Diageo, the maker and distributor of Johnnie Walker, Smirnoff, and Cape Velvet Cream, among other popular brands, haS won an appeal brought by the South African Revenue Service (Sars) to declare Cape Velvet Cream Original liqueur as a non-liquor product.
In a matter dating back to 2022, the Supreme Court of Appeal (SCA) ruled that Diageo's application to the High Court, which ultimately aimed to set aside Sars' classification of its Cape Velvet Cream Original product, and replace it with the classification it contended for, was successful.
The SCA ruled there is a limited difference between the parties, concerning the appropriate excise duty tariff heading and item heading, under which the product must be classified.
In a decision that could have broader implications for the alcohol and beverage industry, the SCA ruled in favour of Diageo SA, the local subsidiary of the British multinational beverage giant, in a dispute over the classification of one of its liqueurs for excise duty purposes.
The matter revolved around the correct tariff classification of Diageo’s Cape Velvet Cream Original, a cream liqueur made from a wine spirit base.
At issue was whether the alcohol content in its flavouring—derived in part from vanilla extract—was high enough to classify the product under a more heavily taxed category, or whether it could be deemed a "non-alcoholic" ingredient, under South African tax law.
Sars argued that even though the flavouring in Cape Velvet Cream Original contained a small amount of alcohol (0.6% alcohol by volume), it still fell under the same category as stronger alcoholic beverages.
Diageo contested this classification, arguing the flavouring’s alcohol content was negligible—after blending, the final product had an alcohol by volume (ABV) of just 0.002%.
The company contended that, based on both South African law and international precedents, this minimal alcohol content should allow the product to be classified under the category that applies to liqueurs made from wine spirits, to which "non-alcoholic ingredients" have been added.
The case eventually reached the South African Supreme Court after a series of rulings, with the full court in Pretoria siding with Diageo in 2023, overturning an earlier decision by the High Court that had upheld Sars’ classification.
At the heart of the SCA’s ruling was the application of a legal concept that essentially states that the law does not concern itself with trivial or insignificant matters.
In this case, the Court determined that the extremely low alcohol content in the flavouring—far below the 0.5% threshold used to define “non-alcoholic beverages” under South African law—could reasonably be ignored in determining the product's classification for tax purposes.
The Court said that the term “non-alcoholic ingredient,” as outlined in Additional Note 4 to Chapter 22 of Schedule 1 of the South African Customs and Excise Act, had to be interpreted in a broader regulatory context.
Given that the final product’s alcohol content was so minimal, the Court concluded that the flavouring could indeed be classified as a "non-alcoholic ingredient," regardless of the fact that the vanilla extract used in the recipe did contain trace amounts of alcohol.
The outcome underscores the importance of clarity in the classification of goods under customs and excise laws and signals that the South African tax authorities may adopt a more lenient approach when it comes to products with negligible alcohol content.
“This is a clear win for fairness and consistency in the way alcoholic beverages are taxed,” said a Diageo spokesperson in a statement following the judgment. “It provides much-needed clarity for companies in the beverage industry and ensures that products with minimal alcohol content are not unfairly taxed.”
Sars has yet to indicate whether it will seek further appeal, but the ruling is expected to set a precedent for future cases involving the classification of alcoholic products.
BUSINESS REPORT