ELITUNNEL MERCHANTING LIMITED v THE REGIONAL COLLECTOR OF CUSTOMS [2000] NZCA 270 (12 April 2000)

IN THE COURT OF APPEAL OF NEW ZEALAND

ca305/98

	between	ELITUNNEL MERCHANTING LIMITED
		Appellant

	and	THE REGIONAL COLLECTOR OF CUSTOMS
		Respondent

Hearing:	29 March 2000
Coram:	Richardson P Henry J Keith J
Appearances:	R R Ladd and L K O'Leary for the Appellant M J Ruffin for the Respondent
Judgment:	12 April 2000

judgment of THE COURT DELIVERED BY KEITH J

[1] The issue in this appeal is whether certain commissions paid by Elitunnel Merchanting Ltd (the importer) are to be included within the customs value of imported goods for duty purposes.The Regional Collector of Customs (Northern) decided that the commissions were part of the value.Salmon J in the High Court agreed and dismissed the importer's appeal.The importer now appeals to this Court.

[2] Caterpillar Footwear, the imported goods in question, was manufactured in Asia.Until the end of 1993, its global distribution was controlled, under a licence by Caterpillar Inc of the United States, by Cadco and Jerryco.They granted Custom Originals (the trading name of Desert Storm Management Pty Ltd, an Australian company) the exclusive licence for Australia and New Zealand. Custom Originals appointed the appellant as exclusive New Zealand licensee from 18 January 1993.The letter of appointment is brief, simply serving as confirmation to Elitunnel Merchanting Ltd of its appointment as the exclusive licensee.Its second, final sentence said that the appointment is deemed official by Custom Originals, licensee for Australia and New Zealand.The Court was referred to no other specific documentation of the relationship.Mr Ladd, for the importer, did however refer us to correspondence as support for his contention that Custom Originals was the importer's agent rather than a seller.We come back to that matter in para [20].

[3] At the end of 1993 Caterpillar Inc terminated the licence with Cadco and Jerryco and replaced them with Wolverine World Wide Inc.Wolverine entered into a distribution and licence agreement with Custom Originals, appointing it the distributor of Caterpillar Footwear in Australia and New Zealand.The arrangement between Custom Originals and the importer continued as previously, although Custom Originals' agreement with Wolverine prohibited assignment of the distributor's rights and duties without Wolverine's written consent. Wolverine said to the Collector that it had not assigned distribution rights to the importer and that is not disputed.

[4] The agreement between Custom Originals and Wolverine granted Custom Originals the exclusive right to sell products to retailers in Australia and New Zealand.It was required to purchase all products from an authorised manufacturer, in Asia, designated by Wolverine. Further, although Custom Originals was to purchase all products directly from an authorised manufacturer by a purchase order made out to it, it was to send each purchase order to Wolverine for its review and approval.If Wolverine approved the order it would send it on to the manufacturer.Custom Originals was fully and solely liable for the payment to the manufacturer and it was bound to secure this payment obligation by a letter of credit or other guaranteed procedure required by the manufacturer and approved by Wolverine.Custom Originals was to report each month, among other things, on sales and its inventory.At the relevant times the importer knew nothing of that agreement.Wolverine said to the Collector that it had no agreement with the importer.It understood that the importer was a customer in the New Zealand market.All sales under the agreement with Custom Originals were reported to it as combined purchases for both markets and it was not in possession of sales reports specific to the New Zealand market.

[5] Salmon J summarised the arrangement between the appellant and Custom Originals in these words:

The appellant and Custom Originals would confer from time to time as to the product suitable for the New Zealand market.To assist in the decision making process the appellant had available to it line drawings of the available product provided by Wolverine and information as to the factory cost of the product.The Asian factories required that the minimum order should be 600 pairs of any particular item. This was far more than was needed for the New Zealand market so that it was necessary for New Zealand orders to be "piggy backed" onto orders from Australia.It was only if the combined orders met the minimum that a particular shoe could be ordered.All the appellant's orders were placed with Custom Originals.Custom Originals invoiced the appellant. The combined order then followed the procedure required by the distribution agreement.

[1]Initially, the appellant's order combined with that of Custom Originals was delivered to Australia.The appellant's order was then separated out of the combined order and shipped to New Zealand.[2] For reasons of convenience to Custom Originals, that procedure was changed and the New Zealand component was, at least in some instances, shipped direct from Asia to New Zealand.[3]There were occasions when the appellant purchased footwear directly out of stock held by Custom Originals in Australia.Whichever method of supply was used the payment arrangement was essentially the same.Custom Originals invoiced the appellant for the factory price of the shoes.In a separate invoice Custom Originals charged the appellant a commission of first 26 percent and later 31 percent of the factory price.If the goods had been sent to Australia or were purchased out of stock Custom Originals would invoice the appellant for a pro rata proportion of freight and insurance costs incurred.[The reference in that sentence to insurance costs is incorrect as other passages in the judgment indicate, but nothing turns on that.]For goods shipped direct from Asia to New Zealand and in the case of goods shipped from Australia to New Zealand the appellant paid its own freight and insurance costs.

Originally the commission was invoiced as "royalty/commission". Later as a result of a request from the appellant the payment was described as "styling and buying charges".(Numbers added for convenience.)

[6] The numbers added to the middle paragraph of that passage indicate the three ways in which the goods came to New Zealand.As Mr Ladd appeared in the end to accept, to argue that Custom Originals is an agent in the third case is impossible.It has bought the goods.It owns them.If it decides to sell at the importer's request then it is plainly the seller.There is no possible relationship between the importer and any third party, in particular Wolverine or the authorised manufacturer, which could make Custom Originals an agent in respect of that product.The argument against this was that the payments were made to Custom Originals for the service it had provided in representing the importer in the purchase of the goods (to anticipate the relevant legislative test : para [11]).But there had been no such representation in respect of those goods : they were Custom Originals' goods until some time after they arrived in Australia and it decided to sell them to the importer.

[7] The reason given by the importer for the change recorded in the last paragraph of the passage quoted from the judgment was that "it now seems that we could be deemed to be liable on your commissions unless we are specific with our wording on your invoice.This would be disastrous ...".The appellants asked for the new description to begin with the next shipment "as an audit by Customs could be disastrous on previous orders".

[8] The valuation decisions were made under the provisions for the valuation of goods for the purposes of the customs tariff set out in the Ninth Schedule to the Customs Act 1966.The repeal of that Act by the Customs and Excise Act 1996 as from 1 October 1996 is of no moment because (1) the importer's relations with Custom Originals and the importing transactions in question ended at about that time, (2) the provisions of the old law continue to apply to the transactions (as is confirmed by s295 of the new Act), and (3) in any event the valuation provisions included in the Second Schedule to the new Act have been carried over from the old with no significant alteration.Both sets of valuation rules were designed to give effect in New Zealand law to international agreements of 1979 and 1994 on the implementation of article VII, the valuation article, of the General Agreements on Tariffs and Trade of 1947 and 1994 (NZTS 1982 No 10, AJHR 1983 A14; and UKTS 12 (1996)).The 1994 valuation agreement replaced that of 1979 as from 1 January 1995, part way through the importing period in issue in this case.Again that replacement does not matter since there is no significant difference between the relevant provisions of the two agreements.

[9] This case turns, so far as the law is concerned, on a handful of provisions of that Schedule.We begin with the proposition in cl 2(1) that the customs value of imported goods is:

their transaction value, that is, the price paid or payable for the goods when sold for export to New Zealand, adjusted in accordance with clause 3 of this Schedule, if --

...

(c) Where any part of the proceeds of any subsequent resale disposal, or use of the goods by the buyer is to accrue, directly or indirectly, to the seller, the price paid or payable for the goods includes the value of that part of the proceeds or can be adjusted in accordance with clause 3 of this Schedule.

This provision follows in part the wording of article 1(1) of the 1979 and 1994 agreements.

[10] "Price paid or payable" is defined in cl 1(1) as the aggregate of all amounts paid or payable by the buyer to or for the benefit of the seller in respect of the goods.A critical question on the present facts is who is "the seller" in the present transaction.If the seller is Custom Originals then the commission must be included in the price.

[11] Major attention was given in argument to cl 3(1)(a) which requires the addition to the price paid or payable of:

(i) Commissions and brokerage in respect of the goods incurred by the buyer, other than fees paid or payable by the buyer to his agent for the service of representing him overseas in respect of the purchase of the goods.

That is essentially the wording of article 8(1)(a)(i) of the 1979 and 1994 agreements read with the interpretative notes annexed to the agreements and accepted by the States parties along with the agreements.The importer argued that because the payments were fees paid to an agent, they were excluded from the valuation by the final words of the provision.Also relevant was cl 3(1)(a)(iv) which requires that there be added to the price:

Royalties and licence fees, including payments for patents, trademarks, and copyrights in respect of the imported goods that the buyer must pay, directly or indirectly, as a condition of the sale of goods for export to New Zealand, exclusive of charges for the right to reproduce the imported goods in New Zealand

[12] In this case the appellant paid (at first 26 per cent and later) 31 per cent commission to Custom Originals.Of that, Custom Originals kept 15.25 per cent and, in terms of its agreement with Wolverine, paid the balance of 15.75 per cent to Wolverine, which kept 10.5 per cent and paid the balance of 5.25 per cent to Caterpillar.The issue, to return to the words of cl 3(1)(a)(i), is whether the 31 per cent commission or the 15.25 per cent retained by Custom Originals was a "fee paid or payable by the buyer to [its] agent for the service of representing [it] overseas in respect of the purchase of the goods".

[13] The importer accepted in August 1997, when the Collector of Customs demanded payment of $290,000 based on the commissions which had been paid, that the proportion of the commission payable as a royalty to Caterpillar and as a licence fee to Wolverine (15.75 percent in all) was to be properly included as part of the value for duty.While the importer claimed to withdraw that concession at an early stage of the proceedings, it was accepted in the High Court and this Court that the concession was correct.The dispute accordingly is confined to the commission of 15.25 percent charged by Custom Originals. The appellant contends that the payments made to Custom Originals were exempt under the final phrase of cl 3(1)(a)(i) because it was a payment by it to Custom Originals as an agent for the service of representing it overseas in respect of the purchase of the goods. The Collector of Customs argues to the contrary that the payments are to be included because the relationship between the appellant and Custom Originals was that of buyer and seller, to return to the basic provisions of cls 2(1) and 1(1).

[14] Having set out the facts and legislation, Salmon J accepted the importer's argument that whether the payments made to Custom Originals were buying commissions and accordingly not part of the value was "a question of fact to be determined on all the facts and circumstances pertaining to the transactions and the relationship of all the parties involved.No one fact or circumstance can be determinative ...".In determining the legal tests, he gained assistance from explanatory notes to the 1994 Agreement prepared by the World Customs Organization, a text book commentary on the agreement, a publication by the United States Customs Service and decisions of United States courts.

[15] It is convenient to note at this point the varying significance of the texts relating to the 1979 and the 1994 agreements.The interpretative notes are actually part of the text as agreed to by the States parties to it;the explanatory notes are prepared by the Technical Committee on Customs Valuation of the World Customs Organization (Customs Cooperation Council) under powers conferred by the States Parties under Annex II to the 1979 and 1994 agreements; the text book, Saul L Sherman and Hinrich Glashoff Customs Valuation : Commentary on the GATT Customs Valuation Code (1988) provides a detailed commentary on the 1979 agreement making extensive use of the work of the Technical Committee up to the date of publication;and the United States material all appears to turn on different statutory language, s402(b) of the Tariff Act of 1930 as amended, although the issues about agency presented by the cases are close to some of those in issue here.This case does not require any detailed examination of the relative authority of these materials or of possible differences between them.It is nevertheless worth repeating that the Court's task is to give effect to the relevant provisions of the schedule to the Customs Act bearing particularly in mind that they are designed to give effect, as part of a world wide uniform system of valuation, to the provisions of the 1979 and 1994 agreements to which New Zealand was at relevant times a party.Further, those agreements provided for the preparation and publication of the explanatory notes and other documents by the Technical Committee. Parliament did indeed recognise, if only in part, the significance of those documents in a 1987 amendment to the Customs Act which, reversing a judgment of the High Court, expressly allowed Courts to consider them for certain purposes; Customs Amendment Act (No 4) s3 adding s19D to the Act.For the background see Hastings [1987] NZLJ 300.The Court should of course, so far as the legislative language allows, interpret the legislation consistently with New Zealand's international obligations, eg Sellers v Maritime Safety Authority [1999] 2 NZLR 44, 57.The close conformity of the legislation and treaty wording in this case means that that presumption of interpretation can be applied without difficulty.

[16] Having set out the legal tests, the Judge then reviewed features of the facts, a number of which, he said, pointed to the existence of a buying agent relationship between Custom Originals and the importer.But, he continued, other factors, which he considered under the heads of Control, Ownership and Documentation, outweighed them, and led him to the conclusion that the relationship between Custom Originals and the appellant was not that of agent and principal.Accepting the importer's counsel's submission that he should stand back and look at the reality of the situation, the Judge concluded:

that the reality of the situation is that Custom Originals was not a buying agent for the appellant.My conclusion is that Custom Originals were not concluding contracts between the manufacturers of the shoes and the appellant. Indeed, their licensing agreement did not enable them to do so.In my view there was never at any stage a contract between the appellant and the manufacturer.The situation was that Custom Originals placed orders with the manufacturer which included goods which the appellant then purchased from Custom Originals.Those purchase arrangements might be regarded as favourable in comparison with other buyer/seller relationships, but it was an arrangement which had advantages to Custom Originals as well.They were able to use the New Zealand quantities to make up the required minimums.In most cases they received payment earlier than would be the case with a normal buyer/seller relationship and in those circumstances where the appellant's order was shipped direct from Asia the appellant accepted the primary responsibility for its own freight and insurance charges.

The whole relationship between the parties should be considered.That includes the purchases from stock held by Custom Originals and the purchases which involved the goods being shipped to Australia and the appellant's share of them being separately identified only after they arrived in Australia.

[17] In his submissions before us, Mr Ladd (who had not appeared in the High Court) similarly stressed commercial reality.He referred both to the facts relating to the particular market and to matters emphasised in the 1979 and 1994 agreements.

[18] To begin with the second, the preamble to the agreements mentions the States parties' desire to elaborate rules to provide greater uniformity and certainty in the implementation of the GATT valuation provision itself, their recognition of the need for a fair, uniform and neutral system for valuation, and their recognition that customs values should be based on simple and equitable criteria consistent with commercial practices and that valuation procedures should be of general application without distinction between sources of supply. That preamble of course adds force to the propositions about the interpretation of legislation such as that in issue in this case touched on in para [15] above and to the common emphasis on the desirability of the uniform interpretation and application of such legislation.

[19] The reference in the preamble is of course to commercial practice and not to commercial reality.On the facts of this case that appears to be a significant difference.Commercial practice, like fairness and equitable criteria, might well recognise as Sherman and Glashott (p109) put it that:

if the buyer ... goes abroad ... to negotiate the purchase ... [those] costs ... are not to be added to the price as an indirect payment for the goods. There is no more reason to include the cost of hiring an outside agent to perform the same function.Hence the exclusion from Customs value of buying commissions.

[20] But the question still remains, where is the evidence here of such hiring of an outside agent?The components of commercial reality to which Mr Ladd directed us consisted of the smallness of the New Zealand market and the consequent need for cooperation between the New Zealand and Australian importers to make up the necessary minimum amounts.That cooperation, he said, involved a joint enterprise between Custom Originals and the importer : the joint enterprise character of the relationship was to be seen in the correspondence which preceded the January 1993 letter appointing the importer as the New Zealand licensee (para [2] above).In December 1992 the importer and Custom Originals (twice) wrote to the then licensees about their plans to proceed with orders in the Australian and New Zealand markets.According to Mr C R Allen, a director and shareholder of the importer and its principal witness, the proposal was that the importer would work with Custom Originals if the then licensees decided to proceed with Custom Originals and that company in turn decided to service the New Zealand market through the importer.

[21] There is however no evidence of any response to the importer by the then licensees.They did not acknowledge any joint operation.All that there is from that time, so far as the importer is concerned, is the letter of 18 January 1993 and the course of dealing which followed.And Wolverine of course was not involved in those exchanges : it did not come on the scene for another twelve months.It is essential to return to the reality of the relationships actually existing under the agreement between Wolverine and Custom Originals and the agreement between Custom Originals and the importer.

[22] Those relationships can, we think, be dealt with briefly.The base question is who was the seller to the importer.There is no evidence at all of any agreement between the importer and the authorised manufacturers or between the importer and Wolverine in respect of which Custom Originals could be the importer's agent.It is accepted that the importer had no power to deal direct with the manufacturers.Wolverine's denial of any agreement with the importer has not been questioned.If there could be no direct dealing between the importer and those third parties there is no basis for an agency relationship in respect of the dealing.The only involvement that the importer regularly had with the manufacturers was that some of the stock was shipped directly to it.But, at that Asian end of the transactions, the essential steps of ordering, approvals, manufacture and payments were handled only between Custom Originals and the manufacturer with Wolverine providing the required approvals. The importer's only contractual relationship was with Custom Originals.To approach the matter from another angle, there is no basis in the evidence for an argument that the importer could sue the manufacturer if the goods were faulty or that the manufacturer could sue the importer for non payment.

[23] Mr Ladd also emphasised the following matters as showing that the importer did exercise control over Custom Originals and accordingly was a principal:

* The style of shoes to be purchased;

* The quantity;

* The price;

* The delivery date;

* The marketing of the shoes in New Zealand;

* The ordering of stock.

[24] He did not however provide any real response to the point made to him from the bench that those matters are equally consistent with a buyer-seller relationship.And in any event, the hard question remains unanswered : who is the other party to the contract if Custom Originals is the agent?

[25] Mr Ladd made an alternative submission that if there were two transactions, the relevant one was the sale from the manufacturers to Custom Originals, the importer was not involved and its commission payments to Custom Originals were not part of that initial transaction.The payments were however, to return to the wording of the legislation, amounts paid for the benefit of the seller (here Custom Originals) in respect of the goods imported. The fact that Custom Originals passed part of the commission on is of no consequence;see also the requirement that royalties and licence fees be added under cl 3(1)(a)(iv) (para [11] above).

[26] It follows that the appeal fails.The respondent is entitled to costs of $5,000 and reasonable disbursements including the travel and accommodation expenses of counsel, to be fixed by the Registrar in the absence of agreement.

Solicitors:

Simpson Grierson, Auckland for the Appellant

Meredith Connell, Auckland for the Respondent