Collector of Customs v Marym (Australia) Pty Ltd

[1992] FCA 412

Re: COLLECTOR OF CUSTOMS
And: MARYM (AUSTRALIA) PTY LTD
No. V G6 of 1992
FED No. 412
Administrative Law - Customs - Evidence
(1992) 15 AAR 436

COURT

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Heerey J.(1)

CATCHWORDS

Administrative Law - appeal - Administrative Appeals Tribunal - error of law - failure to state reasons - whether application should be remitted to Tribunal for hearing - unchallenged evidence - whether appropriate for Court to finally dispose of matter.

Customs - valuation of imported goods - men's clothing - Division 2 of Part VIII Customs Act 1901 - licence fee paid by respondent to licensor for design and other services - whether licence fee part of "transaction value" of goods - whether payments part of the price of goods in their "import sales transaction" - whether contract of sale and licence agreement form a single transaction - whether payments "price related costs" - whether "production materials" includes intangible items.

Evidence - affidavit evidence - unchallenged - absence of inherent improbability - acceptance.

Words and Phrases - "arrangement" - "transaction"

Administrative Appeals Tribunal Act 1975 (Cth): s.44(4) and (5)

Customs Act 1901 (Cth): s. 154, 159(1) and (2), 161(1)

Anasson v Phillips (NSW Supreme Court, Young J., unreported, 4 March 1988)

Austin v Deputy Secretary, Attorney-General's Department (1986) 12 FCR 22

Commonwealth Banking Corporation v Percival (1988) 82 ALR 54.

Dornan v Riordan (1990) 95 ALR 451

Estee Lauder Pty Ltd v Comptroller-General of Customs (Federal Court of Australia, Sheppard J, unreported, 28 June 1991)

Inland Revenue Commissioners v Duke of Westminster (1936) AC 1

Leving v Director of Custodial Services (NSW Court of Appeal, unreported, 23 July 1987)

Newton v Federal Commissioner of Taxation (1958) 98 CLR 1

Putnin v Federal Commissioner of Taxation (1991) 98 ALR 13

Statham v Federal Commissioner of Taxation (1988) 16 ALD 723

HEARING

MELBOURNE

#DATE 12:6:1992

Counsel for the applicant: Mr J. Lenczner

Solicitors for the applicant: Australian Government Solicitor

Counsel for the respondent: Mr J. Slonim

Solicitors for the Respondent: Wisewoulds

ORDER

It is ordered that:

The application be dismissed with costs including reserved costs.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

This appeal from the Administrative Appeals Tribunal concerns the valuation of imported goods under Division 2 of Part VIII of the Customs Act 1901 (the Act).

1. The respondent Marym (Australia) Pty Ltd (Marym) purchased a quantity of mens' fashion garments from the manufacturer D'Urban (Hong Kong) Limited (D'Urban) by a written order dated 20 September 1990. The goods were to be delivered in July 1991. They were duly despatched and D'Urban invoiced Marym for the price of HK$151,000.89 C and F Melbourne.

2. Marym is the wholly owned subsidiary of Marym S.A. (Switzerland) which is owned by three Swiss residents. Marym sells to retailers in Australia through a commission agent, Kenneth Helder and Son Pty Ltd (Helder).

3. The issue raised by this case is the treatment for customs duty purposes of a licence fee paid by Marym to an Italian company IDD Italia S.r.l (IDD) which provided design and other services for Marym.

4. IDD is a wholly owned subsidiary of IDD S.A. (Switzerland) which in turn is a wholly owned subsidiary of a Japanese listed company D'Urban Inc. D'Urban Inc holds 25 per cent of the shares in the Hong Kong D'Urban company, the remainder being held by Hong Kong residents. The Tribunal's reasons state (par 3) that counsel for Marym informed the Tribunal that it was not in dispute that Marym and IDD were "related persons" for the purposes of Division 2 of Part VIII of the Act. A reference to the transcript however shows that counsel made no such concession and it does not appear to be in truth the position.

5. In about mid 1989 IDD and Marym entered into an agreement (the licence agreement) under which IDD (referred to as the Licensor) granted a licence to distribute garments to Marym (referred to as the Licensee) and agreed to provide certain other services. An unsigned draft agreement was in evidence but it was common ground that the parties acted on this agreement and treated it as binding on them. Relevantly the licence agreement provided:
   

"W H E R E A S:

A. The Licensor is engaged in the business of designing and marketing male fashion clothing.

B. The Licensee is engaged in the business of importing, distributing and marketing clothing (including male fashion clothing) in Australia.

C. The Licensor and the Licensee mutually desire that the Licensee be the exclusive licensee in Australia and its Territories and New Zealand and its Territories of the copyright in clothing designs and paper patterns owned by the Licensor as hereinafter provided.

NOW THIS AGREEMENT WITNESSETH AS FOLLOWS:-

1. Interpretation

1.1 In this Agreement unless inconsistent with the context or subject matter:-

....

"Effective Date" means the 1st day of January 1989. "Territory" means Australia and its Territories and New Zealand and its Territories. ....

2. Grant of Licence

2.1 The Licensor hereby grants to the Licensee an exclusive licence to utilize in the Territory all-male clothing designs and paper patterns owned by the Licensor (hereinafter referred to as "the Designs") and to distribute in the Territory garments manufactured from the Designs for a period of seven

(7) years from the Effective Date (hereinafter referred to as "the Term").

2.2 The Licensor shall provide the Designs to the Licensee or its nominated agent as and when requested by the Licensee.

3. Licence Fee

3.1 The Licensee shall pay to the Licensor an annual licence fee (hereinafter referred to as "the Licence Fee") being eight per cent (8%) of the total sales by the Licensee during the current calendar year of garments manufactured from the Designs (hereinafter referred to as "the Gross Turnover"). 3.2 The Licence Fee or the first twelve (12) months of the Term shall be computed according to the Gross Turnover in the calendar year ended the 31st day of December 1989.

3.3 Unless otherwise agreed in writing between the parties, the Licence Fee shall be payable in quarterly instalments, with the first instalment being payable by the 31st day of March in each year.

4. Research and Development

4.1 The Licensor covenants and agrees that it shall:

(a) Carry out for the Licensee studies of new product lines proposed by the Licensee;

(b) Develop and prepare designs, patterns and samples of new products for viewing by the Licensee as and when requested by the Licensee;

(c) Supervise the production of sample products for use by the Licensee in the Territory;

(d) Assist the Licensee in the development of labels for the marketing of products by the Licensee in the Territory.

4.2 In consideration of the covenants and agreements contained in clause 4.1, the Licensee shall pay to the Licensor an annual fee of SIXTY THOUSAND DOLLARS

($60,000.00) (hereinafter referred to as "the R and D Fee") or such other amount as the parties may agree in writing from time to time.

4.3 Unless otherwise agreed in writing between the parties, the R and D Fee shall be payable by the 31st day of January in each year for and in respect of the preceding calendar year.

5. Buying Agency and Production Assistance 5.1 The Licensor covenants and agrees that it shall:

(a) Select, prepare and arrange the supply of seasonal fabric ranges for the Licensee and negotiate on behalf of the Licensee the purchase prices for such fabric ranges;

(b) Select accessories on behalf of the Licensee for the production of garments by the Licensee including but not limited to buttons, linings, canvas and threads;

(c) Maintain quality control of the production of garments by the Licensee for distribution by the Licensee in the Territory including but not limited to the supervision of production, the approval of garments as meeting productions standards prior to shipping, and the supervision of packing of garments into containers and the shipping of the containers to the Territory. 5.2 In consideration of the covenants and agreements contained in clause 5.1, the Licensee shall pay to the Licensor an annual fee (hereinafter referred to as "the Buying Agency Fee") being two per cent (2%) of Gross Turnover in the current calendar year. 5.3 The Buying Agency Fee for the first twelve (12) months of the Term shall be computed according to the Gross Turnover in the calendar year ended the 31st day of December 1989.

5.4 Unless otherwise agreed in writing between the parties, the Buying Agency Fee shall be payable in quarterly instalments, with the first instalment being payable on the 31st day of March in each year.

6. Administrative Services

6.1 The Licensor covenants and agrees that it shall:

(a) Prepare and supply technical sales support and assistance to the Licensee including but not limited to:

(i) Styling charts;

(ii) Order books;

(iii) Technical product and sales data;

(b) Make available to the Licensee its Computer Bureau services, which services shall include but not be limited to:

(i) The preparation of production orders for suppliers;

(ii) The production of computerised labelling;

(iii) The preparation of statistical information;

(iv) Analysis of the Licensee's marketing operations;

(v) The preparation of invoices for the retail sales of products imported and distributed by the Licensee. 6.2 In consideration of the covenants and agreements contained in clause 6.1, the Licensee shall pay to the Licensor an annual fee (hereinafter referred to as "the Administrative Fee") being one third of the total operating costs of the Licensor's Italian sales office in the current calendar year.

6.3 The Licensor shall provide the Licensee with such evidence as the Licensee may reasonably require to satisfy itself as to the total operating costs of the Licensor's Italian sales office in any particular calendar year.

6.4 The Administrative Fee for the first twelve (12) months of the Term shall be computed according to the total operating costs of the Licensor's Italian sales office in the calendar year ended the 31st day of December 1989.

6.5 Unless otherwise agreed in writing between the parties, the Administrative Fee shall be payable in quarterly instalments, with the first instalment being payable on the 31st day of March in each year.

7. ...

8. Licensee's Duties and Obligations

8.1 The Licensee shall during the Term:

(a) Use its best endeavours to promote, extend and maximise the sales of garments manufactured from the Designs (hereinafter referred to as "the Garments") thoughout the Territory;

(b) Not manufacture, market, distribute or sell (whether directly or indirectly) or assist any other person (whether directly or indirectly) to manufacture, market, distribute or sell garments which are competitive with the Garments except with the prior written consent of the Licensor;

(c) Not sell the Garments outside the Territory or sell the Garments to a third party within the Territory where there are reasonable grounds for the Licensee to believe that the third party may, whether directly or indirectly, sell or cause to be sold the Garments outside the Territory;

(d) Defray all expenses of and incidental to the Licence hereunder incurred by the Licensee;

(e) Not pledge the credit of the Licensor and shall have no power or authority to do so;

(f) Reimburse to the Licensor all reasonable travelling, accommodation and living expenses incurred by the Licensor in the performance and execution of its duties and obligations hereunder.

9. Licensor's Warranty

9.1 The Licensor warrants and represents that it has full power and authority to enter into this Agreement and to grant the exclusive licence to the Licensee in accordance with this Agreement.

..."

1. Before the Tribunal Marym relied on affidavit evidence, none of which was challenged. It appears from that evidence that IDD's primary business is the development and design of fashion garments. It develops a range of clothing products for seasonable distribution in a number of international markets. These garments are marketed in various countries by distributors, some of which are wholly owned subsidiaries of IDD and others are independent local distributors operating under licence, like Marym.

2. In general, garments that are marketed by Marym in Australia are manufactured by D'Urban. At the start of each selling season IDD provides Marym with garment samples and fabrics after consultation with Helder, Marym's selling agent in Australia. IDD then negotiates with D'Urban production specifications and prices on behalf of Marym and other distributors. This negotiation takes place on an arms-length basis and D'Urban has occasionally reduced capacity available to IDD because of heavy bookings by other customers.

3. IDD purchases fabric from Italian manufacturers and sells it to D'Urban on a CIF no return basis at cost to IDD plus six per cent. D'Urban then pays IDD for the fabric.

4. Marym forwards individual orders to IDD which are tabulated by the IDD Computer Bureau by style, size and design specifications into a bulk order for the manufacturer. After being checked by Marym the bulk order is then sent by Marym to D'Urban. D'Urban manufactures the goods and ships them direct to Marym with appropriate invoices. IDD prepares on behalf of Marym invoices for each of Marym's customers.

5. Marym pays D'Urban directly for the invoiced cost of the goods. None of this invoice cost is paid by Marym to IDD for any purpose, nor is any part of that payment forwarded by D'Urban to IDD after receipt from Marym.

6. Marym is invoiced by IDD on a quarterly basis for all fees payable under the licence agreement. D'Urban has not been aware of the existence of the licence agreement. IDD does not forward to D'Urban any part of the payments received from Marym.
   The Collector's Case

7. The only payment that is in issue between the parties is the 8 per cent annual licence fee payable under cl.3.1 of the licence agreement.

8. The Collector claims that this amount forms part of the "transaction value" of the goods and hence of their "customs value": s.159(1) and (2). "Transaction value" is defined by s.161(1) as follows:
   

"The transaction value of imported goods is an amount equal to the sum of their adjusted price in their import sales transaction and of their price related costs to the extent that those costs have not been taken into account in determining the price of the goods."

1. The Collector puts his case on two bases. First he says that the payments in question form part of the price of the goods in their import sales transaction (we are not here concerned with "adjusted price" under s.161(2)). Alternatively, he says the amounts are "price related costs".

2. As to the first limb of the argument, "import sales transaction" is defined by s.154 relevantly as follows:
   

"import sales transaction", in relation to imported goods, means:

(a) where there was one, and only one, contract of sale for the importation of the goods into Australia entered into before they became subject to Customs control and it was also a contract for their exportation from a foreign country - that contract;

(b) ...

(c) ...

and includes:

(d) ...

(e) any other contract, agreement or arrangement relating to the contract of sale referred to in paragraph (a), (b) or (c) that a Collector determines is so closely connected with that contract and to the goods the subject of that contract that together they form a single transaction."

1. The Collector says the licence agreement falls within (e) so that payments made under it are, by virtue of ss.159(1) and 161(1), part of the price. (The reasons given under s.37 of the Administrative Appeals Tribunal Act 1975 (the AAT Act) include a finding that par (b)(ii) of the definition of "price" also applied, but that argument was apparently not put to the Tribunal and was not raised before me.)

2. As to the second limb, the Collector says that the payments come within par (a) of the definition of "price related costs" because they are "production assist costs in respect of the goods." This latter concept is defined in s.154 to mean the sum of:
   

"(a) the purchaser's material costs;

(b) ...

(c) the purchaser's work costs; and

(d) the purchaser's subsiduary costs;

"Purchaser's material costs" covers amounts relating to "production materials" which, in relation to imported goods, means:

"(a) materials, components or other goods that form part of the imported goods; and

(b) materials consumed in the production of the imported goods;"

1. It is said the designs provided by IDD were production materials because they were "consumed", that is to say, used, in the production of the garments even though not used up.

2. The Tribunal also dealt with the issue of "purchaser's work costs" but this issue was not raised in the Notice of Appeal.

3. Counsel for the Collector addressed some argument to the issue of "purchaser's subsidiary costs" but this issue was also not raised in the Notice of Appeal; nor was it considered by the Tribunal.
   The Tribunal's Decision

1. Even though the question was not raised by the parties, the Tribunal decided that par (d) of the definition of "import sales transaction" was not applicable. That issue was not debated before me. The Tribunal continued:
   

"17. We have come to the conclusion that paragraph (e) of the definition is also not applicable. Although in paragraph (e) the preposition "to" in the expression "to the goods the subject of that contract" might appear at first sight to relate back to the word "relating", the fact that those words are part of the phrase "is so closely connected with that contract and to the goods the subject of that contract that together they form a single transaction" prevents that and requires that it bear the same meaning as the preposition "with". In our view it is not possible to regard the agreement to grant the licence and to pay a fee for the licence as being so closely connected with the contract between the applicant and D'Urban and with the imported goods that together they form a single transaction. That is so, even if the provisions relating to research and development, buying agency and production assistance and administrative services contained in the same document as the agreement relating to the grant of the licence and the payment of the licence fee are to be taken as being inseverable parts of one single agreement, which we consider is not so. Consequently, we have come to the conclusion that the import sales transaction in respect of the goods with which we are concerned in these proceedings does not include the agreement to grant and pay for the licence. The fee payable for the licence is, therefore, not part of the price of the goods in their import sales transaction." (Tribunal's emphasis.)

1. Counsel for the Collector attacked the sentence in that paragraph commencing "In our view" on the basis that it did not disclose the reasoning of the Tribunal. The Tribunal did not, he said, explain why it was not possible to regard the licence agreement as having the necessary close connection. Counsel referred to the decision of the Full Court in Dornan v Riordan (1990) 95 ALR 451 at 456 to 461, the gist of which is that failure by the Tribunal to state reasons constitutes an error of law.

2. I agree with this submission. The impugned sentence does no more than state a conclusion. It does not logically flow from the second sentence of the paragraph which, as far as I can understand it, does no more than discuss the meaning of par(e) of the definition. There is no attempt to reason the conclusion stated. It is not suggested that the construction put on the statute is determinative of the issue before the Tribunal; still less is there any explanation why that should be so.

3. On the second limb of the case, the Tribunal said as to the "purchaser's material costs" point that production materials must "necessarily be tangible items and not intangible items such as copyright and design. Insofar as the designs supplied by IDD to D'Urban (were) in material form - and there is no evidence as to how they were provided - they were certainly not incorporated into the garments in that material form so as to form part of the imported goods and there is no evidence that they were consumed in the production of the imported goods."
   Should the Matter be Remitted?

4. Counsel for the Collector urged that, once it was established that the Tribunal had erred in law by failing to state reasons, the only appropriate order was that the application be remitted to a differently constituted Tribunal for hearing, with or without further evidence as the Tribunal shall deem proper. He argued that even though there had been no dispute as to the primary facts before the Tribunal, the drawing of inferences from those points was also a fact finding exercise that remained to be carried out, according to law, by the Tribunal.

5. Recent decisions of the Full Court indicate that the powers conferred by s.44(4) and (5) of the AAT Act the Federal Court on appeal from the Tribunal include, in appropriate circumstances, a power to affirm or set aside the decision which was the subject of review by the Tribunal.

6. In support of his argument as to the appropriate course to be taken counsel for the Collector referred to Commonwealth Banking Corporation v Percival (1988) 82 ALR 54. However an examination of that authority to my mind makes it clear that the appropriate course to be taken depends on the nature of the case itself. The Tribunal had considered conflicting medical evidence in a Commonwealth employees' compensation claim. After holding that the appeal should be allowed and the Tribunal's decision set aside, the Full Court said (at 61):
   

"(Counsel for the appellant) submitted that the court should act on the basis of the findings of fact made by the tribunal and ordered that Mr Percival's application for review made to the Administrative Appeals Tribunal be dismissed. However, although that is a course which the court may adopt when the factual basis is clear, it is not a course to adopt when the evidence was complex and provides a basis for several differing conclusions. In this case, it having been found that the tribunal approached the matter on a wrong basis, the appropriate order is that the matter be remitted to the Administrative Appeals Tribunal to be heard and decided again with or without the hearing of further evidence. Such an order will enable all matters to be considered."

1. Thus the decision of the Full Court on the point necessarily assumed that there was jurisdiction to make an order finally disposing of the matter but that in the particular circumstances of that case such an order was not appropriate.

2. In Austin v Deputy Secretary, Attorney-General's Department (1986) 12 FCR 22 the Full Court was concerned with an appeal from a decision of the Tribunal involving the Freedom of Information Act 1982. In respect of two particular documents the Tribunal had held that they were exempt under the legal professional privilege exemption. The Full Court held that such a finding was not open to the Tribunal as the evidence failed to show that the documents satisfied the "sole purpose" test of Grant v Downs (1976) 135 CLR 674 at 688. Nevertheless the Full Court thought that documents came within the personal privacy exemption (s.41(1)). The Full Court said (at 26):
   

"But this court is empowered in this appeal, by s 44(4) of the Administrative Appeals Tribunal Act 1975 (Cth), to "make such order as it thinks appropriate by reason of its decision". The information contained in the two documents numbered 19 plainly falls within s 41(1); a decision to the contrary is not open on the material. Notwithstanding that no submission appears to have been put to the Tribunal, in respect of these documents, under s 41, the Tribunal was clothed by s 58(1) with the powers of the agency whose decision it was reviewing, and was expressly empowered by that provision to decide any matter in relation to the request that, under the Act, could have been decided by the agency. In those circumstances, the appropriate order for this Court to make is simply to dismiss the appeal."

1. In Statham v Federal Commissioner of Taxation (1988) 16 ALD 723 the Full Court considered that the Tribunal had erred in law in concluding that ss.25(1) and 26(a) of the Income Tax Assessment Act 1936 applied to the proceeds of certain land subdivisional sales. After referring to s.44(4) and (5) of the AAT Act the Full Court said (at 725):
   

"It would obviously be wasteful of time and costs, and oppressive to witnesses, to order a rehearing if that can be avoided. It would not be appropriate to ask the Deputy President who heard the matter to reconsider an opinion he has expressed so emphatically. It would clearly be far better if this court could properly dispose of the matter finally provided such course is within this court's powers. In our view it is permissible and right that we adopt this course in the present case. The facts are largely undisputed and the Tribunal did make some findings of fact on material matters.

In all the circumstances we think it appropriate to review the facts as found, and proceed to consider what orders should be made to dispose of the matter finally."

1. In Putnin v Federal Commissioner of Taxation (1991) 98 ALR 13 which concerned claims for deduction of legal expenses under s.51 of the Income Tax Assessment Act, the Full Court found that the Tribunal had erred in law. The Full Court pointed out that, in considering the appropriate course under s.44(4) of the AAT Act, "... the facts, upon the legal complexion of which the result depends, have been found, or are undisputed." The Full Court concluded that the "appropriate" orders under s.44(4) would be to provide for the allowance of the applicant's objections and to uphold the appeal.

2. In the present case I think that the appropriate course is to consider whether the unchallenged evidence leads to the conclusion for which the Collector contends.
   A Single Transaction?

3. Division 2 of Part VIII of the Act was introduced into the Act as an entirely new division in 1989. The only decision on the division since it was introduced to which I have been referred is Estee Lauder Pty Ltd v Comptroller-General of Customs (Sheppard J., unreported, 28 June 1991). In Estee Lauder the applicant in 1990 imported cosmetics from associated companies in other countries. In 1969 the applicant had entered into a licence agreement with a Canadian company which was the owner of the trade mark "Estee Lauder". Under that agreement the applicant was licensed to use the trade mark in Australia in return for certain royalty payments. One of the issues in the case was whether the royalty payments fell within the definition of "price" in s.154 of the Act and in particular whether they were payments made:
   

"... under any other contract, agreement or arrangement (other than the contract of sale), whether formal or informal, being a contract, agreement or arrangement ... that a Collector is satisfied is so closely connected with the contract of sale ... and to the goods the subject of that contract that together they form a single transaction;"

This part of the definition of course mirrors par (e) of the definition of "import sales transaction" with which the present case is concerned.

1. Counsel for the applicant put forward a number of factors as providing a reason why the necessary degree of connection was lacking. These included:
   

1. The licence agreement was removed in time from the import transactions.

2. The licence agreement did not relate specifically to the goods which were imported or any specific goods.

3. The royalties were calculated on sales in Australia by the importer, not on sales by the exporter to the importer.

4. The licence agreement did not require the payment of royalties on all goods imported - only on goods which were sold.

1. All of these factors are, mutatis mutandis, applicable in the present case. In addition, the vendor under the contract of sale (D'Urban) is an entity commercially distinct from the licensor under the licence agreement. Sheppard J. upheld the applicant's argument on this issue. His Honour said (at 19):
   

"The licence agreement was made in 1969 and appointed the applicant exclusive licensee of the relevant trade marks in Australia. The agreement entitled the applicant to use the trade marks on goods manufactured in Australia as well as finished goods imported here. The applicant's manufacturing operations in Australia were and are extensive so that its sales comprise substantial quantities of cosmetics manufactured here in addition to those which are imported. Then there is the fact that the licence fees are calculated on sales. For this purpose locally manufactured cosmetics and imported cosmetics are treated indistinguishably. There is also the circumstances that not all goods imported or manufactured by the applicant are sold. Some are given away either in the course of promotions or for reasons not so directly connected with the applicant's advertising and marketing activities. All these factors lead, in my opinion, to the conclusion that it could not be correct to say that either of the contracts pursuant to which the goods were imported and the licence agreement together formed a single transaction."

1. While Estee Lauder obviously differed in some respects from the present case, and in particular on the issue whether the importer was also a manufacturer, I think the approach adopted by his Honour leads to the same conclusion here.

2. What the definition of "import sales transaction" requires is an examination of the contract of sale and some other contract agreement or arrangement (contract etc) relating to the contract of sale. Par (e) poses the question whether "they", that is the contract of sale and the other contract etc, together form a single transaction. Assuming for the moment that the licence agreement in the present case might be said to "relate" to the contract of sale between D'Urban and Marym in the sense that they both have some application to the particular goods in question, it is clear that in itself is not enough. There has to be such a close connection between the contract of sale and the other contract etc that together the two contracts form a single transaction.

3. In my view, on the admitted facts of the present case, the contract of sale and the licence agreement do not form a single transaction. They were entered into at different times with different parties and for different purposes and attach to different aspects of Marym's dealing with the goods in question. IDD's right to the 8 per cent licence fee is conditioned on events quite different from those which entitled D'Urban to the price under the contract of sale.

4. Counsel for the Collector placed stress on the word "arrangement" and cited the well known statement of the Privy Council in Newton v Federal Commissioner of Taxation (1958) 98 CLR 1 at 7:
   

"Their Lordships are of opinion that the word "arrangement" is apt to describe something less than a binding contract or agreement, something in the nature of an understanding between two or more persons - a plan arranged between them which may not be enforceable at law. But it must in this section comprehend, not only the initial plan, but also all the transactions by which it is carried into effect - all the transactions, that is, which have the effect of avoiding taxation, be they conveyances, transfers or anything else. It would be useless for the commissioner to avoid the arrangement and leave the transactions still standing."

1. Counsel argued that the Tribunal ignored this "arrangement" which he said included the "physical operation of the relationship" and the way it "works actually in practice." He referred to LNC (Wholesale) Pty Ltd v Collector of Customs (1988) 17 FCR 154 at 164. There was, he said, a single transaction because of the relationship between the parties and what IDD does. There was an "umbrella agreement" between IDD and Marym of which the agreement between IDD and D'Urban was but a "sub-specie".

2. In the context of the definition of "import sales transaction", the licence agreement was plainly a contract. One does not need to, and indeed cannot, characterise it as one of the lesser breeds of legal relationships, viz agreements or arrangements.

3. The reference in Newton to the transactions by which the arrangement is carried into effect as being comprehended whether the term "arrangement" is I think equally applicable to the expression "contract" in par (e). "Transaction" in relation to a contract of sale includes both the contract itself and its performance by the seller delivering the goods and the buyer paying the price.

4. But to the extent that the Collector's argument involved treating the licence agreement and the contract of sale as being together some sort of overall scheme or device, it should in my opinion be rejected. There was no cross-examination of the deponents of affidavits relied on by Marym. In the absence of some inherent improbability - which was not suggested - they must be accepted: see Anasson v Phillips (NSW Supreme Court, Young J., unreported, 4 March 1988), Leving v Director of Custodial Services (NSW Court of Appeal, unreported, 23 July 1987), noted in (1992) 66 ALJ 298. I do not see why the substance of the licence agreement and the contract of sale should be anything other than "... that which results from the legal rights and obligations of the parties ascertained upon ordinary legal principles": Inland Revenue Commissioners v Duke of Westminster (1936) AC 1 at 20-21 per Lord Tomlin. The way the licence agreement and the contract of sale "worked in practice", to use counsel's expression, was completely in accord with the legal rights and obligations which they created.

5. Reference was made to the Replacement Explanatory Memorandum circulated at the time of the introduction of s.154 in its present form. It included the following:
   

"The mischief to which paragraphs (d) and (e) are directed is known as 'transaction splitting', whereby special or separate payments are made to the vendor (or a person 'related' to the vendor for the benefit of the vendor) in respect of some specialised service which in reality forms part of the goods, or adds something of value to the goods, such as: engineering; homologation; modifying the goods to comply with a standard; design modifications; finishing; refurbishing; research and development etc: The provisions are not intended to apply to services which have a 'merely' incidental connection with the goods:"

1. I find it difficult to reconcile these detailed criteria with the plain words of the statute itself. If Parliament had wanted to legislate against "transaction splitting" and catch special or separate payments made to or for the benefit of the vendor or a person "related" to the vendor, it could have done so - presumably in much the same terms as it chose to do so in par (a)(ii) and (b)(ii) of the definition of "price" in s.154(1) (a provision not relied on by the Collector in the present case, at least in the hearing before me).

2. But in any case on the uncontested evidence it seems that IDD and D'Urban operated completely at arms length. They might be technically "related" within the meaning of s.154(3)(b)(iii) in that D'Urban Inc of Japan controls (via IDD Switzerland) 100 per cent of IDD and 25 per cent of D'Urban and therefore more than 5 per cent of each. But the evidence shows they operated independently and each received and retained the financial reward it received from Marym entirely for its own benefit.

3. I think that in the absence of some clear statutory direction that an artificial concept of relatedness is to produce a different result, the licence agreement and the contract of sale were, as a matter of legal substance and commercial reality, quite separate transactions.

4. It follows that the licence agreement was not part of the "import sales transaction" and the licence fee did not form part of the price and hence cannot be included in the customs value.
   Price Related Costs

5. I agree with the Tribunal that the definition of "production materials" does not extend to intangible items such as the chose in action contstituted by copyright in a plan or design. "Goods" in s.4(1) is defined to include:
   

"(a) ships and aircraft; and

(b) all kinds of moveable personal property".

Such a definition is consistent with the ordinary understanding of the word which would not include a right to copyright.

1. There was an attack on the finding that there was no evidence that designs in material form were supplied by IDD to D'Urban. The only evidence relating to the provision of designs was in the affidavit evidence of IDD's Managing Director Sig. Giovanni Francese where it was said that:
   

"The cost of producing multiple copies of the designs and patterns in various sizes and providing them to the manufacturer at Marym's instruction is also included in this service (i.e. the 2 per cent Buying Agency and Production Assistance Service under cl.5 of the Licence Agreement)."

1. There is no dispute between the parties that the 2 per cent fee forms part of the customs value. But the Collector cannot in my opinion also include the 8 per cent licence fee. It is not a "cost of acquisition" for the purposes of the definition of "purchaser's material costs" because the cost of acquisition has been met by other means, viz the 2 per cent fee.

2. I also reject the argument that, if the designs were provided in material form, they were "consumed" and therefore formed part of "purchaser's material costs." One cannot say in my opinion - certainly on the state of the evidence - that designs are materials consumed in the course of production. I think "consumed" in this context means used up.

3. The application will be dismissed with costs including reserved costs.