Kia Australia Pty Ltd v Chief Executive Officer of Customs
[1998] FCA 1060
•1 SEPTEMBER 1998
FEDERAL COURT OF AUSTRALIA
CUSTOMS & EXCISE – valuation of goods – transaction value – whether transaction value includes commission – whether commission paid to an agent is a buying commission – whether agent is “associated with” the vendor of imported goods – meaning of “associated with in s 155(2)(e)(ii) of the Customs Act 1901 (Cth)
STATUTES – construction – meaning of “associated with”
Customs Act 1901 (Cth) ss 154(1), 155(1), 155(2)
Armstrong v Clark [1957] 2 QB 391 mentioned
Darvall v Lanceley (1986) 5 NSWLR 722 mentioned
Hope v Bathurst City Council (1980) 144 CLR 1 followed
Lim v Minister for Immigration Local Government & Ethnic Affairs (1992) 176 CLR 1 mentioned
Minister for Immigration & Ethnic Affairs v Teoh (1995) 183 CLR 273 mentioned
R v Skeen and Freeman (1859) 169 ER 1182 mentioned
Stead v State Government Insurance Commission (1986) 161 CLR 141 mentioned
KIA AUSTRALIA PTY LTD v CHIEF EXECUTIVE OFFICER OF CUSTOMS
VG 381 of 1997
FINKELSTEIN J
1 SEPTEMBER 1998
MELBOURNE
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VG 381 of 1997
On Appeal from the Administrative Appeals Tribunal
BETWEEN: KIA AUSTRALIA PTY LTD
Applicant
AND: CHIEF EXECUTIVE OFFICER OF CUSTOMS
Respondent
JUDGE:
FINKELSTEIN J
DATE OF ORDER:
1 SEPTEMBER 1998
WHERE MADE:
MELBOURNE
THE COURT ORDERS THAT:
The appeal be allowed.
The decision of the Administrative Appeals Tribunal be set aside and the matter be remitted to the Tribunal to be heard and determined according to law.
The respondent to pay the applicant’s costs of and incidental to this appeal.
Note: Settlement and entry of orders are dealt with in Order 36 of the Federal Court Rules
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VG 381 of 1997
On Appeal from the Administrative Appeals Tribunal
BETWEEN: KIA AUSTRALIA PTY LTD
Applicant
AND: CHIEF EXECUTIVE OFFICER OF CUSTOMS
Respondent
JUDGE:
FINKELSTEIN J
DATE OF ORDER:
1 SEPTEMBER 1998
WHERE MADE:
MELBOURNE
REASONS FOR JUDGMENT
HIS HONOUR: Kia Australia Pty Ltd (Kia Australia), a company incorporated in Australia, is a subsidiary of Itochu Corporation (Itochu), formerly known as C Itoh & Co Ltd, a Japanese corporation. Itochu holds 2% of the total outstanding shares of Kia Industries Co Ltd (Kia) a company established in Korea. Kia Australia imports into Australia and distributes motor vehicles and spare parts that are manufactured by and purchased from Kia. Orders for the imported goods are placed by Itochu as agent for Kia Australia in accordance with a Buying Agency Agreement dated 4 July 1996. By that agreement Kia Australia appointed Itochu as its agent to place orders with Kia for the purchase of goods, to pay for those goods and to organise for the shipment of those goods from Korea. In consideration for those services Kia pays Itochu a commission and reimburses it for the price paid for the goods together with the cost of insurance and freight.
The question raised by this appeal is whether the commission paid by Kia Australia to Itochu pursuant to the agency agreement should be brought to account in determining the value of the imported motor vehicles and spare parts for the purposes of the payment of duties of customs.
Section 21 of the Customs Tariff Act 1987(Cth) provides that duties of customs are imposed, in accordance with that Act, on goods imported into Australia. Speaking generally that duty is a percentage of the value of the goods imported: see s 13(1) and Schedule 3 of the Customs Tariff Act. Section 13(2) provides that, unless the contrary intention appears, such value is to be ascertained or determined in accordance with Division 2 of Part VIII of the Customs Act 1901 (Cth).
A senior inspector of the Australian Customs Service decided that the value of goods imported by Kia Australia in October 1996 should include, in addition to the price paid for those goods, the commission paid to Itochu pursuant to the agency agreement. Kia Australia applied to the Administrative Appeals Tribunal for the review of that decision. The Tribunal affirmed the decision and Kia Australia now appeals to this Court pursuant to s 44(1) of the Administrative Appeals Tribunal Act 1975 (Cth) to have the decision of the Tribunal set aside. Such an appeal is confined to a question of law arising from the decision of the Tribunal.
Before turning to consider the issues raised by this appeal it is necessary to refer to the relevant provisions of Division 2 of Part VIII of the Customs Act. It is the construction of certain of those provisions that will determine the outcome of this appeal. It will also be helpful to trace their history.
Australia is one of the contracting states to The General Agreement on Tariffs and Trade (1947) (GATT). One object of GATT is for the contracting states to adopt a uniform system for the valuation of goods for customs. Article VII of GATT provides that the value of imported goods is to be based on the actual value of those goods: Article VII, clause 2(a). “Actual value” is defined as “the price at which, at a time and place determined by the legislation of [each contracting state], such or like [goods] is sold or offered for sale in the ordinary course of trade under fully competitive conditions”: Article VII, clause 2(b). However, when the actual value is not ascertainable the value is to be based on the nearest ascertainable equivalent of such value: Article VII, clause 2(c).
In 1979 the contracting states entered into an Agreement on Implementation of Article VII of GATT which entered into force for Australia on 22 December 1982. By the Agreement on Implementation the primary basis for the value of imported goods was to be their “transaction value” which was defined in Article 1 to be “the price actually paid or payable for the goods” to which there would be added certain expenses incurred by the importer. Those expenses are set out in Article 8 of the Agreement on Implementation. They include: “commissions and brokerage, except buying commissions”: Article 8, clause 1(a)(i). The interpretive notes in Annex 1 to the Agreement on Implementation define “buying commissions” to mean “fees paid by an importer to his agent for the services of representing him abroad in the purchase of the goods being valued”: see the interpretive note to Article 8.
To give effect to Australia’s obligations under the Agreement on Implementation a new Division 2 of Part VIII of the Customs Act was enacted comprising sections 154 to 161D: see the Customs (Valuations) Amendment Act 1981. For present purposes it is sufficient to summarise the relevant provisions. By s 157 it was provided that, subject to certain immaterial exceptions, the customs value of imported goods was to be the “transaction value” of those goods. Section 159(2) defined “transaction value” to be an amount equal to the price of the goods as adjusted to the extent required by s 159(3). “Price” was defined in s 154 to mean “the aggregate of all payments made, or to be made, directly or indirectly, in connection with the goods by the purchaser to or for the benefit of the vendor”. One adjustment that was required to be made by s 159(3)(a) was to add to the price:
“commission or brokerage (not being a fee paid or payable by the purchaser to his agent for the service of representing the purchaser in the purchase of the goods to be valued) paid, or payable by the purchaser in respect of the goods to be valued.”
The legislation recognised that it might not always be possible to determine or that it might not always be appropriate to apply the transaction value of goods. Accordingly, other methods of ascertaining their value were provided for. These were their identical goods value (s 157(2)), their similar goods value (s 157(3)), their deductive value (s 157(6)), and their computed value (s 157(7)). If the customs value of goods could not be determined in accordance with any of these provisions the Comptroller General was permitted to determine their value in accordance with s 157(8).
It was contemplated that it might not be appropriate to impose duties of customs on the transaction value of imported goods if the purchaser and vendor of the goods were related and that relationship may have influenced the price of the goods: see ss 158(5) and (6). Section 154(4) defined the circumstances in which two persons would be deemed to be related to each other. In the case where both persons were bodies corporate they would be related if they were controlled by the same person or if the same person held more than 5 per cent of the voting shares in each body corporate: see s 154(4)(b).
A number of practices developed by which importers attempted to reduce the duty of customs payable on imported goods. One, known as transaction splitting, was where the importer paid part of the purchase price to a company that was associated with the vendor ostensibly for services rendered in relation to the goods. This payment was not disclosed and was not treated as part of the purchase price for the ascertainment of the transaction value of the goods. Another practice, known as payment separation, involved the payment of a fee to a person alleged to be the agent of the importer who was in reality the agent of the vendor. This payment was said not to be part of the transaction value of the goods for the reason that it fell within the exemption in s 159(1)(3)(a) on the basis that it was a fee payable by the importer to his agent.
In 1987 the Customs Act was amended by the Customs (Valuation) Amendment Act 1987. Certain of the amendments were made for the purpose of rendering ineffective the practices just described. The following changes are relevant in that regard.
First, the definition of “price” in s 154 was repealed and replaced. Now “price” was defined, in substance, to be the aggregate of all payments made by the purchaser to the vendor, to an associate of the vendor for the benefit of the vendor or otherwise for the benefit of the vendor.
Second, there was the introduction of a definition of “associate” in relation to a vendor of goods. For that purpose “associate” was defined in s 154 to mean:
“(a)a person who substantially influences the business operations of the vendor;
(b)a person whose business operations are substantially influenced by the vendor;
(c)a person who substantially influences the business operations of a person whose business operations are substantially influenced by the vendor;
(d)a person whose business operations are substantially influenced by a person who substantially influences the business operations of the vendor; or
(e) a person who is related to the vendor,”;
Finally, s 159(3)(a) was amended so that it now read:
“Commission or brokerage (not being a fee paid or payable by the purchaser to the purchaser’s agent for the service of representing the purchaser in the purchase of the goods to be valued where the agent is not also the agent of the vendor, or otherwise associated with the vendor except as agent of the purchaser, in relation to the purchase) paid, or payable, by the purchaser in respect of the goods to be valued.” (the additional words are underlined)
It was thought by some that the meaning of the expression “associated with the vendor” in
s 159(3)(a) was governed by the new definition of “associate” in s 154. Certainly the Australian Customs Service took that view. For example, in a notice published on 22 June 1987, the acting Comptroller General of Customs stated that the introduction of the definition of “associate” “provides a definition of ‘associate’ for use in relation to ‘price’ and ‘buying commissions’”. Plainly enough, this was an erroneous view. When a statute creates its own dictionary only that word that has been defined in the dictionary should be given the defined meaning: see e.g. Darvall v Lanceley (1986) 5 NSWLR 722.
There were further amendments to Division 2 of Part VIII of the Customs Act by the Customs and Excise Amendment Act 1989. The amendments that are of relevance are as follows. The definition of “transaction value” was changed to read:
“The transaction value of imported goods is an amount equal to the sum of their adjusted price in the 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.”: see s 161(1).
Definitions of “adjusted price” and “price related costs” were inserted. Section 161(2) defines the “adjusted price” to be the price of the imported goods subject to certain deductions. The definition of “price” in s 154(1) was changed so that it now comprised, in substance, all payments that have been made or are to be made directly or indirectly in relation to the imported goods by or on behalf of the purchaser to the vendor, to any person related to the vendor or to any other person for the direct or indirect benefit of the vendor either in accordance with the contract of sale, or in accordance with some other contract, agreement or arrangement for the doing of anything to increase the value of the goods: see the definition in s 154(1). “Price related costs” comprised a number of costs that might be incurred in relation to the imported goods including “commission, other than a buying commission, or brokerage, paid or payable, directly or indirectly, by or on behalf of the purchaser in respect of the goods: see the definition in s 154(1).
The Amendment Act of 1989 also introduced a definition of “buying commission”. In s 155(1) that commission is defined to mean “an amount paid or payable by or on behalf of the purchaser of the goods directly or indirectly to a person who, as an agent of the purchaser, represented the purchaser in the purchase of the goods in the import sales transaction.” However, s 155(2) provides that an amount paid by the purchaser to another person would not be taken to be a buying commission unless that other person did not and does not:
“(a)produce, in whole or in part or control the production, in whole or in part, of:
(i)the imported goods, or any other goods whose value would be taken into account in determining, or attempting to determine, the transaction value of the imported goods; or
(ii)any other goods of the same class as goods referred to in subparagraph (i);
(b)supply, or control the supply of, any services:
(i)`whose value would be taken into account in determining, or attempting to determine, the price of the imported goods; or
(ii)any other services of the same class as the services referred to in subparagraph (i);
(c)…
(d)…
(e)in relation to any of the goods referred to in subparagraph (a)(i) or any of the services referred to in subparagraph (b)(i):
(i)act as an agent for, or in any other way represent, the producer, supplier, or vendor of the goods or services; or
(ii)otherwise be associated with any such person except as the agent of the purchaser;
(f) … .”
The question for the Tribunal was whether the commission paid to Itochu was a component of the transaction value of the imported goods. The commission had been paid in respect of the imported goods and would be a “price related cost” and therefore a component of the transaction value unless it was a buying commission as defined by s 155(1).
The commission had been paid to Itochu for representing Kia Australia in the purchase of the goods. Thus it fell within the definition of buying commission in s 155(1). But, if Itochu was “associated with” Kia s 155(2)(e)(ii) would prevent the commission being treated as a buying commission. And the respondent was contending that the two companies were associated. Accordingly, the Tribunal was required to determine (a) what was the meaning of the expression “associated with” in s 155(2)(e)(ii) and (b) on the facts before it was Itochu “associated with” Kia in accordance with that meaning.
The case that Kia Australia argued before the Tribunal was that a person would only be “associated with” the vendor of imported goods if that person was “related to” the vendor in accordance with the defined meaning of that expression. This curious construction was said to be justified on the basis that Division 2 of Part VIII of the Customs Act must be construed so as to accord with Australia’s obligations under GATT and the Agreement on Implementation (see Lim v Minister for Immigration, Local Government & Ethnic Affairs (1992) 176 CLR 1 at 38; Minister for Immigration & Ethnic Affairs v Teoh (1995) 183 CLR 273 at 315) and to give effect to those obligations it was necessary to adopt the construction contended for.
There is no substance to the argument and it was rightly rejected by the Tribunal. It is true that the Agreement on Implementation does deal with the position of related parties in a particular context. The Agreement on Implementation recognises that if the buyer and seller of imported goods are related it might not be appropriate for the customs value of the imported goods to be their transaction value: see Article 1, clause 2(a). Article 15 sets out the circumstances in which persons will be deemed to be related. One circumstance is where persons are associated in business in that one is the sole agent, sole distributor or sole concessionaire of the other: see Article 15, clause 5. Thus the Agreement on Implementation does treat persons who are associated in this limited sense as related persons. But the converse is not true: the Agreement on Implementation does not treat persons who are related within the meaning of Article 15 as “associates”. It seems that Kia Australia based its argument on the false assumption that the Agreement on Implementation did treat related persons as associates.
However, in disposing of the argument by exposing the falsity of its underlying assumption, I would not wish it to be thought that I would have arrived at any different conclusion if the Agreement on Implementation did define “associates” as persons who were related within the meaning of Article 15. Even if that had been so, I can think of no justification, in this statute, for giving a word a meaning by reference to the defined meaning of another word.
The submission that the Tribunal did accept was that the word “associated” should be given its ordinary meaning. The Tribunal said that according to the Macquarie Dictionary that ordinary meaning was:
“[T]o connect by some relation, as in thought; to join as a companion, partner or ally; to unite; combine; a partner in interest, as in business or in an enterprise or action; allied; concomitant.”
While not apparent from its reasons the definition which the Tribunal quoted was of the word “associate” and was in any event not the complete definition of that word. According to the Macquarie Dictionary the word “associate” has fourteen meanings. Two of the omitted meanings are worth mentioning. They are:
“4. To enter into a league or union; unite … 8. A confederate; an accomplice; an ally.”
The Tribunal found that, by reason of its 2% shareholding in Kia, Itochu was associated with Kia within the ordinary meaning of the word “associated”. The Tribunal did not say which of the five meanings it had set out from the Macquarie Dictionary was the appropriate ordinary meaning of the word that justified this conclusion. It seems reasonable to infer that the meaning that the Tribunal had in mind was: “[T]o connect by some relation, as in thought.”
I accept the view of the Tribunal that the word “associated” in s 155(2)(e)(ii) is to be given its ordinary meaning. The word does not appear to be used in any special or technical sense. However the word has more than one ordinary meaning and the task that the Tribunal was required to undertake was to determine which of its several ordinary meanings was the appropriate one. This is a process of construction and if the Tribunal arrived at the wrong meaning of the word then it has erred in law: Hope v Bathurst City Council (1980) 144 CLR 1 at 8 per Mason J.
Before turning to consider the meaning of the word “associated” there is a preliminary question of construction that must be resolved. That question is whether the clause that precedes subparagraphs (i) and (ii) of s 155(2)(e) qualifies both subparagraphs or only the first subparagraph. In other words, the question is whether the agent and the vendor or supplier (as the case requires) must be associated “in relation to any of the goods referred to in [s 155(2)(a)(i)] or any of the services referred to in [s 155(2)(b)(i)]” before that association (if there is one) will prevent the commission that is paid to the agent being treated as a buying commission.
There is some difficulty with the language of s 155(2)(e). A natural reading of the sub-section makes it clear that the opening clause does qualify subparagraph (i). The position is less clear in the case of subparagraph (ii). The difficulty is that the words of subparagraph (ii) do not naturally follow the opening clause to produce co-ordinate clauses. However, if the words “otherwise be” in s 155(2)(e)(ii) are read as “is otherwise” the problem disappears.
In any event, it would be an unusual result if the opening clause of s 155(2)(e) only qualifies subparagraph (i). In the case of a payment to an agent of the vendor or to an agent of the supplier the payment will be excluded from being taken to be a buying commission if that agency was in relation to the goods referred to in s 155(2)(a)(i) or the services referred to in s 155(2)(b)(i). There is no reason why the same qualification should not attach to a payment made to an associate of the vendor or supplier. Indeed, it would be unjust if a payment made to an associate of the vendor or supplier would not be a buying commission when the same payment if made to an agent would be a commission of that character. For these reasons it is necessary to construe the opening clause of s 155(2)(e) as one which qualifies both subparagraphs (i) and (ii).
I can now turn to the meaning of the word “associated”. To arrive at a meaning that requires a choice between several ordinary meanings it is appropriate to adopt that meaning which better carries out the objects of the Act: Armstrong v Clark [1957] 2 QB 391. It is also necessary to avoid irrational and illogical consequences: R v Skeen and Freeman (1859) 169 ER 1182.
The purpose for including as a component of the price of imported goods payments that are made to an agent who is also an agent of or associated with the vendor of goods or the supplier of services as a component of the price of the imported goods is to ensure that duties of customs are imposed on the actual price of those goods. That is the reason why the agency or association must be in respect of the imported goods or in respect of the supply of other goods or services whose value would be taken into account in determining the price of the imported goods. This reason suggests that the association must be something more than a mere “connection” between the agent and the vendor or supplier. It also suggests that an agent to whom a commission is paid will relevantly be “associated with” the vendor or supplier if the agent and the vendor or supplier are acting together or have some common purpose in relation to the goods referred to in s 155(2)(a)(i) or the services referred to in s 155(2)(b)(i).
In this regard the Oxford English Dictionary provides a more useful definition of “associate” than does the Macquarie Dictionary. One meaning that the Oxford English Dictionary attributes to the word “associate” is: “to join (persons, or one person with another), in common purpose, action, or condition; to link together, unite, combine, ally, confederate.” It is in this sense that the word “associated” in s 155(2)(e)(ii) should be understood. Thus, to establish an association will require something more than a connection between the agent and the vendor. In particular, where the connection is a shareholding, at least where that shareholding is less than a controlling interest, there will not be an association for the purposes of the section.
Moreover, to give the word “associated” a meaning that would have the effect that a mere holding of shares by the agent in the vendor would constitute an association is to give the word a meaning that will produce unreasonable results. Why should it be supposed that the Parliament intended that any connection between the agent and the vendor however remote, should affect the character of the commission that is paid to the agent? Take as an example the case where the agent provides a variety of services that are quite unrelated to the importation of goods. Should the fact that the agent performs some of those services for the vendor create an association between them? What if the agent is also a seller of goods? If the agent sells goods to the vendor should that result in an association for the purposes of s 155(2)(e)(ii)? Take another example that is close to the facts of this case. Assume an agent who also invests some of its funds in securities. Should an investment in the securities of the vendor result in an association for the purposes of the section? In my view to give the word “associated” a meaning that would produce the consequence that an association is created in any of the above circumstances is both unwarranted and unnecessary. It is not a meaning that would further the objects of the legislation.
It follows that the Tribunal was in error in the conclusion that it reached. It was not open for the Tribunal to conclude that merely because Itochu held 2% of the issued capital of Kia the two companies were associated within the meaning of s 155(2)(e)(ii). Further, even if that shareholding did amount to an association it was still necessary for the Tribunal to consider whether that association was in relation to the imported goods or in relation to the other goods referred to in s 155(2)(a)(i) or in relation to any of the services referred to in
s 155(2)(b)(i). The Tribunal did not consider this issue at all. It had it would not have been open to it to find the relevant relationship merely because of the shareholding.
Prima facie then the decision of the Tribunal should be set aside and the matter remitted to it for reconsideration. However, the respondent contends that orders to this effect should not be made because, so it is said, it is inevitable that the Tribunal will arrive at the same result: see Stead v State Government Insurance Commission (1986) 161 CLR 141 at 145.
The basis for this contention is the assertion that there was uncontested evidence before the Tribunal that shows that Itochu was relevantly associated with Kia. That evidence comprises two agreements to which both Itochu and Kia were parties. The first is a Capital Collaboration Agreement dated 20 May 1983. By that agreement Itochu and Toyo Kogyo Co Ltd each agreed to subscribe for shares in the capital of Kia and also agreed to establish a co-operative relationship for the purpose, among others, of exploring the market in motor vehicles to enable Kia to attain the capability of an advanced motor vehicle manufacturer in the international market. The second agreement is a Distributorship Agreement dated 1 October 1996 by which Kia appointed Kia Australia to distribute motor vehicles and parts throughout Australia. The agreement provides that Itochu will be responsible for the importation of the motor vehicles and parts on behalf of Kia Australia.
The possible relevance of these agreements to the question whether Itochu was associated with Kia arose during the hearing before the Tribunal. The respondent sought to rely on those agreements as well as the 2% shareholding to establish the relevant association. When this point was raised the solicitor who appeared on behalf of Kia Australia took objection. He said that the only matter that was in dispute between the parties was whether the 2% shareholding could give rise to an association. The solicitor said that it had been his understanding that this was the way the respondent proposed to conduct its case until reference to the two agreements was made.
The way this objection was ultimately resolved is not altogether clear. But I think that a fair reading of the transcript of the proceedings shows that both the Tribunal and the solicitor were left with the impression that the two agreements were irrelevant to the question of association. I do not mean that what was said on behalf of the respondent amounted to a clear indication that the two agreements were no longer being relied upon. However, sufficient was said to lead both the Tribunal and the solicitor to form the view that they need not concern themselves with those agreements.
Counsel for Kia Australia says that if it had been realised that the two agreements were to be relied upon to establish an association between Itochu and Kia further evidence would have been led at the hearing to explain the precise relationship between those corporations and to explain how they carried out their obligations under the agreements. This evidence would establish, so it was said, that there was no association between the corporations.
In these circumstances it would be unfair to deny Kia Australia the opportunity of dealing with the two agreements in the way that its counsel says it should have been permitted to do had the relevance of them been appreciated when the case was before the Tribunal.
Accordingly, the appropriate orders to make are to allow the appeal, to set aside the decision of the Tribunal and to remit the matter to the Tribunal to be heard and decided again.
I certify that this and the preceding eleven (11) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein
Associate:
Dated: 1 September 1998
Counsel for the Applicant: Mr K Bell QC Solicitor for the Applicant: Louis Gross & Associates Counsel for the Respondent: Mr S McLeish Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 9-10 February 1998 Date of Judgment: 1 September 1998
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