HALLIBURTON AUSTRALIA PTY LTD And CHIEF EXECUTIVE OFFICER OF CUSTOMS

[2010] AATA 842

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2010] AATA 842

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2009/0780

GENERAL ADMINISTRATIVE  DIVISION		)
Re		HALLIBURTON AUSTRALIA PTY LTD

Applicant

And CHIEF EXECUTIVE OFFICER OF CUSTOMS

Respondent

DECISION

Tribunal Dr G Hughes, Member
Brigadier C Ermert (Retd), Member

Date29 October 2010

PlaceMelbourne

Decision The Tribunal affirms the decision under review.

.................[signed].......................

Member

CUSTOMS – tariff classification – goods comprising sensors – independent technology or parts of drill

Customs Tariff Act 1995  Sch 3

Times Consultants Pty Ltd v Collector of Customs (1987) 16 FCR 449

Re Tridon Pty Ltd and Collector of Customs (1982) 4 ALD 615

REASONS FOR DECISION

29 October 2010 Dr G Hughes, Member
Brigadier C Ermert (Retd), Member         

1.      The Applicant imported goods known as a Geo-Pilot Rotary Steerable System (the Geo-Pilot).  The Geo-Pilot is used for directional drilling and is known in the industry as point-the-bit, rotary steerable system.

2.      The issue was whether the goods should be classified under sub-heading 9015.80.00 of the Customs Tariff Act 1995 as contended by the Applicant, or 8431.43.00 as contended by the Respondent.

3.      The relevant headings under chapter 90 are as follows:

9015SURVEYING (INCLUDING PHOTOGRAMMETRICAL SURVEYING), HYDROGRAPHIC, OCEANOGRAPHIC, HYDROLOGICAL, METEOROLOGICAL OR GEOPHYSICAL INSTRUMENTS AND APPLIANCES, EXCLUDING COMPASSES; RANGEFINDERS:

…

9015.80.00-Other instruments and appliances

The relevant headings under Chapter 84 are as follows:

8431PARTS SUITABLE FOR USE SOLELY OR PRINCIPALLY WITH THE MACHINARY OF HEADINGS 8425 TO 8430:

…

8431.43.00Parts for boring or sinking machinery of [subheading] 8430.41.00 or 8430.49.00

4.      Goods classified under 9015 attract a duty rate of Free, whereas goods classified under 8431 attract a duty rate of 5%. 

5.      The Applicant contended that the goods were geophysical instruments, as envisaged by chapter 90, rather than parts of machinery (specifically, a drill string) as envisaged by chapter 84.

6.      The essence of the Applicant's contention was that the goods did not form part of a drill but rather they represented independent technology.  The goods had the ability to provide geophysical data to the operator of the drill as a part of the process of searching for oil.  It was a tool which could be added to the drill string, and was not inherently part of the drill string.  The drill would still operate without the Geo-Pilot.

7.      In the Applicant's contention the goods were adequately embraced by the description  in the Harmonised System Explanatory Notes, sections VI (4) and (5) of which read:

(4)circumferential acoustic scanning tools which create a 'picture' of a borehole by measuring the acoustic travel time of an ultrasonic signal emitted from a rotating transducer in the head of the tool.

(5)       apparatus for measuring the inclination of the borehole.

8.      Jim Tilley, Global Technical Adviser for the Applicant, gave evidence on its behalf.  Mr Tilley explained how advances in directional drilling technology had enabled more complex trajectories to be drilled and  targets to be reached which were inaccessible by conventional drilling methods.  The Geo-Pilot system provided operators with advanced wellbore placement control and enhanced drilling capability compared with conventional systems; particularly because of the ability of its near bit sensor systems to provide a high degree of directional control and geo-steering capability.  In particular, the At-Bit-Gamma (ABG) sensor measured natural gamma ray emission from the formations being drilled and provided geo-steering with early warning of approaching formation changes as well as an indication of the direction of the approaching bed boundary. 

9.      Under cross-examination, Mr Tilley acknowledged that the ABG was optional in the sense that it was the subject of an extra charge but he asserted that it was nevertheless part of the standard equipment.  He acknowledged that there was no mention of the At Bit Inclination (ABI) or ABG sensors in some product descriptions issued contemporaneously by the Applicant but added that this did not mean that the Geo-Pilot could operate without them.  He agreed that the ABI and ABG sensors could be used in other equipment, although the sensors may not be quite the same in each instance.  Mr Tilley agreed with a calculation by the Respondent's representative that, in a quantitative sense at least, the sensors represented 3% of the weight of the subject goods.

10.     The essence of the Respondent's case was that the goods were attached to a drill bit and formed an integral part of drilling (boring) machinery, never being used for any other purpose.

11.     The Respondent acknowledged that the goods included ABI and ABG sensors (the latter being optional), which themselves would be geophysical instruments but which represented only a small portion of the goods, both in a quantitative and qualitative sense.  The essential character of the Geo-Pilot was that it was a directional drilling system. 

12.     The Respondent emphasised that the sensors did not represent the entire product.  They did not flex the drive shaft and point the bit.  The ABG sensor was optional and, whether  it was present, did not affect the characterisation of the Geo-Pilot as a point-the-bit, rotary steerable, directional drilling system.  ABI sensors could be, and are, used with other drilling systems that are not point-the-bit systems and hence could not be said to define the unique character of the Geo-Pilot. 

13.     In support of its contention that the Geo-Pilot comprised more than just the sensors, the Respondent emphasised that:

·the subject goods are attached to the drill bit;

·the subject goods incorporate a relatively flexible drive shaft;

·the entire power that drives the drill bit, generated by the top-drive motor, is transmitted through that drive shaft; and

·changes in drilling direction are obtained by flexing that drive shaft in the manner described above, and thereby pointing the drill bit.

Mr Tilley acknowledged the accuracy of this overview under cross-examination.

14.     The Respondent observed that in addition to containing mechanical components, the goods further incorporated:

·a lithium battery to provide power;

·an onboard computer;

·communications electronics;

·several sensors, including

ooil level sensors;

ocurrent draw sensor;

osystem voltage and battery power usage sensors;

otemperature of the electronics;

orpm sensor, which measures the rotation of the bit;

oTEM (torsional efficiency monitor) sensor;

osensors which detect housing roll, clutch slip and brake slip;

oseveral position sensors, to detect the position of the eccentric rings;

oABI (At Bit Inclination) sensor; and

oABG (At Bit Gamma) sensor.

Again, Mr Tilley agreed with these observations under cross-examination.

The Tribunal’s deliberations

15.     The Tribunal is unable to accept the Applicant's contention that the goods are geophysical instruments or in any other way fall within Chapter 90.  The ABI and ABG sensors could be described as geo-physical instruments but the goods as a whole could not be so described.  It is not sufficient that the goods contained ABI and ABG sensors.

16.     It is the Tribunal's conclusion that the goods constitute part of a drill string. Data is gathered via the sensors to enable the drill to be steered.  It is therefore part of the directional drilling equipment.  The sensors provide useful information but do not define the essential functionality of the goods.

17.     The essence of the goods is not defined by the fact that they incorporate the sensors.  As pointed out by the Respondent's representative, there are other directional drilling systems which do not incorporate the sensors.

18.     The Tribunal is not persuaded by the Respondent's contention as to the relative quantitative significance of the sensors in proportion to the remainder of the goods.  It is persuaded, however, by the submission that the Applicant's case is flawed in its attempt to define the whole goods by reference to what was described by the Applicant itself as an optional component.  It agrees that in essence the Geo-Pilot is a directional drilling tool, of which the sensors are a relatively small part.

19.     Ultimately, it is necessary to consider the essential character of the machinery in its entirety.  The fact that the machinery contains sensors which, imported separately, would be considered goods for the purposes of Chapter 90 does not of itself mean that the entire machinery constitutes goods for the purposes of Chapter 90.  In this instance, the goods cannot accurately be described as geophysical surveying instruments but rather they represent steering tools of a drill string.

20.     It is the Tribunal's conclusion that the goods form part of the drilling equipment, part of the drill string. They serve the purpose of directing the bit.  They constitute a part of the equipment and hence are correctly classified to heading 8431.

21.     The Tribunal's conclusion is consistent with prevailing authority.  In Times Consultants Pty Ltd v Collector of Customs (Qld) (1987) 16 FCR 449, Morling and Wilcox JJ observed that "the classification of goods for tariff purposes is a practical 'wharfside' task", adding that "[i]t ought normally be possible to classify goods merely by looking at them and by considering their nature and the function which they were designed to serve". Also of relevance is the decision by the Administrative Appeals Tribunal in Re Tridon Pty Ltd and Collector of Customs (1982) 4 ALD 615 in which the Tribunal, after identifying eight principles relevant to the process of classifying goods, observed that there were circumstances "in which the identity of the individual components is subordinated to the identity of the combination".

Decision

22.     For the above reasons, the Tribunal affirms the decision under review.

I certify that the twenty-one [21] preceding paragraphs are a true copy of the reasons for the decision herein of
Dr G Hughes, Member and
Brigadier C Ermert (Retd), Member

Signed: ...........................[signed]...................................................

Grace Horzitski  Associate

Date of Hearing  23 September 2010
Date of Decision  29 October 2010
Solicitor for the Applicant             Mr L Gross, Gross & Becroft Lawyers
Solicitor for the Respondent        Mr R Northcote, Australian Government Solicitor