Pacific Resources International Pty Ltd and Chief Executive Officer of Customs

[2011] AATA 285

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2011] AATA 285

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No  2010/1888

GENERAL ADMINISTRATIVE DIVISION		)
Re		Pacific Resources International Pty Ltd

Applicant

And Chief Executive Officer of Customs

Respondent

DECISION

Tribunal Senior Member A K Britton and Dr T Schafer

Date2 May 2011

PlaceSydney

Decision The decision under review is affirmed.

........................[sgd]......................

Senior Member A K Britton

CATCHWORDS

CUSTOMS AND EXCISE – Tariffs – Omega-3 Microencapsulated Fish Oil Powder – identification - classification - edibility – preparations – irrelevance of overseas tariff rulings

Customs Tariff Act 1995 (Cth) – Sch 2: rule 1, 2(b), 3(a), 4 and Sch 3: subheadings 1504, 1518, 15.17, 1517.90 and 2106

Customs Act 1901 (Cth) – ss 167 and 273GA(2)

Re Tridon Pty Ltd and Collector of Customs (1982) 4 ALD 615; [1982] AATA 119

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

Re Chinese Food and Wine Supplies Pty Ltd v Collector of Customs (Vic) (1987) 12 ALD 313

Robert Bosch Corp v US 63 Cust Ct 96

Re Avion Engineering Pty Ltd and Collector of Customs [1988] AATA 586

Re Chemark Services Pty Ltd and Collector of Customs (1991) 24 ALD 578; [1991] AATA 67

Re Bayer Australia Ltd and Collector of Customs (NSW) (1985) 7 ALN N84

REASONS FOR DECISION

Senior Member A K Britton and Dr T Schafer

1.Pacific Resources International Pty Ltd, the applicant in these proceedings, imports into Australia “Omega-3 Microencapsulated Fish Oil Powder”, also known as “MEG-3 Powder”, an ingredient added to various food products including bread and confectionery. It is claimed that MEG-3 Powder enhances the nutritional value of the food to which it is added.  

2.Whether duty is payable on goods imported into Australia, and the amount, if any, that is payable, is determined by how the goods are classified under the Customs Tariff Act 1995 (Cth) (the Tariff Act). The respondent, the Chief Executive Officer of Customs, issued a Tariff Advice that MEG-3 Powder (the goods) be classified under subheading 1517.90 of Schedule 3 of the Tariff Act on the basis that they are “edible … preparations of animal or vegetable … oils”. As such the goods attract a general rate of duty of five percent. Pacific Resources paid duty under protest and subsequently applied to the Administrative Appeals Tribunal for review of the decision.

3.Pacific Resources argues that the goods should be classified under subheading 1504 of Schedule 3 of the Tariff Act on the basis that they are “oils … of fish”. Pacific Resources contends that while the goods have the appearance of powder they are in fact fish oil contained within a microcapsule. In the alternative, Pacific Resources contends that the goods should be classified under subheading 1518 “inedible … preparations of animal or vegetable … oils” or, subheading 2106 “Food preparations not elsewhere … included”. Goods classified under any of the three sub-headings nominated by Pacific Resources do not attract duty.

Statutory framework

4.Where, as in this case, duty is “paid under protest” under s 167 of the Customs Act 1901 (Cth) (the Act), the owner of the goods who has paid the duty under protest may apply to the Tribunal for review of the decision requiring the payment of duty: s 273GA(2) of the Act.

5.On review the Tribunal is required to determine under which of the headings in Schedule 3 of the Tariff Act the goods should be classified. The general rules for the interpretation of Schedule 3 are set out in Schedule 2 of the Tariff Act. Rule 1 states:

... classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes and, provided such headings or Notes do not otherwise require, according to the following provisions: …

6.The classification of the goods under the Act requires us to first, make objective findings as to how the goods, as imported, should be identified; and second, determine under which of the headings in Schedule 3 of the Tariff Act, the goods should be classified.

Identification of the goods: principles

7.The principles to be applied in the identification of the goods were summarised in Tridon Pty Ltd and Collector of Customs (1982) 4 ALD 615 at pp 620, 621 (citations omitted):

(i) Identification must be objective, having regard to the characteristics which the goods, on informed inspection, present ...

(ii) The identification of goods cannot be controlled by the descriptions of the goods adopted in the nomenclature of the Tariff ...

(iii) Nevertheless in identifying goods it is necessary to be aware of the structure of the nomenclature, the basis on which goods are classified and the characteristics of goods which may be relevant to the frequently complex task of classification ...

(iv) In the identification of goods, knowledge of how those who trade in the goods describe them will usually be relevant, but not necessarily conclusive ...

(v) All the descriptive terms, both specific and generic, by which the goods may fairly be identified may be relevant to the classification of the goods within the Tariff...

(vi) Descriptive terms may be of varying degrees of specificity (e.g. windscreen wiper blade refills, parts for a windscreen wiper, or parts for a motor vehicle). Generic descriptions may be by reference to the materials or substances from which the goods are manufactured ...

(vii) Identification will frequently extend to characterisation of goods by reference to their design features cf Re Vergo Manufacturing Co Pty Ltd and Collector of Customs (Vic) (1981) 3 ALN No 15 or by reference to their suitability for a particular use where those characteristics emerge from informed inspection of the goods imported ... . The extent to which those characteristics may be relevant to the ultimate classification of the goods and whether evidence of the use to which the goods are put to after importation is relevant, will depend upon the language of the Tariff Nomenclature... and

(viii) Composite goods, notwithstanding that they have components which are separately identifiable, may nevertheless be identifiable in combination as a new entity if the identity of the separate units is subordinated to the entity of the combination ... .

8.Identification is to be undertaken as a practical “wharfside task”, made by reference to the characteristics the goods present, and not by reference to the intentions of the importer or supplier: Times Consultants Pty Ltd v Collector of Customs (Qld) (1987) 16 FCR 449, at 463; see also Chinese Food and Wine Supplies Pty Ltd v Collector of Customs (Vic) (1987) 12 ALD 313.

9.In Times Consultants, the Full Court of the Federal Court said at 463:

It must always be remembered that the classification of goods for tariff purposes is a practical "wharfside" task. Upon some occasions it will be necessary for the classifier to obtain information to enable identification of the goods but it is entirely inappropriate that he or she should enter into enquiries upon matters such as cost, commercial advantage and purchaser preference which the Tribunal undertook. It 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.

How should the goods be identified?

10.The manufacturer of the goods describes the goods in these terms:

MEG-3® is manufactured using our exclusive Powder-loc technology … Its patented, double shell protector produces a free flowing dry powder with a unique molecular construction that locks in the benefits of Omega-3, and locks out even the slightest hint of fishiness.  This new powder can be easily incorporated into any production facility without the mess or smell of working with conventional fish oil products.                 

11.The goods comprise two main ingredients: refined fish oil (60%), and gelatine (30%). The goods also contain small amounts of sodium ascorbate, canola oil, tocopherols, sunflower oil and citric acid. As explained by Professor David Brynn Hibbert, Professor of Analytical Chemistry, University of New South Wales, the gelatine is used to coat the fish oil using a process of microencapsulation which involves the following steps:  

i) gelatine is mixed with water and sodium ascorbate;

ii) refined fish oil is added to create an emulsion – finely dispersed oil drops in the water;

iii) each oil drop is coated with gelatine;

iv) the mixture is cooled so that coated drops are further coagulated and coated with gelatine;

v) the microencapsules are dried and packaged.

12.According to Professor Hibbert none of these steps change the physical structure or composition of fish oil. He explained that fish oil in encapsulated form is identical to fish oil in its un-encapsulated form.

13.It is agreed that the process of microencapsulation allows the goods to be used in a wide variety of foods without the oil being released from the capsule until it reaches the consumer’s stomach. This allows the oil to be consumed without imparting the taste or smell of fish. According to Professor Hibbert, what is released in the stomach is fish oil, not fish oil which has been converted in some way.  It is agreed that the oil has not been chemically modified.

14.Professor Hibbert did not agree with the proposition that the goods could be described as “preparations of oil” and argued that the microencapsulation process “stores” rather than “prepares” the oil. 

15.Pacific Resources contends that:

·While on first inspection the goods appear to be a powder this is an appropriate case to conduct additional enquiries;

·The evidence of Professor Hibbert makes plain the goods are an oil retaining all of the qualities of oil when released from its gelatine coating;

·The addition of a small amount of other substances does not alter the fact that each microcapsule contains fish oil. 

16.In our opinion, the “wharfside” identification task in this case is relatively simple and straightforward.  No further inquiries are needed to determine that the goods look like a powder, have the consistency and texture of a powder and were described by their manufacturer as a “a free flowing dry powder with a unique molecular construction.”  Nor are further inquiries needed to discover that they are devoid of the “mess and smell” of fish oils and do not taste like fish oils. A powder, while it may be messy or smelly or both, is, by definition, not a fluid.  The goods are intended to be used in the preparation of foods as a powder so that the tiny droplets of oil contained within each powder grain will not emit their fishy characteristics until within the digestive tract.

17.An oil, on the other hand, by definition, is a liquid. Fish oil does not look like a powder, have the consistency of powder and could not with any truth or accuracy be described by its manufacturer as “a free flowing dry powder with a unique molecular construction”. Because it is a fluid, fish oil is characteristically both messy and smelly. Fish oils are generally regarded as tasting unpleasant.  Hence the desirability of a powderised form to eliminate those three obnoxious features of it.

18.The “sophisticated packaging” is not designed primarily for the purpose of storage or transport, as suggested by Pacific Resources. There are much simpler, and undoubtedly cheaper, equally effective forms of storage and transportation of fish oils than microencapsulation, if that is the intended purpose of such “packaging”. Bottles are but one ready example. That microencapsulation is not primarily intended to “package” fish oil for storage is suggested by the fact that the powder is itself packaged in containers.  The real purpose of microencapsulation is obvious from the manufacturer’s descriptions: it is a method or technology for enhancing food products by dispensing or incorporating omega-3 oils without the disadvantages of fishy tastes and smells in the end product. 

19.While the substance contained within the microcapsules is fish oil, the goods in question, taken as a whole, are more than fish oil: they are a powder of microcapsules containing fish oil and additives.  In our view, while it is true that there has been no material change to the chemical structure of each droplet of oil contained within each microcapsule, the essential characteristics of the goods as an oil (liquidity, viscosity, odour, taste) have not been preserved and have been altered in more than an incidental way for the purposes discussed above: see generally Robert Bosch Corp v US 63 Cust Ct 96 at 103-104; Avion Engineering Pty Ltd and Collector of Customs [1988] AATA 586 at [18].

How should the goods be classified?

20.Having decided how the goods should be identified, we must determine under which of the subheadings in Schedule 3 the goods should be classified.

21.If heading 1504 (fats and oils of fish) is eliminated as a possible category as the goods are not oils, they are arguably 1517 (edible preparations of animal oils) or 1518 (inedible preparations of animal oils) or 2106 (food preparations not elsewhere specified). Pacific Resources contends that if heading 1504 is not applied, the goods should be classified under headings 1518 or 2106.  The respondent contends that the goods ought to be classified under heading 1517.

22.Pacific Resources contends that the goods are inedible.  We disagree. Pacific Resources also contends that the goods are not a “preparation”.  We also disagree with that proposition.  In our view, therefore, the correct heading is 1517.

Are the goods edible?

23.“Edible”, in our opinion, means “fit for human consumption as a food or an ingredient of a food”. Something “inedible” is something that cannot be eaten, either because it is dangerous to health or so repulsive it cannot be consumed as a food in itself or as an ingredient of a food compounded of various ingredients.  An inedible food or ingredient of food is an oxymoron.

24.It is common ground that the goods are designed to be used as an ingredient in food and not to be consumed directly. It is also agreed that the goods are not poisonous. Professor Hibbert and the General Manager of Pacific Resources have tasted the goods. The General Manager described the goods as having a bland and then a fishy taste. He said he would not eat the good directly. Each described the goods as having an unpleasant taste. In their opinion the goods were not fit to be eaten as a food.This, however, is not conclusive nor is it a matter for expert evidence.  We accept the opinions of Professor Hibbert and the General Manager as lay opinions. 

25.The respondent observes that the goods are predominately composed from two main ingredients, food grade gelatine and food grade fish oil, both of which are suitable for human consumption and are themselves edible.  The respondent also points out that fish oil and capsules of fish oil are sold in Australia for direct consumption and that there are many substances, for example flour and pepper, not designed to be eaten “straight” but are nonetheless edible.  Many of the ingredients of a cake (butter, sugar, flour, salt, baking soda, etc) are rarely eaten straight yet it would warp the language to argue that such ingredients are inedible only on the basis that, taken alone, they are unpleasant or would not be eaten by themselves as foods.  Mere unpleasantness, when taken alone, does not disqualify these goods from edibility.

Are the goods “preparations”?

26.As we noted above, it was argued for Pacific Resources that the goods are not preparations but had simply been subjected to a “sophisticated form of packaging” and we have rejected that submission.  In our view, there is no question that the goods are “preparations”.  A “preparation” is “something prepared, manufactured or compounded”: Chemark Services Pty Ltd and Collector of Customs (1991) 24 ALD 578 at [12]. See also Macquarie Dictionary (1^st edition).  In Bayer Australia Ltd and Collector of Customs (NSW) (1985) 7 ALN N84 the Tribunal said, inter alia, “the expression is not in our opinion apt to cover a product of an intermediate nature not presented in a form ready to be marketed”.  This was cited with approval in Chemark at [12]. This suggests that if goods are ready for market and have undergone a process of manufacturing or compounding they may be regarded as “preparations”.

27.In our view, if goods are put through a process involving microencapsulation of tiny droplets of oil in gelatine plus the addition of other chemicals for various purposes, as a result of which fish oil is converted, in effect, to a powder, they have been “prepared, manufactured or compounded” and are thus, in our view, a “preparation”.

Overseas tariff rulings

28.It is obviously desirable, if appropriate, for trading countries to harmonise their classifications of goods for tariff purposes.  This simplifies international trade for manufacturers, exporters and importers.  Nevertheless, uniformity of approach is not always possible or desirable.  As Pacific Resources notes, the USA and UK have taken different classification approaches to goods of this type.  The USA has classified the goods within the 1517 heading whereas the UK applies the 1504 heading.  These rulings are unhelpful and irrelevant to our considerations.

Conclusion

29.In summary, we find that the goods are a preparation of animal oils and therefore should be classified under heading 1517 of Schedule 3 of the Tariff Act. Accordingly the decision under review must be affirmed.

I certify that the 29 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member A K Britton and Dr T Schafer.  

Signed:         ........................[sgd]..........................
  Associate to Senior Member Britton

Dates of Hearing  23 March 2011
Date of Decision  2 May 2011
Solicitor for the Applicant          Mr T Greenwood
Solicitor for the Respondent     Mr R Northcote