Collector of Customs v Savage River Mines

[1988] FCA 125

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CUSTOMS DUTY - imported oil - for use in processing iron ore -

!	proper classification - "topped crude" or "fuel oil" - Schedule 3
Customs Tariff Act 1982 - approach tonstruction -
!
I	classlfications of equal standing - not necessarily mutually
exclusive - characterisation based on use and composition open - legislative pollcy - appeal allowed - referred back to Tribunal.
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I	Customs Tariff Act 1982
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Customs Tariff Amendment Act (No. 2) 1983
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Customs Act 1901 Acts Interpretatlon Act 1901
Re: Gissing and The Collector of Customs (1977) 14 ALR 555
COLLECTOR OF CUSTOMS V SAVAGE RIVER MINES No. G417 of 1987

SYDNEY

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FOX, DAVIES AND FRENCH	JJ.
29 March 1988
IN THE FEDERAL COURT	1
OF AUSTRALIA	1

NEW	SOUTH	WALES	1
DISTRICT	REGISTRY	1	NO. G471 Of 1987

GENERAL DIVISION 1

B E T W E E N :  COLLECTOR OF CUSTOMS

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Applicant

- AND: SAVAGE RIVER MINES

Respondent

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MINUTE OF ORDER

JUDGES: FOX, DAVIES and FRENCH JJ.

DATE :	2 9 March	1988
PLACE :	Sydney

THE COURT ORDERS THAT:

1. The appeal belowed.

2 . The decision of the Tribunal be set aside.

3 . The case be remitted to the Tribunal to be heard and

decided again according to law with or without the

hearing of further evidence as the Tribunal thinks fit.

4. The respondent pay the applicant's costs of the appeal.

NOTE: Settlement .and entry of orders is dealt with in

Order 36 of the Federal Court Rules.

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IN THE FEDERAL COURT OF AUSTRALIA

1

NEW SOUTH WALES DISTRICT REGISTRY No. G477 of 1987

1

DIVISION GENERAL )

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BETWEEN:  COLLECTOR OF CUSTOMS

Applicant

- AND: SAVAGE RIVER MINES

Respondent

CORAM :	Fox, Davies and French JJ.
DATE :	29 March 1988
PLACE :	Sydney

REASONS FOR JUDGMENT

THE COURT: 

On 4 January 1986 at Port Latta in Tasmania, the vessel

"Elota" delivered to the order of Savage River Mines some 14.45

million litres of oil. The oil, which was imported from the

United States of America, was intended for use in the processing of iron ore by the passage of a mixture of its gaseous combustion products and air over magnetite (Fe01 and iron pyrites (FeS) to

convert them into hematite (Fe304).

The product was classified by the Collector of Customs

in Tasmania as a fuel oil for the purpose of assessing customs

duty.	Under that classlfication it attracted duty at
a rate of $0.02076 per litre.	On this basis, Savage River Mines

paid, under protest, an amount of $299,973.86.

According to the company, It should not have had to pay anything as the oil was a "topped crude", designated as free of

duty under Schedule 3 to the Customs Tariff Act 1982.

Savage River Mines applied to the Administrative Appeals

1 .

Tribunal on 14 March 1986 to have the Collector's decision

reviewed. The application was successful and on 3 September 1987

the Tribunal ordered that the decision be set aside and that the oil in question be classifled as topped crude. From that decision the Collector now appeals to this Court.

Before turning to the facts of the case it is convenient

to set out the relevant statutory provisions.

Statutory Framework

Classifications of imported goods for the purpose of

determining the rate of customs duty applicable to them are set

out in Schedule 3 to the Customs Tariff Act 1982 as amended by the

Customs Tariff Amendment Act (No. 2) 1983. The rates of duty

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specified in the Schedule for each classification are payable by

virtue of ss.18 and 19 of the Act, read with	s.153 of the Customs
Act 1901.

The Schedule is divided into a hierarchy of items designated by an asterisk, sub-items designated by a single dash, paragraphs designated by two dashes and sub-paragraphs designated

by three dashes.(sub-section 16(1)). Rules for its interpretation

are set out in Schedule 2 and are	given effect for that purpose	by
s.17 of the Act.	The items and sub-items of	Schedule 3 which are

relevant to this case are as follows:-

" NO	Goods	General	special
rate	rate

27.09 *PETROLEUM OILS AND OILS Free

OBTAINED FROM BITUMINOUS

MINERALS, CRUDE

27.10- *PETROLEUM OILS, OTHER THAN

CRUDE, AND OILS, OTHER THAN
CRUDE, OBTAINED FROM BITUMINOUS
MINERALS: PREPARATIONS THAT DO
NOT FALL WITHIN ANY OTHER ITEM
AND THAT CONTAIN NOT LESS THAN

70% BY WEIGHT OF PETROLEUM OIL,

OR OF OIL OBTAINED FROM

BITUMINOUS MINERALS, WHERE THE
OIL IS THE BASIC CONSTITUENT OF

SUCH A PREPARATION:

27.10.1- Crudes, topped or enriched	Free
27.10.2-	Goods, as follows:
(a) automotive diesel oil:
(b) fuel oil;
(c) heating oil:
(d) industrial  diesel fuel:
(e) -lighting kerosene: (f) marine diesel fuel;
(g)  power kerosene:

27.10.21 - - Goods, as follows: $0.10007/L PNG:

( a )	automotive diesel oil:	$0.10007/L
( b )	industrial diesel fuel:

(c) marine diesel fuel

27.10.29 - -Other $O.O2076/L PNG:

$O.O2076/L

27 .10.3 Kerosene for use in aircraft $O.O8002/L PNG:

$O.O8002/L"

Rules of Interprctation under Schedule 2 which are

applicable are:-

"l.(l) The titles of Divisions, Chapters and Sub-chapters in

Schedule 3 are provided for reference only, and shall not be used for the purpose of interpreting that Schedule.

( 2 ) For the purpose of ascertaining whether goods fall

within an item, sub-item, paragraph	or sub-paragraph or
whether an item, sub-item, paragraph	or sub-paragraph applies

to goods, regard shall, subject to sub-rules ( 3 1 , ( 4 ) and

(5), be had to the terms of items (including sub-items,

paragraphs and sub-paragraphs) and of notes to Divisions and

Chapters and, except where those terms otherwise require,	to
rules 2 , 3 and 4 .

( 3 ) For the purpose of ascertaining whether goods fall

within an item or whether an item applies to goods, regard

shall not be had to the terms of any sub-item.

( 4 ) For the purpose of ascertaining whether goods fall

within a sub-item or whether a sub-item applies to goods,

regard shall not be had to the terms of any paragraph.

(5) For the purpose of ascertaining whether goods fall

within a paragraph	or whether a paragraph applies to goods,
regard shall not be had	to the terms of any sub-paragraph.
...

3.(1) Where, for any reason, goods fall within 2 or more

items, 2 or more sub-items of an item, 2 or more paragraphs

of a sub-item	or 2 or more sub-paragraphs of a paragraph, the
item, sub-item, paragraph	or sub-paragraph, as the case may
be, that applies to the goods shall, subject	to sub-rule ( 3 ) ,
be ascertained in accordance with the following	principles:

(a) If one of the items, sub-items, paragraphs

sub-paragraphs, as the case may be, provides a more or

specific-description of the goods than any other of the

items, sub-items, paragraphs or sub-paragraphs, that

first-mentioned item, sub-item, paragraph or

sub-paragraph, as the case may be, applies to the

goods.

(b)	I f -
(i) the item, sub-item, paragraph or sub-paragraph that

applies to the goods cannot be ascertained in	~	. .
accordance with	paragraph (a)	:

( ii) the goods are

( A )	mixtures:
(B) composite	goods consisting of different

materials	or made up of different components:
or

(C) put up in sets; and

(iii) one material or component gives to the goods their essential character,

the goods shall be taken to consist	of that material or
component.

(c)	If the item, sub-item, paragraph or sub-paragraph that
applies to the goods cannot be ascertained in accordance

I wlth paragraph (a) or paragraph (b) the item, sub-item,

paragraph or sub-paragraph, as the case may be, that

applles to the	goods 1s that item, sub-item, paragraph
or sub-paragraph that occurs last in Schedule	3 among
those items, sub-items, paragraphs	or sub-paragraphs,

which equally merit consideration when determining the

item, sub-item, paragraph	or sub-paragraph, as the case
may be, that applies to the	goods."

The Evidence

The Collector's decision to classify the oil in question

as fuel oil was based upon a definition of that product devised by

the Australian Customs Service, listing various physical

properties including specific gravity. The decision was also

based upon the description of the product appearlng in the relevant invoice as "Medium Fuel Oil (Topped Crude)" and the use

to which it was to be put.

The Tribunal heard expert evidence on a number of issues

including chemical and industry definitions of "topped crude" and

"fuel oil". It is neither necessary nor desirable that this Court

should make any findings of fact on that evidence. It suffices to say that the evidence suggested that "topped crude" is crude oil partly refined by the distillation, at atmospheric pressure, of

some of	its more volatile components. Evidence in relation to
what may	constitute "fuel oil' was rather more complex.
Specifications for various grades	of fuel oil in the united States

and Great Britain respectively were before the-Tribunal. The
American specifications, prepared by the American Society for
Testing Materials ("ASTM") set out some six classes listing their
relevant physical properties. The British Standards specification

contained two broad categories, engine and burner fuels, and

listed the propertles of seven sub-categories of burner fuels.

Extracts from textbooks and technical dictionaries were also tendered and referred to.

Dr. Barry Batts, a senior lecturer in the School of

Chemistry at Macquarie University, gave evidence of the results of a test he carried out on a sample of the subject oil to determine

the temperatures at which it would boil as various components were

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distilled off. He compared the resultant curve of boiling point temperatures against volume distilled with curves measuring like properties for crude oils as displayed in a standard text, Perry's

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Chemical Engineers' Handbook, (6th Ed.). ne concluded, by

comparing the test curve with the textbook curves, that the sample

was indeed a topped crude. He also contrasted the curve wlth that

obtained while testing a sample of Mobil fuel oil o € similar specific gravity and concluded that the sample was not of a fuel

oil.	Applying the ASTM specification, he excluded all grades
except Grade	6 and observed that having regard to the low

viscosity of the sample, it was probably not within Grade 6 either. ne rejected the Australian Customs Service definition as inadequate. He dld concede that some classes of topped crude oil might be useable as fuel oil (Appeal Book 67-68).

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Dr Frank Peters, who formerly held the office of

Australian Government Analyst, and presently chairs committees of the Standards Association of Australia in relation to petrol and diesel fuel, also gave evidence for the company. He attacked the Australian Customs Service definition of fuel oil by showing that it would encompass a number of types of crude oils. The physical properties and geographical sources of the crude oils referred to were set out in a reprint from the Oil and Gas Journal of 1983. The quantitative measures of physical properties of the subject

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material fell well within the ranges of those crudes. D r Peters

expressed the view that fuel oil meant fuel oil as defined by the

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ASTM specifications and the British Standards. ne agreed with Dr Batts that the subject oil did not fall within Grades 1 to 5 of the ASTM fuel oil classifications and, given that it was a fairly

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mobile liquid, probably did not fall within Grade 6. Whether the residue after atmospheric distillation of crude oil would be

suitable for use as a fuel oil would depend on how far the

distillation process had gone.

The Collector called three witnesses, Messrs McMahon,

Savage and Robinson. MrcMahon, who is the Assistant

Comptroller-General of the Excise and Bounties Branch of the

Australian Customs Service, told the Tribunal that the policy

underlying the tariff was to allow in crude oil for use as feed

stock free of duty in the expectation that excise would be paid on

the finished products derived from it. Direct evidence from a public servant as to the policy of legislation is unlikely to be helpful in the process of statutory construction. It is difficult

to envisage any circumstances in which such evidence could rise

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l	a.

above the level of one person's opinion on the	matter. There was
in this case however, other evidence of the legislative policy	by
way of a statement made by the	relevant Minister in the Second

Reading Speech for the Customs Tariff Amendment Bill (No. 2) 1979.

It was there said:-

"Crude and enriched petroleum oil will also be exempt as it is further manufactured into products which are th n subject to excise duties."

M r McMahon in his evidence went on to explain the way in

which the Australian Customs Service had developed its definition

of "fuel oil" after consultation with the Australian	I stitute of
Petroleum.	The object of that definition was to distinguish fuel

oil and diesel oil. No attempt had been made to derive a definition of topped crude but in his view topped crude is crude oil used for further processing whereas fuel oil is a finished product.

Mr Thomas Savage is employed by the University of Sydney

as the Executive Officer of the Chemical Engineering Foundation

and has significant industry experience. Crude oil, he said,

comes with a wide variety of properties. Subjected to atmospheric distillation, it could be sold as topped crude or as industrial

fuel oil depending upon its intended use. In the light of the

proposed use of the subject oil, he would regard it as fuel oil.

Kevin Robinson is the Manager of Marine Aviation and

Government Contracts for Caltex Oil Pty Limited. He saw the

problem of definition in marketing terms and said that, if sold to

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an, end user, the oil in qucstlon would be designated fuel 011.

The term "topped crude" referred to a refinery feed stock. It was

possible, he said, to market a fuel oil product which did not fall

within the ASTM categories.

From the textbooks and dictionaries also put in evidence

it was open to conclude that fuei oils could be produced from

crude oil by atmospheric distlllation. That is to say it was open

to conclude that some topped crudes could be used as fuel oils.

The Tribunal's Decision

The Tribunal approached the problem by observing that

the scheme of classification in Schedule 3 "requires a distinction

I	to be made between a topped crude on the one hand and a fuel oil
on the other". Each classification, it said, should be assigned
"a separate effective meaning if that be feasible". The Tribunal
referred to the definition of "fuel oil" in the 9th Edition of the
Condensed Chemical Dictionary which extends to "Any liquid
petroleum product that is burned in a furnace for the generation

of heat, or used in an engine f o r the generation of power	..". It
includes, accbrding to the definition, "a distillated fraction	of

petroleum, a residuum from refinery operations, a crude petroleum,

.or a blend of two or more of these".

In spite of that definition which clearly covers at

least some topped crudes, the need to assign a "separate effective
meaning" to each classification in Schedule 3 led the Tribunal to
say:-

I	.
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" * 10.

"Accordingly in spite of the definition adopted in

Exhibit K, we would not regard a topped crude petroleum

as being fuel a oil for the purposes of the

classification".

The Tribunal accepted D r Batt's evidence that the

subject material was a topped crude.	It accepted also that	it
"had qualities of a fuel oil". It did not	go so far as to make	a

positlve finding that on the evidence it either was or was not

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fuel oil. It rejected a use based approach to the classification

and went on to say:-

"It appears to us therefore that fuel oil can be understood as being a fractionated product of the refining of a crude or of the further refining of a topped crude, but not in the parlance of refining, the topped crude itself, even though the latter could be

utilised as a fuel oil, perhaps with some wastage	of
the	higher octane constituents. This view appears
consistent with the construction of the tariff	and

explains in our opinion the distinction drawn in

sub-items 27.10.1 and 27.10.2 between topped crude on

the one hand and the goods in 27.10.2 which are

products of the further refining of topped crude."

In essence, the Tribunal decided that the two

classifications, "topped crude" and "fuel oil" which appear in the

Schedule m tually are exclusive that therefore and

characterisation of a product as "topped crude" is sufficient to
preclude its -characterisation as "fuel oil".	To put it another
way, the Tribunal read down the	term "fuel oil" to exclude any
topped crudes.

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Having taken this approach and characterised the subject

product as "topped crude" the Tribunal did not move to a

consideration whether, having regard to composition or proposed

use or a combination of those factors, it could also be

characterised as fuel oil.	On this basis the Tribunal set aside
the Collector's decision and held that the subject	goods should be
classified under sub-item	27.10.1 as free of customs duty.

The Grounds of Appeal

The notice of appeal, as amended at the hearing of the appeal, sets out the following grounds:-

"(a) the Tribunal misdirected itself in law as to the

proper interpretation of sub-items 27.10.1 and

27.10.2 in that it held that the said sub-items

should be construed without reference to the use to

be made of the goods.

(b) the Tribunal erred in law in construing Schedule 3 to the Customs Tariff Act 1982 as requirlng a distinction.to be made between a topped crude on the one hand and a fuel oil on the other.

I (c) the Tribunal erred in law in that as a result of

its erroneous construction of the said Schedule

that a topped crude petroleum was not to be

regarded as a fuel oil for the purposes of the classification, it precluded itself from

determining the issues before it according to law.

(d) the Tribunal erred in law in construing the said

tariff solely with reference to	"the parlance of
refining ."

The Approach to Construction

The provisions of Schedule 3 to the Customs Tariff Act 1982 are part of the Act itself - sub-s.13(2) Acts Interpretation

- Act 1901. Their operation in a particular case involves a process

of statutory construction and the application of the statute

properly construed to the facts of the case. A court or tribunal charged with determining whether goods are within a given item, sub-item or paragraph of the Schedule may properly first construe

the relevant categories	and then classify the subject goods	by
reference to them.

In Re: Gissing and The Collector of Customs (1977) 14 ALR 555, the Administrative Appeals Tribunal, comprising Brennan

J. and two members, said at 556:-

"The question raised by the application is one of

classification. In order to answer the question, it is necessary to identify the goods, and by construing L>?

.~ariff, to determine which provision of the Tariff

includes the goods so identified. Identification of

goods to be classified is often a simple exercise. When

goods are separate units, each identical with the

others, and possessing no distinctive feature by reason

of their association, each unit may be identified

self-evidently as the relevant entity	for
classification."

Counsel for the applicant seemed to rely upon - Re:

Gissing to support a submission that the Tribunal went the wrong way about its task - instead of characterising the goods and

seeing which tariff category they fell into, it interpreted the

tariff and then looked at the	goods to see whether they fitted
with the category	so interpreted.

-

The process of identification described in Re: Gissing
arose in a case about multi-component goods. In that context

identification does not necessarily involve description or

classification of the goods. The latter is not a process

logically anterior to the process of statutory construction.
Insofar as the Tribunal approached the problem before it as one of

construction followed by application, its approach discloses no

I	error in reasoning.
It is however its construction of the relevant items in Schedule 3 that gives rise to difficulty.
,	The arrangement of a
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i Schedule into items, ub-items and paragraphs, discloses a

I hierarchy of classifications. Sub-rules ( 3 1 , ( 4 ) and (5) of Rule

1 of the Interpretive Rules show the process of construction at

I any given level of classification is not to be affected by what is

i to be found at any lower level. What is in a sub-item cannot

affect the application of an item. What is in a paragraph cannot

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affect the application of a sub-item.

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The insulation of different levels of classification from each other in this way	does not imply that classifications of
equal standing are mutually exclusive. Rule	3 of the Interpretive

Rules plainly contemplates the possibility that goods may fall

within two or more classificatlons of equal standing. In this-

case, the possible application of the Interpretive Rules was not considered by the Tribunal. In effect, it read down the term

"fuel oil" appearing in sub-item 27.10.2 to exclude "topped

crude". This was in the face of its own finding that there was "no necessary inconsistency between	Dr. Batts' evidence that the
product is a topped crude and the evidence that it also meets a

commonly accepted definition of a fuel oil".

Accepting that the two classes of product overlapped in

I physical properties, the Tribunal could not find that the

differentiation "called for" by the classifications in Schedule 2 turned on chemical analyses of the products. And as already

observed, it "firmly rejected" a use based distinction as "not

the normal approach to classification".

However as fucl oil is oil adapted for use as fuel,

ordinarily in a furnace or engine or for heating, a use based

distinction may be admitted in the present case. Its importance

in the process of characterisation is a matter of evidence. The Tribunal was entitled and obliged to consider the evidence to ascertain whether, having regard to such factors as physical and chemical properties and suitability for particular uses, the product in question was "fuel oil" or not.

There was some testimony before the Tribunal which

suggested that sale	of the oil for end use as distinct from use	as
a refinery	feed stock, would stamp it, in marketing terms,	as a

fuel oil rather than as a topped crude. Whether that evidence

should be accepted and whether marketing terminology has any

weight in the final characterisation, is a matter for the Tribunal

to consider in the light of all the evidence.

If, on all the evidence, it could be characterised only

as "fuel oil" then duty would be payable in accordance with the

terms of Schedule 3.	If it could be characterised as "topped
crude" also, then the appropriate category would be selected by
the proper application of the Interpretive Rules.	The criterion
of comparative specificity embodied in sub-rule 3(l)(a)	would

require a consideration on the evidence of the nature of the two

categories "topped crude" and "fuel oil". The application of

sub-rule 3(l)(b) would be similarly dependent on conclusions of

fact about the goods. If neither	(a) nor (b) were applicable then
sub-rule 3(l)(c) would appear to require classification	of the
product as a fuel oil.

The Tribunal has in this case erred in law in construlng

the Schedule as requiring a distinction to be made between “topped

crude” and “fuel oil” in such a way as to render the two classes

mutually exclusive.	The Tribunal could properly have proceeded as
follows:-

1.    Determine whether the product in question is to be

regarded for the purposes of Schedule 3 as fuel oil

only.

2.    If “yes” to 1, the duty is payable.

3 .    If “no” to 1, determine whether the product falls

into either or both categories In the Schedule.

I 4 . If the product does fall into both categories,

determine on the evidence and the proper

application of the Interpretive Rules, including

the rule as to comparative specificity, which is

the relevant’ category.

The Tribunal has taken an erroneous view of the relevant

provisions of the Schedule which precluded it from a proper

consideration of the evidence to determine whether what was

imported was fuel oil for the purposes of sub-item 27.10.2. In our opinion the appeal should be allowed and the matter referred back to the Tribunal to be decided according to law. The appeal

having been successful, the respondent will be required	to pay the
applicant’s costs of the appeal to	be taxed.

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I certify that the preceding fiftcen

(15) pages are a true copy oE the

Reasons for Judgment herein of the Court.

Associate: v

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CCNnsel for the Applicant:  Mrs P. Flemmlng QC w l t h Miss R.M. Henderson

Solicitor for the Applicant: Australian Government Solicitor

Counsel for the Respondent: J.M.N. Rolfe Q . C . with J . S . Hilton

Solicitors for the Respondent: Messrs. Dunhill, Morgan & Co.

Date of Hearing:	15 February	1988
Date of Judgment:	29 March 1988