Enviroserv Waste Management (Pty) Ltd ("Enviroserv") appealed to the Supreme Court of Appeal against the tax court's decision to disallow manufacturing allowances claimed in terms of section 12C of the Income Tax Act, No. 58 of 1962 ("ITA") - [the other issue in the appeal related to the imposition of understatement penalties, which is not discussed in this article].


Enviroserv conducts a waste management service business (involving the collection of pre-classified solid waste from clients in return for consideration).

Collected solid waste is taken to landfill sites where same is treated, recycled and disposed of.

Hazardous solid waste material is converted to waste material which is safe for disposal.

This entails the following process at the landfill sites:

  • waste is weighed;
  • waste classification (per truck) is confirmed; and
  • waste is placed into the 'workface' – being the inside of cells in order to treat it.

Cells were constructed by excavating a landfill site and installing a subsoil and drainage system inside such cells.

Inside the constructed cells:

  • the waste is treated with various chemicals (such as lime, cement, caustic soda, ferrous sulphate, hydrogen peroxide, sulphur, sodium metabisulphite, and other chemicals);
  • the waste is broken down, degrades and decomposes. Through this process, leachate (a toxin) is produced;
  • the leachate gathers at the bottom of the cells and is drained and pumped away to a storage dam or tank;
  • the leachate is then further treated in the storage dam or tank through processes such as reverse osmosis, nano filtration, freeze crystallisation and evaporation or micro encapsulation for further removal of toxins (before being disposed of safely as prescribed by legislation).

The solid waste remaining (after removal of leachate) is stored in the cells indefinitely.

Enviroserv monitors the landfill for 30 years to ensure that no toxic substance leakage occurs.

Enviroserv submitted that:

  • the process that takes place within the cells is 'manufacturing' or a process akin thereto; and
  • the cells constitute plant used directly in the process of its manufacturing activities (or a process similar thereto).

The Commissioner for the South African Revenue Service ("Commissioner") submitted, on the contrary, that:

  • landfills are constructed to avoid leachate formation inside them;
  • leachate is not manufactured but an unwanted product that happens when water enters the landfill;
  • if leachate forms in the landfill it is treated and does not enter the environment;
  • the process in which the cells are used is ancillary to manufacture; and
  • the cells are essentially used for waste storage (not for a process similar to manufacture).

The Commissioner submitted further that:

  • the cells are buildings (not plant) because the cells are immovable property structured to fulfil the purpose of waste disposal;
  • the various layers constructed cannot be viewed as plant because these are not fixtures, implements, machinery or apparatus used in carrying on any industrial/manufacturing process but are permanent structures;
  • the landfill is an asset used to handle resultant pollutants outside the ongoing process;
  • the landfill should be classified as an 'environmental waste disposal asset' that is more akin to the longer useful life of a manufacturing building and is similar to dams, reservoirs, evaporation ponds etc.

Relevant provisions

Section 12(C)(1)(a) provides for manufacturing allowances as follows:

"In respect of any –

(a) machinery or plant . . . owned by the taxpayer . . . and . . . brought to use for the first time by the taxpayer for the purposes of the taxpayer's trade (other than mining or farming) and . . . used by the taxpayer directly in a process of a manufacture carried on by the taxpayer or any other process carried on by the taxpayer which is of similar nature; ...

a deduction equal to 20 per cent of the cost to that taxpayer to acquire that machinery, plant . . . shall be allowed in the year of assessment during which the asset is so brought into use and in each of the four succeeding years of assessment. . . "

Section 37B, on the other hand, provides allowances for:

  • environmental treatment and recycling assets, and
  • environmental waste disposal assets of a permanent nature which are used by a taxpayer in a process that is ancillary to a process of manufacture or any process similar thereto.

The relevant definitions, defined for purposes of section 37B, are as follows:

"environmental treatment and recycling asset" means any air, water and solid waste treatment and recycling plant or pollution control and monitoring equipment (and any improvement to the plant or equipment) if the plant or equipment is–

(a) utilised in the course of a taxpayer's trade in a process that is ancillary to any process of manufacture or any other process which, in the opinion of the Commissioner, is of a similar nature; and

(b) required by any law of the Republic for purposes of complying with the measures that protect the environment; and

"environmental waste disposal asset" means any air, water and solid waste disposal site, dam dump, reservoir, or other structure of a similar nature, or any improvement thereto, if the structure is–

(a) of a permanent nature,

(b) utilised in the course of a taxpayer's trade in a process that is ancillary to any process of manufacture, or any other process which, in the opinion of the Commissioner, is of a similar nature, and

(c) required by any law of the Republic for the purposes of complying with the measures that protect the environment."

SCA decision

The Supreme Court of Appeal ("SCA") noted the following applicable principles:

  • 'process' and 'manufacture' are not words of exact meaning;
  • the word 'process' can cover an unlimited multiplicity of types of operations;
  • 'manufacture' includes the making of any sort of article;
  • the essence of manufacturing is what is made is different from that out of which it is made; and
  • dictionary meanings must be informed by the purpose of the section and the context within which that section applies.

The SCA reasoned as follows:

  • the treatment of the solid waste is essential to change its physical, biological and chemical character;
  • the generation of leachate, through decomposition and biodegradation, occurs in the cells (the Commissioner in its pleadings accepted that the treatment of leachate into a form suitable for lawful disposal is a process similar to manufacture);
  • in concluding that the cells are used for waste storage (a purpose ancillary to manufacture) the Commissioner ignored the process of separation of leachate from solid waste in the cells (before drainage from the cells);
  • omitting the process occurring in the cells, and considering only the storage of treated waste in the cells which is the final process in the waste management process, is incorrect;
  • section 12C's wording does not confine its application to the 'principal activity' of the thing in question (it being contended that the principal activity must be determined by having regard to the duration of the process in the cells compared to the number of years of storage of the waste thereafter);
  • section 12C's wording does not support the dictionary meaning that for a process of manufacture to take place there must have been manual labour or a mechanical process;
  • section 12C's wording does not suggest that raw material is insufficient as an end product in a process of manufacture/similar process;
  • section 12C's wording does not support an interpretation that the end product must be useful;
  • the dictionary definition of manufacture as 'the act or process of producing something' is more consistent with the wording of section 12C than a dictionary definition requirement that the production to be my manual labour or mechanical process;
  • the end product (being leachate) was different from the original solid waste;
  • in dismissing the Commissioner's arguments that the cells do not constitute plant, that the cells are not fixtures, implements, machinery or apparatus used to conduct Enviroserv's business, and that the cells are more akin to structures (which the tax court agreed with on the basis that the cells are used as perpetual storage facilities), the SCA confirmed that one must apply the functionality test i.e., one must enquire into whether the apparatus, fixture or machinery is used in conducting the activities of the business - if so it did not matter that it consisted of some structure attached to the soil. In this case the cells were used for the purpose of conducting its business (of extracting leachate and storing non-hazardous waste);
  • Eniroserv's licence referred to its obligation to collect and treat leachate, it produced (at site), in a leachate treatment plant;
  • environmental waste disposal assets, on the other hand, referred to assets which are not indispensable to a process of manufacture used for the ancillary purpose of compliance with environmental legislation. The focus therefore is on whether the asset is or is not indispensable in a process of manufacture;
  • leachate extraction/production was an indispensable part of the treatment of hazardous solid waste (the fact that the same cells were used to store non-hazardous material post extraction did not detract from their use directly in a process of manufacture or similar process);
  • Enviroserv's business included the conversion of hazardous solid waste material into waste material safe for storage;
  • Leachate was a product intended to be produced by Enviroserv's process at site.

The SCA therefore upheld Enviroserv's appeal and Enviroserv's additional assessments were referred back to the Commissioner to be altered.

Significance of this case

Important tax principles emanating from this case include the following:

  • the principal activity/application of a particular item plant is not necessarily decisive;
  • raw material production/production of undesired products is sufficient as a process of manufacture;
  • the word 'manufacture' does not require production by specific means; and
  • to distinguish between environmental waste disposal assets and assets in respect of which manufacturing allowances may be claimed, one must assess and determine whether the asset in question is indispensable to a process of manufacture (or similar process).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.