Court hands SARS major R35 million defeat

The Supreme Court has hit SARS with a R35 million fine, ruling that the taxman cannot issue tax demands without properly considering the evidence, giving reasons, and following fair administrative procedures.

This was the result of a case between the South African Revenue Service (SARS) and a customs clearing agent, QI Logistics, which was heard in the Supreme Court of Appeal (SCA).

The court ruled in favour of QI, setting aside the SARS Commissioner’s decisions holding QI liable for more than R35 million linked to fuel shipments transported from Mozambique to Zimbabwe and Botswana.

It found that SARS failed to demonstrate that it had properly considered the evidence submitted by QI and failed to provide adequate reasons for its decisions, rendering the process procedurally irrational.

Shepstone & Wylie’s partners, Quintus van der Merwe and Taryn Hunkin, explained why the SCA ultimately reached this decision.

QI operates as a licensed clearing agent under the Customs & Excise Act 91 of 1964 (the Act). In 2020, QI launched a review application after SARS demanded payment of just over R35 million.

The dispute arose from fuel consignments imported from Mozambique in 2018 that were moved in transit to Zimbabwe and Botswana.

QI, as a clearing agent, simply cleared the goods for transit through South Africa. It did not otherwise control or have an interest in the goods.

SARS alleged that QI had not provided sufficient proof that the fuel had been exported and sought to hold QI liable for duties, levies, VAT, and forfeiture amounts in lieu of the goods.

QI had received the so-called acquittal documents, which it presented to SARS as proof of export. However, SARS subsequently disputed the veracity of those acquittals and deemed the goods to have been diverted.

In August 2024, the Gauteng High Court dismissed QI’s application, holding that, under the Act, liability depended on whether the clearing agent could satisfy the statutory requirements to prove that goods were duly exported.

The High Court concluded that QI failed to establish compliance with those requirements and upheld SARS’s demand for all taxes and forfeiture in lieu of the goods.

Focus of the appeal

QI’s appeal to the SCA focused on whether the taxman’s decision-making process was lawful and rational, van der Merwe and Hunkin explained.

QI argued that SARS failed to properly engage with the extensive evidence submitted in response to notices of intention and failed to provide reasons for the demand.

It also argued that QI had not been given an opportunity to make representations before SARS exercised its discretion to demand an amount in lieu of forfeiture.

The SCA found that SARS’ letter of demand contained only brief assertions that certain entries were not endorsed for arrival and exit at border posts.

It did not explain why the substantial documentary evidence submitted by QI was rejected or regarded as insufficient.

According to the judgment, there was no contemporaneous record showing that SARS had properly evaluated the acquittal documents supplied by QI.

Notably, van der Merwe and Hunkin pointed out that these documents included detailed representations and multiple supporting files.

The court stressed that a reviewing court must determine whether there was a rational connection between the information before the decision-maker and the decision reached.

The court said that “both the process by which the decision is made and the decision itself must be rational. An irrational step in that process may therefore taint the ultimate decision and render it reviewable.”

It also noted that where there is procedural irrationality, one does not get to the merits of the decision.

The court critiques SARS

Van der Merwe and Hunkin said a significant factor in the court’s decision was SARS’s failure to provide reasons as required under section 5 of the Promotion of Administrative Justice Act.

QI requested clarification on why its export documents were inadequate and on the basis on which the forfeiture-related demand had been imposed.

SARS did not respond. A failure to respond is prima facie procedurally unfair, van der Merwe and Hunkin explained.

The court held that “a failure to provide reasons can ordinarily not be remedied by an ex post facto rationalisation in litigation”.

The SCA held that the absence of reasons strengthened the inference that the Commissioner had failed to properly engage with relevant evidence and had not adequately exercised the discretion granted under the Act.

The court also drew a distinction between liability for customs duties and the separate decision to demand an amount in lieu of forfeiture under section 88(2) of the Act.

While liability for duties may arise automatically if statutory requirements are met, the forfeiture provision grants SARS a discretionary power.

The SCA found no evidence that SARS considered relevant factors, invited representations from QI, or independently assessed whether a forfeiture-related demand was appropriate.

As a result, van der Merwe and Hunkin said the forfeiture decision was also found to be procedurally irrational and unlawful.

Against this backdrop, the SCA set aside the demand on review, with costs, and referred the matter back to SARS.

“The judgment reinforces the principle that administrative decisions must be lawful, reasonable and procedurally fair,” van der Merwe and Hunkin said.

“A decision-maker must allow a party adversely affected the opportunity to be properly heard, and must then consider the information before reaching a decision.”