High Court judge Justice Emilia Muchawa has ruled in favour of the Zimbabwe Revenue Authority (ZIMRA) in a dispute with Afrochine Smelting (Pvt) Ltd, a large-scale producer of ferrochrome.
The case centered on how much royalty the company should pay on its exports.
The crux of the disagreement was the calculation of the “gross fair market value” of the ferrochrome.
ZIMRA argued that the value should be based on the Fastmarkets Ferro-Alloys benchmark price, an international standard price used in the industry. Afrochine, on the other hand, insisted on using a lower ex-works price, which excluded freight costs.
Justice Muchawa, who presided over the case, sided with ZIMRA. He pointed out that the Mines and Minerals Act mandated royalties to be paid on a percentage of the “gross fair market value” of the minerals produced.
This value, he explained, should be determined by what a willing buyer and seller would agree upon in an open market transaction, without any deductions.
Afrochine’s argument that ZIMRA was interfering with their business decision by dictating the selling price was dismissed by the judge. He noted that the company was free to negotiate a price above the benchmark but could not manipulate the base value to reduce its royalty obligation.
Justice Muchawa further ruled that Afrochine’s exclusion of freight costs from the invoice value amounted to an unlawful deduction under Section 37(9) of the Finance Act.
This provision, introduced to address a previous loophole exploited by mining companies, explicitly prohibits deductions for “beneficiation, processing or other costs whatsoever incurred in the production of the mineral concerned.”
The judge also rejected Afrochine’s interpretation of the penalty clause in the Finance Act. The company argued that the “double the amount of royalties payable” as the primary civil penalty meant a 100% penalty on top of the unpaid royalties.
Justice Muchawa, however, found that the plain meaning of the clause implied a 200% penalty, separate from the principal debt.
“Section 245 of the Mines and Minerals Act provides for payment of royalties on all minerals won by a miner and disposed of by him. In such process of winning and disposing of a mineral, one incurs production, beneficiation and processing costs.
“Distribution and selling expenses are administrative costs which are deductible for income tax purposes as are the production, beneficiation and processing costs.
“It is my finding therefore that the deduction from the gross fair market value of the cost of freight is proscribed by s 37(9) of the Finance Act.
“Whether reference to “double the amount of royalties payable “as the primary civil penalty means 200% penalty over and above the royalty payable,” the judge noted.
The verdict translates to a significant financial blow for Afrochine. The company will now have to settle the outstanding royalties based on the higher market value, along with hefty penalties imposed by ZIMRA.
“Accordingly, the applicant is liable to pay the following amounts to the respondent:
“Principal amount of US$880,361.54, penalty of U $1,760,723.09 (calculated at 200% according to s 37(5) of the Finance Act Chapter 23:04]) and interest of US$227,772.24.”
Local currency debt due to the Reserve Bank of Zimbabwe retention policy in apportioning of payment of royalties on minerals in local currency is ZWL97,682,345.37.
This amount includes a principal of ZWL22,507,851.49, penalty of ZWL45,015,702.97 (charged at 200%) and interest of ZWL30,154,75.91.
