Two recent cases in the High Court of South Africa concern disputes regarding diesel refund claims that were declined by the Commissioner for the South Africa Revenue Service (SARS or the Commissioner). The cases have implications for mining companies who contract to companies to carry out primary production of mining activities on their land, on a dry contract basis; as well as the interpretation of the concept of mining activities in terms of Schedule 6 to the Customs and Excise Act, 91 of 1964 (the Act). The initial purpose of this diesel rebate, when it was introduced in the 2001 National Budget Speech by the Minister of Finance, was to encourage international competitiveness of mining on land as a primary production sector. The refunds are governed by the Act but are paid by means of the Value Added Tax (VAT) refund system.
In terms of Schedule 6 of the Act, a refund of the fuel levy and the Road Accident Fund levy levied on fuel may be granted in certain circumstances, subject to conditions imposed by SARS. Fuel users have to be registered with SARS in order to qualify for refunds under the diesel refund system. Rebate Item 670.04, included in Schedule 6 to the Act, determines the conditions under which the purchase of diesel becomes eligible for refunds. In this instance, in order to be considered an eligible purchase, the fuel must have been purchased by the user and used as fuel for primary production in mining activities. These activities must be carried out by the issuer or by a contractor who is contracted on a dry basis. Primary productions include those activities undertaken for the recovery of minerals but not including any post-recovery or post processing of those minerals; quarrying activities necessary solely for obtaining, extracting and removing minerals from the quarry, but excluding any secondary activities to work or process such minerals; as well as the transport of ores or other substances containing minerals form the mining site to the nearest railway siding.
In Canyon Resources (Pty) Ltd v the Commissioner for the South African Revenue Service, the applicant, an opencast coal-mining company, disputed a determination by SARS that a diesel refund claimed by the applicant should be declined. When determining whether a refund was due to the applicant, SARS noted that the contractors had been employed on a wet-contract basis; and the logbooks submitted did not sufficiently record the quantity of diesel used and the purpose of each vehicle using such diesel. Therefore, SARS determined that the refund was not applicable. The applicant sought to set aside this decision as well as claim ancillary relief, in terms of section 47(9)(e) of the Act, stipulating that SARS should make payment to them for an amount of ZAR 15,186,109.42, with interest. There was also a separate claim for the setting aside of a penalty imposed by SARS relating to the issue of the diesel refunds in question.
According to the High Court, the definition of a contractor contracted on a “dry basis” (which qualifies for a refund) is "any vehicle, vessel, machine or any other equipment whatsoever using distillate fuel (that) is contracted by a user for the purpose of performing any qualifying activity and the user supplies the distillate fuel from eligible purchases". In contrast, contractors contracted on a “wet basis” (which would not qualify for a refund) means "distillate fuel is supplied with the vehicle, vessel, machine or other equipment contracted or hired...”.
The applicant claimed refunds in respect of six contractors utilised by it or its collieries in the period under assessment. These contractors were Close-Up Mining and Trollope Mining (who performed mining operations), Alcedopro (feeding, hauling and handling services), Minerals Operations Executive and Ingwenya Mineral Processing (coal washing and crushing services), and Ni-Da Transport (transport services).
The applicant purchased diesel from Chevron South Africa (Pty) Ltd (Chevron) for use by its contractors and authorized each of its contractors to place orders directly with Chevron, with diesel delivered to their respective collieries. During the course of 2012 and 2013, the applicant submitted 16 VAT returns in which it claimed diesel refunds in respect of diesel which it had purchased from Chevron and supplied to its contractors.
The High Court determined that the diesel refund in relation to three contractors, Close-Up, Ni-Da and Minopex, did not qualify for refunds as they had been entered into on a wet basis. As such, it was decided that the original determination by SARS should be upheld. Whether the SARS determination was valid in terms of the services performed by contractors Close-Up, Alcedopro and Trollope, and on what contractual basis their services were employed, was referred to oral evidence for further determination. This was to determine whether they were conducting primary production activities for the applicant and whether these activities were performed on a dry contract basis. However, it was also decided by the High Court that even if this entitlement to diesel refunds succeeded, there would be no entitlement to interest and that claiming penalties and costs on this matter was premature.
In Glencore Operations SA (Pty) Limited v Commissioner for the South African Revenue Service, the applicant lodged an appeal against SARS in the High Court for its decision to refuse its internal appeal. The internal appeal was lodged against a determination by the Commissioner not to allow certain rebates in respect of diesel fuel purchased and used in mining operations, in terms of the provisions of the Act.
The dispute between the parties encompassed whether the diesel fuel, in respect of the refunds that were sought, was used by the applicant in its mining operations for “primary production activities in mining”. The issue related to whether the applicant used the diesel fuel in the manner intended by the Act. The Commissioner contended that an activity could not qualify as a mining activity where it was not listed in note 6(f)(iii) of Schedule 6 to the Act and further argued that the concept of mining stops at extraction of coal or other minerals, and does not extend to any activity that follows on extraction. Essentially, the dispute concerned the interpretation of the words "includes" and "mining" in the said note.
The High Court clarified that the items in the list introduced by "includes" go beyond that primary meaning and that words could be added to the primary meaning so that "includes" is non-exhaustive. The High Court concluded that the activities in note 6(f)(iii) are non-exhaustive; and where the activities conducted by the applicant did not fit exactly within any of the activities referred to in the Act, they were in reality the kind of operations which the legislature intended to include in the concept of primary activities in mining. Therefore, the High Court upheld the appeal and substituted the SARS' determination with a determination that the diesel refunds claimed by the applicant qualified under rebate item 670.04. The High Court further ordered that the Commissioner pay the costs.
Both cases point to the need to keep clear records of the purpose of contractors used in mining operations and ensure that diesel refunds claimed are attributed to contractors who perform primary mining production activities as set out in the Act. Mining operators should ensure that refundable diesel usage, as defined in dry contracts, is clearly recorded and clarified in logbooks that are compliant with the Act so that refunds are not be disputed due to poor recording keeping. Further, it is now clear that the definition of mining activities in terms of the Act is not limited to the items listed in note 6 to Schedule 6.
By Virusha Subban, Partner, and Ursula Diale-Ali, Candidate Attorney, Tax Practice, Johannesburg