Woolworths Group Limited and Comptroller-General of Customs - [2019] AATA 62

Woolworths Group Limited and Comptroller-General of Customs [2019] AATA 62 (23 January 2019)
Division:GENERAL DIVISION
File Number(s): 2017/5806
Re:Woolworths Group Limited
APPLICANT

AndComptroller-General of Customs
RESPONDENT

DECISION
Tribunal:Deputy President Bernard J McCabe
Date:23 January 2019
Place:Sydney

The decision under review is set aside. In substitution, the Tribunal decides the goods should be classified under sub-heading 2206.00.30 in Schedule 3 to the Customs Tariff Act 1995.
............................[SGD]............................................
Deputy President Bernard J McCabe
CATCHWORDS
CUSTOMS AND EXISE - classification of goods - cider - definition of cider - whether caramelisation changes apple juice into something different - decision set aside and substituted
LEGISLATION
A New Tax System (Wine Equalisation Tax) Act 1999 s 31
Customs Act 1901
Customs Tariff Act 1995 ss 6, 7, sch 3, sch 3,
CASES
Chief Executive Officer of Customs v ICB Medical Distributors [2007] FCA 1538
Chinese Food and Wine Supplies Pty Ltd v Collector of Customs (Victoria) (1987) 72 ALR 591
Divas Beverages Holdings Ltd v Commissioner of Taxation [2018] FCA 576
Times Consultants Pty Ltd v Collector of Customs (QLD) (1987) 16 FCR 449
SECONDARY MATERIALS
Cooks Illustrated, Caramelizing vs. Browning (online) (November 2009)
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Science of Cooking, What is Caramelization? (online) (undated)
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REASONS FOR DECISION
Deputy President Bernard J McCabe
23 January 2019

This is a case about cider – specifically, how a particular brand of cider imported into Australia should be classified for tariff purposes. Woolworths Limited, the importer, says Savanna Dry alcoholic cider should be classified under tariff sub-heading 2206.00.30 which means the goods can be imported duty-free. The respondent disagrees. While it does not dispute that the goods are properly described as ‘cider’, it says the cider in question does not conform to the definition of ‘cider’ in Additional Note 5 to Chapter 22 of Schedule 3 of the Customs Tariff Act 1995 (the Tariff Act). If the respondent is right, Woolworths is required to pay duty on the product. Woolworths has paid the duty under protest but it wants that money back.
The outcome of the dispute turns on my analysis of the caramelised apple juice concentrate that is added to the fermented apple juice concentrate during the manufacturing process. The caramelised concentrate is added to enhance the colour and taste of the finished product. The respondent says this additive has the effect of taking the product outside of the definition of ‘cider’ in Additional Note 5 which is the key to tariff sub-heading 2206.00.30 and the nil rate of duty.
I am satisfied the product conforms to the definition of cider in Additional Note 5. That means the decision should be set aside. I explain my reasons below.
THE BACKGROUND
Woolworths operates a major supermarket chain and liquor outlets. It imports and retails alcoholic cider products including Savanna Dry brand alcoholic cider. Savanna Dry is imported in 330ml glass bottles that are ready for individual use by consumers.
Savanna Dry cider is produced by Distell, a South African company. The manufacturer says (exhibit one at p 25) the ingredients are:
High Gravity Apple Cider (fermented apple juice @ 6.4% Alc)
Water
Sugar
Apple Juice concentrate
Citric Acid
Caramelized Apple Juice concentrate (for colour purposes)
Sulphur Dioxide as Preservative
Carbon Dioxide added during bottling process
The manufacturer said the caramelised apple juice concentrate was added to the fermented apple juice at an early point in the process before filtration, chilling, pasteurisation and bottling: exhibit one at p 26. Distell obtained the caramelised apple juice concentrate from another company, DD Williamson (UK) Ltd (DDW). DDW marketed the caramelised juice concentrate under the brand name DDW NaturBrown Apple – Liquid 811 (NaturBrown). DDW sells NaturBrown all over the world. DDW describes the product in its promotional material as “100% Cooked Apple Juice Concentrate”: exhibit one at p 28. DDW says the product does not contain any caramel colouring: exhibit one at p 30. The product is comprised of 75-85% apple juice concentrate and 15-25% water: exhibit one at p 29. DDW says its product is an alternative to artificial caramel colour and flavouring: exhibit one at p 31.
The basics of the caramelisation process are familiar to almost any amateur chef. Caramelisation involves the application of heat to a product that contains sugar. The sugar in the concentrated apple juice (or the onions, carrots or any other product containing sugar that is amenable to this process) oxidises or reacts when heat is applied. It results in a distinctive brownish colour and a more intense, delicious taste.
The respondent says a caramelised product like NaturBrown is different to the unheated raw product. In other words, the respondent says the apple juice concentrate is transformed through the process of caramelisation into something else. That understanding of the caramelisation process and its consequences has implications for tariff classification, the respondent argues. To see why, one must understand the details of the legislative scheme.
THE TARIFF CLASSIFICATION PROCESS
Many imported products are subject to duty assessed under the Customs Act 1901. The duty payable in each case is calculated with reference to the criteria set out in the Tariff Act. Those criteria are detailed and the classification of goods for tariff purposes occasionally requires fine – in some cases, bizarrely fine – distinctions. But they are distinctions with real implications. The precise classification of the goods will determine whether duty is payable, and at what rate. That determination has financial consequences for importers who pay the duty at first instance when the goods are entered for home consumption. It also has consequences for consumers who must ultimately bear the cost of tariffs.
Section 6 of the Tariff Act requires that goods be classified under a heading or sub-heading. Each of the headings and sub-headings has a rate of duty attached. Schedule 3 to the Tariff Act sets out the classification criteria applicable to each heading and sub-heading. Chapter 22 of Schedule 3 deals with beverages, spirits and vinegar. Section 7(1) of the Tariff Act notes that the criteria in Schedule 3 must be interpreted using the Interpretation Rules. Those rules are derived from the International Convention on the Harmonized Commodity Description and Coding System. The Interpretation Rules are set out in Schedule 2.
The parties agree the relevant heading is No 2206. The heading reads:
OTHER FERMENTED BEVERAGES (FOR EXAMPLE, CIDER, PERRY, MEAD, SAKÉ); MIXTURES OF FERMENTED BEVERAGES AND MIXTURES OF FERMENTED BEVERAGES AND NON-ALCOHOLIC BEVERAGES, NOT ELSEWHERE SPECIFIED OR INCLUDED: …
There are then a number of sub-headings. Sub-heading 2206.00.30 is relevant. That sub-heading applies to:
…c. cider or perry as defined in Additional Note 5 to this Chapter;…
The Interpretation Rules incorporate additional notes into the definition. Additional Note 5 says that, for the purposes of 2206.00.30, the expression ‘cider or perry’ is a beverage that::
(a)has an alcoholic strength by volume exceeding 1.15% vol; and
(b)is the product of the complete or partial fermentation of the juice or must of apples or pears; and
(c)has not had added to it, at any time, any ethyl alcohol from any other source; and
(d)has not had added to it, at any time, any liquor or substance (other than water or the juice or must of apples or pears) that gives colour or flavour.
In this case, the parties agree Savanna Dry alcoholic cider satisfies (a), (b) and (c) of Additional Note 5. The dispute is in relation to (d). In particular, the parties disagree over whether NaturBrown qualifies as ‘the juice or must of apples’. The respondent says the additive has been transformed through the caramelisation process into another substance that gives colour or flavour.
I will shortly return to a discussion of the evidence describing the production of NaturBrown and its addition to the goods in question. I pause only to note the decision-maker must approach the classification process on the basis it is a ‘practical wharfside task’: see, for example, Times Consultants Pty Ltd v Collector of Customs (Qld) (1987) 16 FCR 449 at 463 per Morling and Wilcox JJ; see also Chinese Food and Wine Supplies Pty Ltd v Collector of Customs (Victoria) (1987) 72 ALR 591 at 599 per Lockhart J. That process focuses on the objective characteristics of the goods in question rather than on the intentions of the importer or manufacturer. It requires a common-sense approach: see, for example, Chief Executive Officer of Customs v ICB Medical Distributors [2007] FCA 1538 at [5] per Rares J.
HOW SHOULD THE GOODS BE CLASSIFIED?
The decision-maker in this case relied on an American publication titled “Cooks Illustrated” (2009) when it made the reviewable decision: exhibit one at p 226. That publication described the process of caramelisation as follows:
Caramelization describes the chemical reactions that take place when any sugar is heated to the point that its molecules begin to break apart and generate hundreds of new flavor, color, and aroma compounds. Consider crème brûlée—after being exposed to high heat, the sugar atop the custard turns golden brown with rich, complex caramelized flavors. (A similar process takes place when you cook onions, carrots, apples, or any other high-sugar fruit or vegetable—the food’s sugars caramelize once most of the moisture has evaporated.)
The reviewable decision also referred to an article titled “What is Caramelization?” published in The Science of Cooking which says:
Caramelization is a type of non-enzymatic browning reaction. As the process occurs, volatile chemicals are released producing the characteristic caramel flavor. The reaction involves the removal of water (as steam) and the break down of the sugar. The caramelization reaction depends on the type of sugar. Sucrose and glucose caramelize around 160C (320F) and fructose caramelizes at 110C (230F).
The respondent’s essential point is that caramelisation involves a chemical change that transforms the product from concentrated apple juice into something different and new which can be used to provide colour and flavour.
Mr Northcote, who appeared for the respondent, did not dispute that NaturBrown was derived from apples. But he said that was not enough to satisfy the definition in Additional Note 5. He says NaturBrown must actually be apple juice (or the must of apples) within the ordinary meaning of that term. He said it is not. He argued NaturBrown is a caramel flavour that should be compared with commercial caramel colorants derived from sugars. He pointed out that if NaturBrown were to be imported into Australia as a product, it would almost certainly be classified under heading 1702 which deals with “other sugars….[including] caramel.” He argued NaturBrown would not be classified as a fruit juice under the heading which deals with fruit juices (and which includes a sub-heading for ‘apple juice’).
The applicant relied on the evidence of an expert food technologist, Dr Simon Brooke-Taylor. Dr Brooke-Taylor provided two reports (exhibits 2 and 3) and gave evidence at the hearing. Dr Brooke-Taylor explained the caramelisation process involved heating the concentrate so that some of the water content evaporated and some (but not all) of the remaining sugars oxidised. He pointed out in his oral evidence that the respondent’s analysis assumed most or all of the water content was evaporated off during the caramelisation process. Dr Brooke-Taylor said that understanding was incorrect. While he agreed the concentrate would be heated for longer (and perhaps at a higher temperature) than it would be if one was merely seeking to achieve greater concentration, the heating process was otherwise unremarkable and the outcome was simply more concentrated juice. Dr Brooke-Taylor added one need only add water to the (cooked and more concentrated) liquid that remained after caramelisation to produce apple juice which could be consumed or sold as such – albeit that it would be more delicious as a consequence of the caramelisation process.
Dr Brooke-Taylor explained in cross-examination that the oxidisation achieved through the caramelisation process did not effect a radical transformation of the product. He said oxidisation was an ongoing process that commenced as soon as the picked apples were exposed to the air, and which continued throughout the manufacturing process. The application of heat might accelerate oxidisation but he pointed out that heat was applied whenever a juice manufacturer was producing concentrate or pasteurising the finished product. He suggested that if one took the respondent’s approach to its logical conclusion, any manufacturing process (particularly one that involved concentration or pasteurisation) would change the juice into something else. He went on to explain that even though the oxidisation process involved the breakdown of the sugars and the production of new compounds, they were still polymers of sugar found within apple juice concentrate, whether caramelised or not: transcript at p 30.
The applicant also referred me to a recent decision of the Federal Court in Divas Beverages Holdings Ltd v Commissioner of Taxation [2018] FCA 576. In that case, the applicant imported grape spirit which it proposed adding to a drink it was manufacturing in order to fortify the alcoholic content of that beverage. The importer was seeking an approval that would allow it to avoid paying duty on the grape spirit. To be eligible, the importer had to establish the spirit was being used to fortify an Australian ‘wine’, which was defined to include ‘grape wine’ and ‘grape wine product’: s 31 of the A New Tax System (Wine Equalisation Tax) Act 1999 (the WET Act).
I am not sure the reasoning in Divas assists me, if only because the definition of ‘grape wine’ in s 31-2(1) of the WET Act uses the word ‘derived’, whereas – as Mr Northcote pointed out in this case – the definition in Additional Note 5 does not refer to products derived from apple juice or must but appears to contemplate that the goods must actually be apple juice or must.
I accept NaturBrown would not be classified as apple juice if it were to be imported as a separate item, but I do not think that resolves the question. I am required to classify bottles of Savanna Dry brand alcoholic cider. I am not focusing on how NaturBrown should be classified if it were being imported. I have to make a common sense determination about classification of the cider product and that requires me to reach a view as to whether NaturBrown has been transformed into an additive that is something other than juice or the must of juice.
I am satisfied from the evidence provided by Dr Brooke-Taylor that NaturBrown is ultimately ‘juice or the must of apples’ for present purposes. Dr Brooke-Taylor explained that caramelisation involves oxidisation, and that oxidisation occurs throughout the manufacturing process in a variety of ways. While it is true that heating the sugars increases the rate of oxidisation which enhances the impact on taste and colour, the application of heat occurs at several points in the manufacturing process: most obviously when the juice is pasteurised, but also when it is first concentrated. NaturBrown, the additive, is apple juice concentrate that has been subject to a more intensive oxidisation process. Nothing has been added; it is ultimately the same thing as the juice concentrate to which it is added. That is obvious in circumstances where Dr Brooke-Taylor said the caramelised product could still be sold as juice if it were reconstituted by simply adding water. A common sense approach suggests NaturBrown is just concentrated apple juice which can be readily reconstituted. It has not been transformed into something else; it has just been made more delicious.
CONCLUSION
The decision under review must be set aside. I decide in substitution that the goods should be classified under sub-heading 2206.00.30 in Schedule 3 to the Customs Tariff Act 1995.

I certify that the preceding 26 (twenty -six) paragraphs are a true copy of the reasons for the decision herein of Deputy President Bernard J McCabe

............................[SGD]............................................
Associate
Dated: 23 January 2019

Date(s) of hearing: 1 June 2018

Solicitors for the Applicant: Gross & Becroft Lawyers

Solicitors for the Respondent: Department of Home Affairs

Date(s) of hearing:	1 June 2018
Solicitors for the Applicant:	Gross & Becroft Lawyers
Solicitors for the Respondent:	Department of Home Affairs