9(b)(ii) were satisfied; and
(b) In the alternative, whether the requirements of s 103(1) were satisfied.

[110] Both the substance over form and the s 103(1) issues depend on SOIL’s
income being taxable in Sasol Oil’s hands in terms of s 9D. Since the Tax Court found
that the assessed amounts were included in SOIL’s net income, the Tax Court did not
deal with the s 103(1) question. The substance over form debate was at the centre of
this appeal.

[111] The Tax Court concluded, with reference to the evidence and in answer to the
question of substance over form raised by SARS that the interposition of SISL in the

crude oil supply chain from SOIL to Sasol Oil was a sham in that there was no
commercial justification for the role of SISL in the supply chain. In arriving at this
conclusion, the Tax Court found the interposition of SISL to be an unusual feature in
the supply chain as provided for in the supply agreements.

[112] The question whether there was a commercial justification for SISL’s role in the
supply agreement is best understood within the context of the restructuring alluded to
earlier in this judgment.

[113] Before the Tax Court, Sasol Oil presented oral evidence of five factual
witnesses and an expert witness. Two of these witnesses were Mr Gird and
Mr Loubser, erstwhile employees of Sasol Oil who, as stated already, were central to
co-ordinating the restructuring process.

[114] There is no doubt that the genesis of the structure of the FBE of the Sasol
Group of Companies, adopted and implemented from July 2001, is found in the written
opinion by PwC dated 3 April 2001, referred to earlier.

[115] The structure expressed in the supply agreements conforms to the structure
adopted by Sasol Oil save that instead of incorporating a new subsidiary company in
the UK (SUK), SISL was clothed with trade functions to be part of the supply chain of
crude oil. What is more, the eventual supply agreements concluded between STI and
SISL and between SISL and Sasol Oil, copy the narrative of the PwC letters. Another
important feature of the opinion letter is a strong recommendation that the company
to be interposed between STI and Sasol Oil should be established with a commercial
justification.

[116] In essence, the 3 April 2001 letter from PwC, introduced a new approach to the
restructuring, which took the Sasol Group in a direction opposite to the initial
restructuring that was mooted. The initial restructuring had its intent to eliminate
duplication and save costs by collapsing STI, one of the subsidiary companies. The
staff and operations of STI in the Isle of Man were to be transferred to SISL in the UK.
The proposal by PwC was to the effect that STI should be retained in the Isle of Man
and a new company to be interposed between the STI and Sasol Oil in the crude oil

supply chain. Thus, the consequence of the PwC recommendation, which was
adopted and implemented, was that instead of having one company in the UK
conducting the acquisition and selling of crude oil to Sasol Oil as initially mooted, two
companies, both Sasol Group subsidiaries, were recommended for the trade
functions.

[117] The purpose was clearly to avoid Sasol Oil from having to purchase crude oil
from STI, as was the case prior to the restructuring. In that instance, the supply and
sale would have been taxable at the hands of STI’s holding company, SIH, a residence
based company in South Africa. The interposed UK Company would ensure that there
would be a distance between Sasol Oil and STI in order to ensure that the supply chain
should fall outside the ambit of s 9D.

[118] Consequent to the PwC letters, the following developments emerged. First, no
new company was incorporated in the UK. SISL was introduced and clothed with
trading functions to be the interposed company. Secondly, Sasol Oil contended that
for a dishonest transaction to take place there would have had to be a conspiracy
involving a number of officials and companies. In my view, that consideration does not
find application in this case, for the following simple reason. Both STI and SISL were
subsidiaries of SIH. In turn, SIH was a member of the Sasol Group. In the final
analysis, all these companies were members of the Sasol Group. Sasol Group and its
GEC were in effective control of the affairs of each of its subsidiaries.  Thus, all it took
was a meeting of its Sasol Group’s GEC to approve the recommended structure. The
question of the need for commercial justification was included in the PwC opinion but
there is no evidence that the meeting of 5 July 2001 expressed itself on how that
question should be addressed. That being so, there is no basis to conclude, in the
absence of evidence, that it would require a conspiracy not to address the question of
commercial justification. Thirdly, on the documents submitted and the evidence
presented before the Tax Court, and contrary to a strong and repeated
recommendation by PwC, there is no explanation as to the commercial justification of
SISL in the new supply chain structure.  Fourthly, as recommended by PwC, the supply
agreements were put in place, one providing for the purchase and sale of crude oil
between STI and SISL and the other between SISL and Sasol Oil, to streamline the
supply chain.

[119] The supply agreements present unusual features of independent trading
companies. Firstly, the agreements provide that the crude oil acquired by STI was
intended to be sold to SISL and to no other third party. Similarly, the crude oil
purchased by SISL from STI, was intended to be sold to Sasol Oil and to no other
external party. Secondly, the agreements ensured that the purchase price remained
constant in that, from STI to Sasol Oil, there was no room to change the price, by
either STI or SISL, with a view to making a profit. In essence therefore, SISL traded
by purchasing crude oil only from STI and on- selling it only to Sasol Oil without making
any profit. Thirdly, the sale of crude oil by STI to SISL does not result in transfer of
ownership in the sale transactions involving SISL. SARS contends that this is a sham.
I agree. The absence of transfer of ownership, though not necessarily invalidating the
transaction, would within the context of the two supply agreements, be one of the
relevant factors indicative of a simulated transaction.

[120] As stated already, historically, and prior to July 2001, Sasol Oil purchased crude
oil directly from STI in terms of an agreement concluded between the parties in 1998.
Thus, only STI performed the function of buying and selling term crude oil. SISL
performed only a shipping service. The supply agreement in terms of which SISL’s
functions would include the buying and selling of crude oil, had to be commercially
justified.

[121] In all three letters (of 3 April 2001, 18 April 2001 and 16 July 2001) PwC
emphasised the need for sufficient commercial justification for SISL’s interposition in
the supply chain to sell crude oil. For example, in the 16 July 2001 letter, the following
is explained:
‘However, we need to stress that sufficient commercial justification must exist for now using
SISL to sell the crude oil to Sasol Oil and to undertake the shipping of such crude oil.  If not,
the use of SISL could be seen as a scheme to avoid tax in SA and the new structure could be
disregarded for SA tax purposes.’

[122] It must be borne in mind that Sasol Oil bore the onus to establish a commercial
justification for the interposition of SISL in the supply chain. It thus fell upon the
witnesses testifying for Sasol Oil to explain to the court such commercial justification.
Did Sasol Oil, through its witnesses, discharge that onus? In this regard, it is important

to have careful regard to the contemporaneous documents and the evidence. As a
general observation, it is instructive that in the contemporaneous documents, including
correspondence between PwC and Sasol Oil, no such commercial justification is
recorded, other than the duplicated costs under the existing structure. The closest
Sasol Oil comes to identifying such justification, is recorded in a letter dated
22 November 2001. There, Mr Gird, in a submission to SISL, projected the adoption
of the PwC structure as a normal part of the Sasol Group’s Business. But it was not.
The main purpose of the PwC structure was tax avoidance, of which there is nothing
wrong in principle. But, in any event, this letter was written months after the Sasol
Group had decided to implement the PwC structure. What is more, apart from the
duplication of costs, there is no discernible problem recorded or identified with the
existing structure. Startlingly, the PwC structure, instead of doing away with
duplication, entrenches it by the interposition of SISL in the buying and selling of crude
oil. It makes no commercial sense at all.

[123] The documentary evidence demonstrates that the initial motivation for
restructuring was intended to collapse STI and end up with only one company doing
all the trade for the acquisition and supply of crude oil. When it became evident on the
advice of PwC, that that approach would attract the imposition of tax in terms of s 9D,
the Sasol Group accepted the PwC model which entrenched the duplication by
imposing SISL in the supply chain between STI and Sasol Oil.

[124] I hasten to add that there was nothing untoward about what at that time
appeared to be a tax avoidance scheme. Much has been written about tax avoidance
schemes. In Helvering v Gregory,1 the court, per Judge Hand, said as follows:
‘Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound
to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to
increase one’s taxes.’
Later, Judge Hand, expanded on this in his dissent in Commissioner v Newman2, and
stated:

1 Helvering v Gregory 69F.2d 809,810 (2d Cir 1934) affd 293 US 465 (1935).
2 Commissioner v Newman F.2d 848.841(2d Cir 1947).

‘Over and over again the Courts have said that there is nothing sinister in so arranging one’s
affairs to keep taxes as low as possible. Everybody does it, rich and poor and all do right, for
nobody owes any public duty to pay more than the law demands.’

[125] These sentiments have since been echoed in a line of decisions3 in South
Africa, including the seminal judgment of  Commissioner of Customs and Excise v
Randles Brothers and Hudson Ltd 1941 AD 369. In that case the court contrasted the
two scenarios of tax avoidance and tax evasion as follows:4
‘A transaction is not necessarily a disguised one because it is devised for the purpose of
evading the prohibition in the Act or avoiding liability for the tax imposed by it. A transaction
devised for that purpose, if the parties honestly intend it to have effect according to its tenor,
is interpreted by the Courts according to its tenor, and then the only question is whether, so
interpreted, it falls within or without the prohibition or tax.
A disguised transaction in the sense in which the words are used above is something different.
In essence it is a dishonest transaction: dishonest, in as much as the parties to it do not really
intend it to have, inter partes, the legal effect which its terms convey to the outside world. The
purpose of the disguise is to deceive by concealing what is the real agreement or transaction
between the parties. The parties wish to hide the fact that their real agreement or transaction
falls within the prohibition or is subject to the tax, and so they dress it up in a guise which
conveys the impression that it is outside of the prohibition or not subject to the tax. Such a
transaction is said to be in fraudem legis, and is interpreted by the Courts in accordance with
what is found to be the real agreement or transaction between the parties.’

[126] The courts have equally not hesitated to express a strong view against
disguised transactions, as  in the English case of Ensign Tankers (Leasing) Ltd v
Stokes (Inspector of Taxes) [1992] 2 All ER 275 (HL) at 295, where the House of Lords
expressed a view thus:
‘Unacceptable tax avoidance [which] typically involves the creation of complex artificial
structures by which, as though by the wave of a magic wand, the taxpayer conjures out of the
air a loss or a gain, or expenditure, or whatever it may be, which otherwise would never have
existed. These structures are designed to achieve an adventitious tax benefit for the taxpayer,
and in truth are no more than raids on the public funds at the expense of the general body of
taxpayers, and as such are unacceptable.’

3 Some of which would include Mackay v Fey NO & another 2006 (3) SA 182 (SCA) and CSARS v
Bosch & another [2014] ZASCA 171; 2015 (2) SA 174 (SCA).
4 Commissioner of Customs and Excise v Randles Brothers and Hudson Ltd 1941 AD 369 at 395-396.

[127] SARS contended that the evidence presented by Sasol Oil is inconsistent with
the stated intention of the transactions. It argued, with reference to CSARS v Bosch &
another [2014] ZASCA 171; 2015 (2) SA 174 (SCA) para 40, that in determining
whether the transactions were genuine or simulated, the court stated thus:
‘. . .The true position is that the "court examines the transaction as a whole, including all
surrounding circumstances, any unusual features of the transaction and the manner in which
the parties intend to implement it, before determining in any particular case whether a
transaction is simulated.’”

[128] In this case, one needs to examine the evidence of the PwC letters of 3 and 18
April 2001 and the transfer pricing documents. These documents, including reports
and minutes of SIH, reveal undisputed evidence, some of which, according to SARS’s
contention, finds expression in the following documents: (a) The 2003 and 2004 Sasol
Limited filings with the USA Security and Exchange Commission refers to SISL
consistently as a ‘service company’  and STI is referred to, correctly so, as a trading
company;  (b) SIH’s Board minutes of 22 November 2002 and 28 February 2003, state
that SISL’s main business is to act as a ‘service company’ while STI’s business is to
act as a trading company; (c) SISL’s transfer pricing report (2002/2003) by KPMG
states that SISL’s ‘primary function is to provide shipping services’ and that it ‘takes
on a small level of risk in connection with the provision of these services’. KPMG
further reports that SISL had only one employee (based in the UK) who is responsible
for ‘facilitating the shipment of oil to [SA]’; (d) The transfer pricing study of Sasol
Limited dated 30 June 2003, repeats that ‘SISL’s primary function is that of arranging
shipping of oil to Sasol Oil’; and (e) The Sasol Oil resolution dated 14 May 2004 in
which the main object of SOIL (which took over from STI) is described as: ‘[t]o act as
an international trading company mainly for Sasol Oil’.

[129] SARS further refers to instances where the description of the role of SISL in the
supply chain was sharply contradicted and irreconcilable with the role as described in
the supply agreements and the oral evidence presented by Sasol Oil’s witnesses in
the Tax Court. Sasol Oil made no effort to explain these glaring contradictions and
inconsistencies. While these instances, when individually considered, might not say
much, their cumulative effect reveals, in the Sasol Group’s own words, the true nature

and identity of SISL’s function as shipping, and never the buying and selling of crude
oil.

[130] The Tax Court found that some of the witnesses presented by Sasol Oil were
not credible in that they resorted to denials and obfuscation when required to explain
the commercial justification for SISL’s role in the supply chain, considering that prior
to July 2001, STI was able to solely conduct the supply directly to Sasol Oil. One such
witness was Mr Gird, who testified that the restructuring he had proposed could not
have been informed by tax considerations as he is not a tax expert. However, there is
evidence that he commissioned an opinion on the tax implications of the initial
proposed structure from Lovell. In addition, he received the PwC report from Ms Van
Wyk, a fact he did not deny. He was thus alive to the possible impact of tax issues on
any mooted restructuring.

[131] Similarly Mr Loubser was confronted, during cross-examination, with a copy of
the minutes as evidence of his presentation to the Board at its meeting of 5 July 2001.
The minutes of the meeting stated the following:
‘A presentation by Mr Henri Loubser emphasised the need to review Sasol’s structure in light
of certain legislative changes. The proposal was to cease the contract between STI and Sasol
Oil and move it to Sasol International Services. This would optimise the tax regime.’ (My
emphasis.)
Mr Loubser’s answers in cross-examination on this aspect were most unsatisfactory.
He sought to distance himself from the clear minutes of the meeting by stating that
because he is not a tax expert, but an engineer, he could not have referred to the
legislative changes or the tax regime. The suggestion of course was that the minutes
incorrectly attributed those remarks to him. This assertion was disingenuous to the
Tax Court. Up to the point in the trial when he was confronted with these minutes,
there is no suggestion that he had ever sought to correct that which he claims had
been wrongly attributed to him. Further, there is neither evidence that the tendency to
attribute reports to officers who knew nothing of the subject was common place at
Sasol Oil, nor was there any plausible reason as to why it would occur.

[132] Messrs Gird and Loubser were not candid with the Tax Court in their attempt to
explain the commercial benefit of SISL in the supply chain. During cross-examination

on this point, Mr Gird referred to a 14 June 2001 presentation by Mr Bredenkamp, who
was responsible for the STI operations in the Isle of Man, as outlining the commercial
justification for the interposing of SISL in the supply chain. A careful reading of that
presentation indicates that it is a repeat of the PwC opinion and fell woefully short of
providing an explanation for the commercial justification of SISL. In the absence of
such commercial justification, what would have been a tax avoidance scheme, as PwC
cautioned, resulted in it being a tax evasion scheme.

[133] The evidence of Mr Harvey Foster, an expert witness, who testified for Sasol,
focused on the international practice in the shipping trade to utilise different companies
in line with their expertise. He further testified that it would be normal ‘for international
crude oil trading companies to buy crude oil on an FOB [Free On Board] basis and
supply it on a delivered outturn basis’ or ‘conclude contracts on a back-to-back basis’.
Such practice he opines, would be aimed at minimising the losses, regard being had
in particular to the risk inherent in the transportation of oil. In general, it seems there
would be nothing untoward with such arranged structures. As counsel for Sasol Oil
correctly submitted, it is a choice that companies are free to make.

[134] Turning to this case, Mr Foster’s evidence could not assist in explaining the role
of SISL. During cross-examination, Mr Foster was confronted with evidence of a study
conducted by KPMG, an audit firm, undertaken for the Sasol Group. The study found
that in this particular case, the risk of losses during transit were minimal because SISL
was insured. The shipping fees earned by SISL were justifiably low, less than 0.5 per
cent of the volume of oil transported. Whatever risk there was, was covered by
insurance. The question thus still remained: What was the commercial justification for
the interposing of SISL, a shipping service company, as a trading company with
powers to procure and sell crude oil as provided for in the supply agreements?

[135] From the record it is evident that Messrs Gird and Loubser as witnesses
repeatedly asserted that their original proposal of restructuring never changed but was
the same and consistent with the one adopted in July 2001. This is not borne out by
the common cause facts. It is undisputed that the original proposal entailed the
collapse of STI in the Isle of Man and transfer of both staff and operations to the UK
based SISL, so as to bring an end to duplication, all of which made commercial sense.

At the risk of repetition, the PwC structure perpetuated duplication, with the identified
inherent risk of absence of a commercial justification.

[136] It is trite that an appeal court is bound by the trial court’s findings of credibility,
unless they were found to be affected by a material misdirection or to be clearly wrong.
The appeal court will only reverse these findings where it is convinced that the findings
are wrong. I am unable to find any misdirection by the Tax Court in regard to the finding
of credibility and contradictions on the part of Sasol’s witnesses, in particular Messrs
Gird and Loubser.

[137] On the conspectus of the evidence I would find that Sasol Oil failed to
demonstrate to the Tax Court the commercial justification for interposing SISL in the
supply chain. The role of SISL as stated in the supply agreements was a simulation.
The continued reference to SISL, well beyond the adoption of the supply agreements,
as a company with shipping functions and providing a service instead of trade
functions, exposes its real role in the supply chain. No explanation could be provided
to the Tax Court by Sasol Oil as to why it now had to take two companies to conduct
a trade function that was initially handled by one company. I would therefore agree
with the finding by the Tax Court that the interposing of SISL was not with the intention
to avoid duplication and reduce costs, it was initially set out to achieve, but resulted in
an entrenched duplication of trade functions by two subsidiary companies, clearly to
evade the clutches of s 9D of the Act. The failure to provide commercial justification
for SISL, revealed the absence of bona fides behind the transactions and as such the
additional assessments were justified.

[138] In light of the conclusions I have reached, in line with that of the Tax Court, I
deem it unnecessary to deal with SARS’ alternative ground of attack based on s 103
of the Act. In this regard, I agree with the view expressed in the first judgment
concerning s 103 debate and conclusion.

[139] I also agree with the Tax Court’s decision on the interest and penalties payable
to SARS on the additional assessments.

[140] In the circumstances I would dismiss the appeal with costs.

_____________________
S P Mothle
Acting Judge of Appeal

Ponnan JA (Lewis and Cachalia JJA concurring)

[141] On whether or not the transactions in question were simulated, my colleagues,
Lewis JA and Mothle AJA, disagree. Lewis JA concludes (a conclusion with which I
align myself) that they are not. Mothle AJA takes the view that ‘the supply agreements
defining the supply chain for crude oil to Sasol Oil in South Africa are a simulation.’ In
arriving at that conclusion, he states: ‘I am unable to find any misdirection by the Tax
Court in regard to the finding of credibility and contradictions on the part of Sasol’s
witnesses, in particular Messrs Gird and Loubser’.

[142] We are not concerned here with a dispute between the parties to the
agreements. It is a third party – the Commissioner – who contends that the parties did
not really intend the agreements to have, inter partes, the legal effect which its terms
convey to the outside world. As Lewis JA points out, no evidence was led for the
Commissioner.  She adds ‘but that is hardly surprising as it would not have had access
to the internal workings of the Sasol Group’. Whilst that may be so, the fact that no
evidence was led for the Commissioner is not without its consequence. It means that
there was nothing to gainsay the evidence of Sasol Oil’s five factual witnesses and
one expert witness. It is unclear to me why the Tax Court took the view that the
evidence of Sasol Oil’s witnesses fell to be rejected. The criticism of their evidence
was not only unduly generalized, but also rather severe. The rejection of the evidence
of senior employees, two of whom were retired, absent any countervailing evidence,
is disquieting. They had no motive to lie in order to save tax for Sasol Oil. No ready
answer presents itself as to why these professional persons would perjure themselves.
There thus appears to be no reason to question the reliability of their evidence (either

individually or collectively), much less their integrity or to brand them untruthful or
evasive witnesses.

[143] However, a finding that the evidence of those witnesses did not survive scrutiny,
is hardly the end of the enquiry. One would have to go much further. For the written
agreements to have been a sham would have required the most extensive and
elaborate fraud, stretching over a period of many years. It would have required the
involvement of the persons participating directly, as well as the boards of directors of
not just Sasol Oil, but also their related companies. The conduct of the parties and the
documents generated before, at the time of and subsequent to the conclusion of the
agreements belies that. There is not the slightest hint or suggestion in the wide array
of documents introduced into evidence, such as letters of credit, bills of lading, invoices
and certificates of quantity and quality, that the transactions were a sham or disguise.
What is more, the financial statements of the relevant companies were entirely
consonant with the supply agreements. The conclusion that such a sham was intended
would mean that the production of these documents would have involved an elaborate
fraud on the part of the authors of the documents and the members of the boards of
directors of the relevant companies, as also their auditors. When one has regard to
the history and background, the genesis and conclusion of the agreements in
accordance with their terms, makes perfect sense.

[144] It goes without saying that the evidence must be looked at holistically. The Tax
Court approached the evidence piecemeal. It appears to have focused rather too
intently upon selected pieces of evidence to support its conclusion that the
transactions were simulated. As it was put in S v Hadebe & Others 1998 (1) SACR
422 (SCA) at 426 f-h (citing with approval from Moshephi and Others v R (1980-1984)
LAC 57 at 59F-H):
‘The breaking down of a body of evidence into its component parts is obviously a useful aid to
a proper understanding and evaluation of it. But, in doing so, one must guard against a
tendency to focus too intently upon the separate and individual part of what is, after all, a
mosaic of proof. Doubts about one aspect of the evidence led in a trial may arise when that
aspect is viewed in isolation. Those doubts may be set at rest when it is evaluated again
together with all the other available evidence. That is not to say that a broad and indulgent
approach is appropriate when evaluating evidence. Far from it. There is no substitute for a
detailed and critical examination of each and every component in a body of evidence. But,

once that has been done, it is necessary to step back a pace and consider the mosaic as a
whole. If that is not done, one may fail to see the wood for the trees.’
Here, a proper consideration of the entire evidential mosaic, leads me to the
conclusion that the alternative hypothesis sought to be advanced by the
Commissioner, namely that the agreements are simulated, is without a proper factual
foundation and remains but a speculative and conjectural one.

[145] In my view, it is clear that the relevant agreements were genuine agreements
and truly intended by the parties in accordance with their terms. There was no
simulation or, more particularly, dishonest intention by the parties to deceive by
concealing the real agreements. There is accordingly no basis for finding that the
ostensible agreements were a pretense or that there was any secret or unexpressed
agreement, at odds with the apparent agreements. I am accordingly in respectful
disagreement with Mothle AJA. For the rest, I agree with Lewis JA.

____________________
V M Ponnan
Judge of Appeal

APPEARANCES
For Appellant:
P A Solomon SC (with him N K Nxumalo)
(Heads also prepared by J M A Cane SC)

Instructed by:

Webber Wentzel, Sandton

Honey Incorporated, Bloemfontein

For Respondent:

D M Fine SC (with him A Pantazis and S L Mohapi)

(Heads also prepared by J Boltar)

Instructed by:

Hogan Lovells (South Africa), Sandton

Lovius Block Attorneys, Bloemfontein