Sars wins ‘customs fraud on clothing imported from China’ case

The South African Revenue Service (Sars) has powers under the Customs Act to detain goods for the purpose of establishing whether those goods are liable for forfeiture under the act.

The lawfulness of Sars’s decision to seize 19 containers of clothing imported from China was considered in a Supreme Court of Appeal (SCA) judgment handed down on June 7 2020, involving the Commissioner for the South African Revenue Service (Sars) and the Minister of Trade, Industry and Competition (the minister) v clearing agent Dragon Freight and a number of importers of goods from China (the respondents).

The minister intervened in the application, for the reason that “customs fraud, particularly in relation to clothing imported from China, is a systemic problem in South Africa”.

Sars had seized the goods on the basis that the respondents had under-declared the value for import duty purposes.

The respondents applied to court to have the containers released.

Sars, losing the matter in the high court, appealed to the SCA, which overturned the high court judgment with costs.

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Background

Sars’s electronic customs system identifies potential risks from customs declarations, and flags any potential under-declared customs value for further investigation.

Sars seized 11 containers of clothing (the first application) in 2019, and 19 containers of similar clothing (the present case) between November 4 and December 20 2019.

Sars obtained information on Chinese export declarations under the customs mutual assistance agreement with the General Administration of Customs of the People’s Republic of China on January 21 2020 in relation to the first application of clothing, which indicated that the invoice prices furnished by the respondents to Sars were “impossibly low”, and the prices stated in the export declarations were “1000% more than the prices declared to Sars”.

Dr Jaywant Irkhede, an expert in textile technology, declared that the clothing in the eight containers was similar to the clothing in the 19 containers.

On February 24 2020 the respondents launched an application in the high court to review and set aside Sars’s decision to detain the 19 containers. However, the respondents had neglected to issue a Section 96(1) notice to Sars, which is required by the act.

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Sars issued a letter of intent to the respondents on March 16 2020, in regard to the 19 containers, informing them that it intended to hold them liable for underpaid customs duty and value-added tax (VAT), to declare the goods liable to forfeiture, and to impose an amount in lieu of forfeiture in terms the act. The respondents were given an opportunity to submit evidence and make submissions.

On March 30 2020 the respondents’ attorney made written representations to Sars attaching statements and affidavits by the Chinese suppliers, who alleged that higher values in the export declarations were incorrect.

Sars on May 29 2020 requested further particulars and documents from the respondents. The respondents replied that Sars’s request was unlawful.

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On August 13 2020 Sars informed Dragon Freight that the goods and the containers in which they were imported would be forfeited. The respondents did not deliver a Section 96(1) notice of their intention to review this decision.

Overturning the high court order

The high court had set aside Sars’s decision not to release the 19 containers and ordered Sars to immediately release those containers and the goods held in them.

The SCA, in overturning the high court order, clarified that the power to detain and the power to seize are two separate administrative acts, which require two separate decisions.

The detention of goods under customs law enables Sars to investigate whether the goods are “liable to forfeiture”. Sars may only seize the goods once it has established that the goods are liable to forfeiture.

“The decision to detain the goods is then overtaken by a new decision to seize.”

The SCA found that the high court conflated the decision to detain the goods with the subsequent decision that the goods would be seized, and that the high court failed to appreciate that once the decision had been taken to seize the goods, the earlier decision to retain the goods was rendered moot.

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Allegations against Sars

The SCA noted that the respondents did not ask Sars for the reasons for its decision, despite having been informed of their right to do so.

The SCA found that:

• The allegation that Sars was biased or that its decision was taken for an ulterior purpose has no basis in the evidence.
• The accusation that Sars was procedurally unfair has no merit.
• The allegations that there was no fairness, accountability, transparency and that Sars had not given reasons are false.

Findings

The court found that:

• There was no credible explanation for the “unbelievably low prices charged by the suppliers of the goods”.
• The importers gave false explanations: that the goods were purchased at very low prices at various markets in China; low prices were obtained by exploiting the ‘trade war’ between the United States and China; the goods comprised old or ‘dead’ stock; the goods could be purchased at “ridiculously low prices” on the Alibaba website.
• The evidence of the expert, Dr Irkhede, and that of the South African Apparel Association, and the Apparel and Textile Association of South Africa, showed that the prices declared by the importers were “unrealistic and unattainable”.