BASF South Africa Pty (Ltd) v CSARS (A2024/024644)

Case Information

Court: High Court of South Africa, Gauteng Division, Johannesburg

Case number: A2024-024644

Applicant: BASF South Africa Pty (Ltd)

Respondent: Commissioner for the South African Revenue Service

Jurisdiction: South Africa

Judgment date: 13 March 2026

Judgment Summary

The appeal concerned two interlocutory procedural orders made by the Tax Court, Johannesburg in a transfer pricing dispute relating to BASF South Africa Pty (Ltd)'s 2011 year of assessment. The Tax Court had granted SARS leave to amend its Rule 31 statement of grounds of assessment and had refused BASF leave to make two of five proposed amendments to its Rule 32 statement of grounds of appeal [1].

The High Court (Mali J, with Dippenaar J and Meersingh AJ concurring) first determined that the Tax Court's orders were appealable, then upheld BASF's appeal on both issues. The court found that SARS's proposed amendments introduced three entirely new benchmarking studies and an MNE Group Synergies adjustment, which together constituted a novation of the whole factual and legal basis of the assessment, prohibited by Rule 31(3) [56, 58]. The court further found that the Tax Court erred in refusing BASF's proposed amendments, because those amendments related to amounts and grounds already in dispute and were not prohibited by Rule 32(3) [80, 81, 82].

Background

BASF South Africa Pty (Ltd) is a manufacturer and distributor of catalysts. It purchases Platinum Group Metals (PGMs) from its connected company BASF Metals GmbH, incorporated in Switzerland (referred to as BASF Zug). The PGMs are liquified, mixed with other chemicals, and applied as a coating to substrates to form catalysts. The catalysts are sold to South African original equipment manufacturers (OEMs) [2].

SARS conducted an audit and concluded that BASF's purchase of PGMs from BASF Zug was not at arm's length. SARS applied the Transactional Net Margin Method (TNMM) with a full cost mark-up (FCMU) profit level indicator. SARS compared BASF's FCMU with those of comparable independent companies and found that BASF's FCMU for the financial year 2011 of (1.00%) fell between the minimum and lower quartiles of the comparable set [27, 29].

On 11 January 2016, SARS issued an additional assessment and adjusted BASF's taxable income for the 2011 year of assessment by the amount of R114,157,077.00, on the basis that the purchase price of PGMs from BASF Zug did not reflect an arm's length price [31]. BASF objected on 5 May 2016, arguing that the prices paid were arm's length and that SARS had failed to account for high-value input materials in BASF's cost base [32]. SARS disallowed the objection on 29 July 2016 and adjusted BASF's taxable income by increasing the FCMU to the median of the arm's length inter-quartile range achieved by comparable companies [32].

BAAS filed a notice of appeal. SARS delivered its Rule 31 statement of grounds of assessment on 24 July 2018. BASF filed its Rule 32 statement of grounds of appeal, which included new grounds relating to, among other things, the extraordinary increase in the price of rare earth minerals and an MNE Synergies adjustment [33, 34, 35].

During preparation for the appeal, SARS commissioned an independent expert, Dr Fügemann, who conducted three new benchmarking studies and considered the effect of group synergies. SARS then sought to amend its Rule 31 statement to introduce these three new benchmarking studies and the MNE Group Synergies ground [36, 37]. BASF also sought to amend its Rule 32 statement in several respects, two of which the Tax Court refused [59].

Core Dispute

The first issue was whether SARS's proposed amendments to its Rule 31 statement constituted a novation of the whole of the factual or legal basis of the disputed assessment, which would render the amendments impermissible under Rule 31(3) of the Tax Court Rules [22].

The second issue was whether the Tax Court's refusal of two of BASF's proposed amendments to its Rule 32 statement was correct, specifically whether those amendments fell outside what a taxpayer may include in a Rule 32(3) statement [23].

A preliminary issue was whether the Tax Court's orders were appealable at all, given SARS's contention that they were merely interlocutory orders with no final effect [5, 6].

The two BASF amendments refused by the Tax Court concerned, first, the alleged failure by SARS to include income of R27,342,842.00 and R49,231,289.00 (totalling approximately R77 million) in computing BASF's earnings before interest and tax (EBIT), and second, compensation BASF received for holding PGMs for OEMs in the form of surcharge levies [59, 60].

Court Findings

On appealability, the court held that the Tax Court's orders were appealable. The court reasoned that questions of competence always have final effect, and that if the orders were not appealable, BASF would be required at the main hearing to answer to pleadings it alleges were improperly introduced, causing it irreversible prejudice [13, 14, 15, 16, 21].

On SARS's Rule 31 amendment, the court held that section 31(2) of the Income Tax Act 58 of 1962, as it read in 2011, permits adjustment only to "consideration" and does not permit a separate adjustment for items such as MNE group synergies [48, 52, 53]. The court further held that SARS's original Rule 31 statement was based on a single benchmarking study, and the introduction of three entirely new benchmarking studies relying on different data sets and different comparables constituted a material alteration of the factual foundation of the assessment, amounting to a novation prohibited by Rule 31(3) [54, 56]. The court found that the Tax Court had erred in granting SARS leave to amend, and had failed to address the MNE synergies issue and its statutory basis, which constituted a material misdirection [57, 58].

On BASF's Rule 32 amendments, the court held that the only restriction Rule 32(3) imposes on new grounds of appeal is that they must not constitute an objection against a part or amount of the disputed assessment not previously objected to under Rule 7 [73, 79]. Because BASF had objected to the entire transfer pricing adjustment of R114,157,077.00, it was entitled to advance new legal or factual grounds directed at reducing or discharging that same adjustment [72, 74]. The court found that the R77 million calculation issue and the surcharge levies ground were both connected to the disputed assessment and did not seek to challenge any previously uncontested amount [68, 71, 76, 81]. The Tax Court had erred by conflating the ground of objection with the subject matter of the objection [80].

Outcome

The appeal was upheld with costs on Scale C, including the costs of two counsel [83, Order paragraph 1].

The Tax Court's order was substituted as follows: SARS was refused leave to amend its Rule 31 statement of grounds of assessment, specifically to make those additions and deletions comprising the proposed amendments served on BASF on 2 February 2023. BASF was granted leave to amend its Rule 32 statement as stated in paragraphs 3 and 6 of its notice in terms of Rule 35. SARS was ordered to pay costs on Scale C, including the costs of two counsel [Order paragraphs 2.1, 2.2, 2.3].

TP Method Highlighted

SARS applied the Transactional Net Margin Method (TNMM) with a full cost mark-up (FCMU) profit level indicator to determine whether the price paid by BASF for PGMs from BASF Zug was at arm's length [27]. The method involved establishing a benchmark range of profitability for comparable independent third parties through a benchmarking study and comparing BASF's actual profitability to that benchmark [27, 28].

BAASF's FCMU for the 2011 financial year was (1.00%), which fell between the minimum and lower quartiles of the range of the comparable set [29]. SARS adjusted BASF's taxable income by increasing its FCMU to the median of the arm's length inter-quartile range achieved by the comparable companies [32].

BAASF argued that the TNMM was inappropriate because PGMs are widely traded commodities with readily ascertainable market prices, and that the Comparable Uncontrolled Transaction (CUP) method ought to have been used, which would have resulted in no adjustment [40]. BASF also argued that SARS failed to treat PGM costs as pass-through costs and that the comparable entities selected were not in fact comparable [41, 42].

During preparation for the appeal, SARS commissioned Dr Fügemann to conduct three new benchmarking studies identifying third-party companies that use high-value input materials such as PGMs in their manufacturing process. Dr Fügemann also considered MNE group synergies in determining an arm's length price [36]. The court held that these three new studies and the MNE synergies ground constituted a novation of SARS's original case and were impermissible under Rule 31(3) [54, 56, 58].

Major Issues / Areas of Contention

• Whether the Tax Court's orders granting SARS leave to amend its Rule 31 statement and refusing BASF leave to amend its Rule 32 statement were interlocutory and therefore not appealable [5, 6, 21].
• Whether SARS's proposed Rule 31 amendments, introducing three new benchmarking studies and an MNE Group Synergies adjustment, constituted a novation of the whole factual or legal basis of the disputed assessment, rendering them impermissible under Rule 31(3) of the Tax Court Rules [22, 54, 56].
• Whether section 31(2) of the Income Tax Act 58 of 1962, as it read in 2011, permitted an adjustment for MNE group synergies, or whether the provision confined any adjustment to 'consideration' only [48, 52, 53].
• Whether BASF's proposed Rule 32 amendments, relating to the alleged exclusion of approximately R77 million from EBIT and compensation received through surcharge levies, were prohibited by Rule 32(3) because they concerned amounts or parts of the assessment not previously objected to under Rule 7 [59, 60, 62].
• Whether the Tax Court erred in treating the absence of specific grounds in BASF's notice of objection as fatal to its proposed Rule 32 amendments, thereby conflating the ground of objection with the subject matter of the objection [80].
• Whether the appropriate transfer pricing method for the PGM purchases was the TNMM with FCMU or the Comparable Uncontrolled Transaction (CUP) method, given that PGMs are widely traded commodities [40].

Read the full judgment (PDF) (Source: SARS)