Chief Executive of New Zealand Customs Service v Country Road Clothing (NZ) Ltd
[2024] NZHC 1696
•25 June 2024
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2023-404-327
[2024] NZHC 1696
BETWEEN CHIEF EXECUTIVE OF NEW ZEALAND CUSTOMS SERVICE
AppellantAND
COUNTRY ROAD CLOTHING (NZ) LTD
Respondent
Hearing: 24 August 2023 Appearances:
P Courtney and L Worthing for Appellant R Geldenhuys for Respondent
Judgment:
25 June 2024
JUDGMENT OF BECROFT J
This judgment was delivered by me on 25 June 2024 at 4pm pursuant to r 11.5 of the High Court Rules 2016.
Registrar/Deputy Registrar
……………………………………
Solicitors/Counsel: Crown Law, Wellington R Geldenhuys, Auckland
CHIEF EXECUTIVE OF NEW ZEALAND CUSTOMS SERVICE v COUNTRY ROAD CLOTHING (NZ) LTD [2024] NZHC 1696 [25 June 2024]
What is this appeal about?
[1] Benjamin Franklin famously observed that nothing in life is certain, except for death and taxes. But in this case, taxes (in the form of customs duties) are anything but certain. Who would have thought that the correct calculation of customs duties could be both hotly disputed and interesting? And as this case shows, the correct calculation of customs duties levied on all imported goods sold in New Zealand is of relevance to all of us who buy them.
[2] Country Road New Zealand (CRNZ) is a well-known and wholly owned subsidiary of Country Road Clothing Pty Ltd (CRAU)—an Australian company. CRNZ operates retail stores in New Zealand. They primarily sell clothing and some homeware. The goods sold in CRNZ’s stores are imported from CRAU.
[3] CRNZ, like other importers, is required to self-assess its customs duties based on the price paid or payable for the imported goods. In this case, the Chief Executive of the New Zealand Customs Service (Customs) disagreed with the assessment made by CRNZ and issued its own re-assessment. CRNZ appealed to the Customs Appeal Authority. The question for the Authority was a little complicated. I summarise it briefly.
[4] Customs maintained, and still maintains, that in calculating the customs value of the imported goods, the price paid or payable for those goods should include the licensing and royalty payments that CRNZ makes to CRAU in respect of valuable intellectual property. Customs says that those royalties are for intellectual property rights that are attached to and incorporated with those goods. This intellectual property seems to relate mainly to the “how to” of selling the goods and includes techniques such as shop layout, design, and shop marketing.
[5] Customs is of the view that the “true cost” of the goods must include those royalties. Without the goods being imported and subsequently sold by CRNZ, there would be no reason for CRAU to provide CRNZ with the post-importation support that constitutes the licensing and royalties; and therefore, no profit upon which the amount paid is calculated.
[6] CRNZ maintains that the payments are an “arm’s-length” royalty paid to CRAU for the complete and comprehensive bundle of intellectual property it supplies, governing every aspect of CRNZ’s retail operations. This is for post-import support. Accordingly, the royalties are not for the goods it imports, nor are they sufficiently related to the proceeds of sale returned to the parent company. Customs duty is therefore not payable on these royalties.
[7] The Authority held CRNZ had correctly assessed the customs duties payable on those goods.1 Customs disagreed, and now appeals to this Court.
[8] The key issue remains the same: whether the “price paid or payable” by CRNZ for the imported goods should include the licensing and royalty payment?
[9] As this is a general appeal,2 I must reach my own view on the merits of the appeal.3
[10] I conclude this introduction by emphasising that this is not a new issue. Three Court of Appeal cases have looked at this general issue—all decided in favour of Customs. Customs argues that the Authority has misdirected itself by failing to follow these three cases. It suggests this is a very simple case and that the doctrine of stare decisis applies.
[11] On the other hand, CRNZ argues the specific facts of this case differentiate it from the previous Court of Appeal cases. CRNZ maintains that because of the crucial factual differences in this case, whereby the licensing and royalties relate not to the goods, but to the process of selling the goods, the Authority was correct. Its decision should be regarded a “one-off” based purely on the facts of this case.
[12] Counsel accept this is a difficult question—right on the cusp of what is to be included in the price paid or payable for imported goods. Indeed, counsel helpfully observed that they did not envy me in my decision-making task.
1 Country Road Clothing Ltd v Chief Executive of the New Zealand Customs Service [2021] NZCAA 07/19.
2 Chief Executive of the New Zealand Customs Service v DB Breweries Ltd [2016] NZHC 2181 at [19].
3 Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141 at [4]–[5].
How does the law require the customs value of goods to be calculated?
[13] The Tariff Act 1988 imposes duties on goods imported into New Zealand. The value of imported goods is the customs value of those goods.4 At the relevant time, “customs value” was to be determined in accordance with the provisions set out in sch 2 of the Customs and Excise Act 1996.5 The apparent purpose of that schedule is to establish the “true cost of the goods to the importer at the time they cross the border”.6
[14] CRNZ is classified as an importer under the Customs and Exercise Act 1996 and is registered with Customs. It is required to declare in its import entries the customs value of the goods it imports into New Zealand. It must then pay duties in accordance with the relevant legislation. Both parties agree that the appropriate method for CRNZ to use in calculating the customs value of the goods is the transaction value method under sch 2 of the Act.
[15]Clause 3 of sch 2 relevantly provides:
(1)In determining the transaction value of goods under clause 2, the price paid or payable for the goods shall be adjusted –
(a)by adding thereto amounts, to the extent that each such amount is not otherwise included in the price paid or payable for the goods and is determined on the basis of sufficient information, equal to –
…
(iv)royalties and licence fees, including payments for patents, trademarks, and copyrights in respect of the imported goods that the buyer must pay, directly or indirectly, as a condition of the sale of the goods for export to New Zealand, exclusive of charges for the right to reproduce the imported goods in New Zealand; and
(v)the value of any part of the proceeds of any subsequent resale, disposal, or use of the goods by the buyer that accrues or is to accrue, directly or indirectly, to the seller; …
4 Tariff Act 1988, s 5.
5 Tariff Act, s 2.
6 Collector of Customs v Avon Cosmetics Limited (2000) 1 NZCC 61,143 (CA) at [20]; and Adidas NZ Ltd v Collector of Customs (Northern Region) [1999] 1 NZLR 558 (CA) at 564 per Henry J.
What is the commercial arrangement between CRNZ and CRAU and how did CRNZ calculate its customs duty?
[16] This proceeding relates to the period between 11 May 2015 and 30 June 2018. During that time, the arrangements under which CRAU supplied goods and services to CRNZ, were relatively informal and are set out in a 1997 “Management Services Agreement”.7
[17] The evidence identifies three categories of payments that CRNZ makes to CRAU:
(a)The sale price CRNZ pays CRAU is based on a “free on board cost” which represents the cost of the goods for CRAU. That cost includes the costs of the materials, manufacturing, sampling, foreign exchange, and commissions. A 10 to 15 per cent loading is also applied to compensate CRAU for design, sourcing, and distribution costs.8
(b)Licensing and royalty payments for intellectual property.
(c)Payments for administrative services.
[18] This judgment will refer to the payment contained in (a) as the “loaded sale price”, and the payment contained in (b) as the “licensing/royalty payment”.
[19]The licensing/royalty payment is calculated using a two-step process:
(a)no royalty is payable if CRNZ’s net profit is the equivalent of a routine return or less;9 and
7 In the agreed summary of facts, it is noted that CRNZ has advised the respondent that, during the period in question, there was no formal signed written agreement between CRAU and CRNZ regarding the royalty fees. However, it is accepted that a binding agreement did exist between the two evidenced by their historic conduct in relation to the determination and calculation of the licensing and royalty payment.
8 This payment is explained in the affidavit of Ms Bronwyn Gorr dated 2 March 2021 at [26]. This pricing is tested annually for income taxation transfer pricing purposes, to determine whether the price charged by CRAU for the products represents arms-length pricing.
9 Which is equivalent to a five per cent return on sales (the return on sales, which is calculated as net profit divided by net sales) or less (the routine return).
(b)if CRNZ’s net profit exceeds the routine return, 75 per cent of that excess is paid to CRAU as the royalty payment.
[20] In the period between January 2014 and June 2018, CRNZ paid CRAU more than $20 million in licensing/royalty payments. CRNZ did not believe it was required to pay customs duties on that amount.
[21] On 10 May 2019, Customs notified CRNZ that it was issuing an amended assessment of CRNZ’s payable customs duties. Customs had taken the view that the value of the goods declared by CRNZ was incorrectly calculated and was not consistent with cl 3(1) of sch 2. Customs adopted the view that the transaction value of the goods should be adjusted to include the licensing/royalty payment.
[22] Customs quantified the duty short paid as being $2,499,972.43, which consisted of $774,483.79 in customs duties and $1,725,488.67 in GST. CRNZ paid that amount by the due date, and it is currently held in the Customs trust account pending the determination of this appeal.
The decision of the Customs Appeal Authority
[23] In its detailed decision, the Authority accepted that the customs value of goods must reflect the true value of those goods including their intangible value. To make that determination the Authority decided it was necessary to consider the categories of payments that CRNZ is required to make to CRAU, and the way those payments are quantified. Then it could determine which of the payments that CRNZ was required to make (to CRAU) should be included in the customs value of the goods.
[24] On the basis of the evidence before it, the Authority found that the price paid by CRNZ to CRAU for the goods themselves was set by a transfer pricing regime. This was to ensure that both parties complied with the relevant legal obligations to calculate and pay for value received from another group member at arm’s-length. Annual “transfer pricing reports” for the period in question, and produced in evidence, were prepared by PWC Australia. The conclusion in the reports was that the product sale prices (between CRNZ and CRAU) were in the arm’s-length range.
[25] Ms Gorr, the Australian General Taxation Manager for CRAU, gave evidence that the price paid for the imported goods included the cost of the goods, duties, commission payments, freight, and sampling, and a 10 to 15 per cent loading for design, sourcing, and distribution—that included the use of CRAU’s intellectual property such as trademarks. The Authority accepted that evidence, and concluded:10
On this evidence I must conclude that there are certainly design elements that are incorporated into the garments. However, they are created by services which are included in the price paid by the Appellant for the imported goods, with a margin added. Certainly, I have been unable to find on the evidence that there is any underpayment for the goods. That is the apparent intention of the pricing methodology, by taking all the identifiable costs that are incorporated into the inherent and intrinsic qualities of the goods; and there is a margin and allowance for profit for the parent company added. The evidence is that the cost is as close to arm's-length as possible (within a transfer pricing regime).
[26] Had the evidence revealed that the royalty payments reflected part of the value of the goods at the border, or were adjusted due to value considerations, then the Authority would have reached a different result. It would have concluded that the price paid for the goods was not the full value and it must be adjusted by the licensing/royalty payments.
[27] The Authority noted that if Customs had grounds to think that CRNZ and CRAU had reduced the CRNZ’s costs by undervaluing stock, then the statutory mechanisms should operate to address that situation. However, the evidence showed that substantial value was contributed by CRAU towards CRNZ’s profitability in the form of commercial strategy information and retail services—after the goods’ importation.
[28] The Authority found that no component of the goods’ value was incorporated into the licensing/royalty payments. This was because the value of those royalty payments had “no quantifiable nexus with the cost or value of the imported goods.”11 It concluded:12
10 At [48].
11 At [48].
12 At [49].
The quantification is a profit sharing formula, and the intention of the parent company and the appellant has been to share profits based on profitability. In a contemporary branded retail chain selling what are readily substitutable goods, the evidence is clear a critical driver of profitability is the retail system (in this case physical premises), the marketing techniques in the facilities, and the integration with brand and wider brand recognition and brand level marketing. It is unsurprising that the parent company and the appellant would choose to share profitability (to the extent the transfer pricing rules allow) based on profitability for which this factor is a key element.
[29] Accordingly, the customs value of the goods had been correctly calculated by CRNZ. Put another way, although these are not the words of the Authority, the licensing/royalty payments were a form of post importation profit sharing, unconnected to the true value of the goods and hence free from customs duties.
The three grounds of appeal
[30] Customs appeals on the basis that the Authority erred in determining that CRNZ had correctly assessed the customs duties due and payable on the goods it had imported and sold in New Zealand.
[31]In particular, the appellant says the Authority made the following errors of law:
(a)It erred by not accepting that it was bound by existing Court of Appeal authority that had already determined materially similar issues. Namely, that under cl 3(1)(a)(iv) of sch 2 of the Act, royalties paid directly to an overseas company, as a condition of the sale of the goods for export to New Zealand, must be included in the price paid for the goods used for calculating their customs value.
(b)It also erred in calculating the value of the imported goods for the purpose of cl 3(1)(a)(iv) using a transfer pricing analysis. That analysis determines whether the sale of the goods from CRAU to CRNZ was at arms-length (for tax purposes) and it should not be used to determine the value of the imported goods for the purpose of calculating customs duties.
(c)Alternatively, the test in cl 3 (1)(a)(v) covered what the Authority found was “profit sharing”. On its plain wording, that clause applies to the value of any part of the proceeds of any subsequent resale of the goods imported by CRNZ that was (here) paid directly to CRAU.
Why Customs believes the customs duty was incorrectly calculated
[32] The argument by Customs, as I understand it, rests on two central propositions. First, the licensing/royalty payments must be regarded as payments “… in respect of the imported goods” (as is provided in cl (3)(1)(a)(iv)) and, contrary to the finding of the Authority, are sufficiently connected to them. They cannot be compartmentalised as relating only to post import sales “know how” and strategies, unrelated to the goods themselves. On a proper analysis, the intellectual property, in part at least, is intrinsically tied up with and related to the goods and is not just confined to the sales process.
[33] Second, Customs submits that under cl 3(1)(a)(iv) the licensing/royalties paid directly or indirectly by CRNZ are paid “… as a condition of the sale of the goods for export to New Zealand”, and therefore must be included in the price paid for the goods in calculating their customs value. Customs argues that the facts of this case are not distinguishable from those in Collector of Customs v Avon Cosmetics Ltd where the Court of Appeal held that the royalties in question covered know-how. The total control CRAU exerts over CRNZ is also critical. CRAU has control over all aspects of the products imported; the processes covering how the goods are sold in New Zealand; and the trademarks incorporated within the products. CRNZ simply could not acquire the tangible goods without the intangibles. Therefore, the licensing/royalties paid to CRAU must constitute a condition of the sale of the goods for export to New Zealand. It does not matter that the amount of the royalties payable cannot be finally determined until after CRNZ has sold the goods.
[34] Customs submits that the Authority failed to apply settled law which has already decided materially similar issues (as contained in Adidas New Zealand Ltd v Collector of Customs and Avon).
[35] In particular, the Authority misinterpreted the Court of Appeal judgments in Adidas and Avon as holding that the purpose and effect of the wording in the regime is to set the true “market price” or “market value” at the border. Customs contends that is incorrect. The Court of Appeal in Adidas and Avon expressed that the intention of the provisions is to ascertain “the true cost of the goods to the importer”. Market price or market value was not a consideration. It should be noted also that in the customs context “cost” does not refer to the production cost of the goods. Rather, the true “cost” of the goods to the importer is, as specified in the Act, the price paid or payable for the goods together with the various adjustments which need to be made to arrive at the amount that is the Customs value.
[36] As a consequence of misinterpreting the Court of Appeal judgments, the Authority failed to turn its mind to the critical issue, namely whether the tangible goods could have been purchased for the purpose of resale without incurring a liability to pay the licensing/royalties when the product was sold.
[37] Customs also submits that the Authority erred in relying on the transfer pricing method to determine the value of the goods. In applying that test, the Authority arrived at the irrelevant conclusion that the cost of the goods was at arm’s-length. The issue it should have turned its mind to was, what is the true value of the goods to the importer?
[38] If the Court is not minded to find that the royalty payment is caught by cl 3(1)(a)(iv), then Customs alternatively submits that on the findings of the Authority that the licensing/royalty transactions are a form of profit-sharing, they are clearly caught by cl 3(1)(a)(v).
[39] On its plain wording, that clause applies to “the value of any part of the proceeds of any subsequent resale of the goods imported by the buyer [CRNZ] that was paid directly to the seller [CRAU]”.
[40] Customs is of the firm view that if the Authority’s decision is allowed to stand, it will provide an easy means for importers to avoid significant sums of customs duties. This will defeat the purpose of the Act.
CRNZ’s view
[41] CRNZ maintains that its duty assessment and the decision of the Customs Appeal Authority are correct. Mr Geldenhuys, counsel for CRNZ, presented his argument carefully and attractively.
[42] CRNZ says that the loaded sale price it paid for the imported goods already included an arm’s length amount for the right to use the Country Road trademark and other intellectual property on and in the goods.
[43] It characterises the licensing/royalties it paid to CRAU as being in respect of a comprehensive “retail formula” that includes know-how, trade secrets, confidential information, copyright in artistic works and marketing content. It says that this retail formula is used in the store layout, and it provides the retail experience that CRNZ needed to operate a leading retail business in New Zealand. On any analysis, Mr Geldenhuys argues that those intellectual property services are not “in respect of the imported goods”, or at least they are insufficiently connected to them.
[44] Specifically, Mr Geldenhuys submits that the licensing/royalties were paid in respect of the retail formula. They were not paid in respect of the imported goods, nor were they paid “in respect of” or “as a condition of the sale of the goods for export to New Zealand” or “any part of the proceeds of any subsequent resale … of the goods”. He says that the true purpose of the licensing/royalty payment is to provide CRNZ the ability to provide its clients with a very specific retail experience. It is that retail experience that drives the profitability of CRNZ’s business. Consequently, CRAU has structured its arrangement with CRNZ so that it can share in the profit it has helped create.
[45] Mr Geldenhuys submits that the Authority correctly applied the legal tests set out by the Court of Appeal in Adidas, Avon, and Chief Executive of the New Zealand Customs Service v Nike New Zealand Limited. CRNZ’s position is that those decisions are all distinguishable on the facts of this case. That is because the price paid for the imported goods in those cases were for goods imprinted with the intellectual property that was the subject matter of the royalty payment (being the trademarks and design elements). No other intellectual property was included. Essentially, the respondent
says that the three Court of Appeal cases can be distinguished because the nature of the royalty payment is different in this case. Mr Geldenhuys characterises the royalty in this case as being for a sophisticated retail formula—a form of profit-sharing, and not for the right to distribute and sell the products imprinted with the licensor’s intellectual property (as it was in Adidas, Avon, and Nike).
The key issue
[46] At the hearing it became clear that the key issue in this case is whether the principles established by the three Court of Appeal authorities capture the facts of this case. If they do, then the licensing/royalty payments should be included in the adjustment of the price paid for the goods so that the customs value reflects them.
[47] Accordingly, it will be useful to summarise the decisions in each of the Court of Appeal cases before engaging with the question of whether the current case can be distinguished on its facts. I note that all the three cases have quite complicated facts which I set out as best I can. Only then can the Court’s approach be understood.
The Court of Appeal trilogy
Adidas New Zealand Ltd v Collector of Customs
[48]Adidas NZ is a wholly owned subsidiary of adidas AG.
[49] Under a licensing agreement, adidas NZ was entitled to the exclusive right to use trademarks, patents, know-how and technical data for the manufacture of branded products in or outside New Zealand and the sale and distribution of those products in New Zealand. The agreement required adidas NZ to pay a royalty on the annual net sales of licensed products.
[50] The licence agreement also allowed adidas NZ to use different suppliers to existing adidas AG suppliers, if those were of better price, quality, capability, and delivery. Accordingly, adidas NZ engaged adidas Asia-Pacific in Hong Kong for manufacturing footwear. There were no import sales transactions between adidas Asia-Pacific and adidas NZ. Their agreement imposed no obligation upon adidas NZ
to utilise adidas Asia-Pacific for manufacturing, and it was silent about any royalty obligations which may arise from the contractual relationship.
[51] Adidas NZ argued that the three essential requirements of cl 3(1)(a)(iv) were not met, so the transaction value of the goods should not be adjusted to include the royalty payments between adidas NZ and adidas AG.
[52]Those three requirements were identified as being:
(a)Were the royalties payable in respect of the imported goods?
(b)Were the royalties payable directly or indirectly to the seller (adidas AG)?
(c)Were the royalties payable a condition of the sale for export?
[53] As to the first requirement, adidas NZ argued that the royalties are not calculated by reference to the price of importation, but rather to the subsequent distribution by way of sale. The Court rejected this argument and found that there was no doubt the royalty was payable in respect of the imported goods because the purpose of the importation was the subsequent sale.13
[54] On the second requirement, the Court saw no justification for imposing a requirement that the payment of royalties must be to the seller in order to be caught by the words of the schedule.14 The Court commented that the provision “envisages a third party, who may be unrelated even indirectly to the seller”.15
[55] The third requirement was regarded as the key issue in the case. The Court considered that the following factual background was particularly relevant to the issue:
[Per the licensing agreement] Adidas NZ is entitled to manufacture the product, to have it manufactured and therefore to purchase it from the manufacturer. The ability to do those things is of no benefit to adidas NZ
13 At 562.
14 At 563. See also Nicholson J’s remarks in Avon Cosmetics Ltd, above n 6, at 350: “[T]his is contrary to the wording of the Ninth Schedule which, by reason of cl 3(1)(a) contemplates something additional to the benefit to the seller.”
15 At 563.
unless it is also able to market and sell the product. The underlying purpose of purchasing product from a manufacturer is to sell it.
(Emphasis added)
[56] For the purposes of cl 3(1)(a)(iv), the “sale” in question must be the transaction or process under which the importer obtains the product (here adidas NZ). Therefore, it is the true nature of that transaction which must be examined:16
Here under the licence agreement adidas NZ is granted the right, together with other rights, to use the protected property (trade marks, patents, etc) for manufacture of goods outside New Zealand.
…
The effect of the licence provisions therefore is that adidas NZ could not through its approved manufacturers import product without incurring a liability to pay royalty on that product when it was sold. Postponement of crystallisation of that liability does not alter the position.
…
If adidas NZ could not import the product which it later sells without incurring the liability to pay royalty, then payment of royalty was a condition of the sale to it of the product.
[57] Essentially, the Court concluded that adidas NZ could not purchase the products which it later sold without having to pay the royalty. Therefore, the obligation to pay the royalty went hand in hand with the importation of the products which were later sold by adidas NZ.17
[58] The Court found that this conclusion was consistent with the apparent intention of the provisions, which is to “ascertain the true cost of the goods to the importer”.18 The Court emphasised that the approach to determining the cost of the goods must account for the “reality of the situation and the importer’s obligations in the context of the particular overall transaction.”19
16 At 564.
17 At 565.
18 At 564.
19 At 564.
Collector of Customs v Avon Cosmetics Ltd
[59] Avon New Zealand and Avon Australia are wholly owned subsidiaries of Avon International. Avon New Zealand sourced the goods sold in its stores from Avon Australia.
[60] Avon Australia paid royalties to Avon Products, the ultimate parent company of Avon International, on its sales except for those to Avon companies (here Avon New Zealand). The Court concluded that the clear intention behind this arrangement was that Avon Products authorised Avon Australia to supply Avon New Zealand without the payment of royalties because Avon New Zealand paid royalties under its licence agreement with Avon Products.
[61] In the High Court, Nicholson J had concluded that there was no contractual requirement tying the purchase of the imported goods with the payment of the royalty on their resale. And that there was no evidence of a buying practice limiting Avon New Zealand's ability to buy Avon products for importation and resale which linked it to its parent company and an obligation to pay royalties to that parent.
[62] However, the Court of Appeal held that the commercial and legal reality of the arrangements between the entities was that Avon New Zealand’s ability to sell the products relied on it paying the royalties. Significantly, that conclusion was supported by an example of the written agreements having been edited when the parties orally agreed that royalties would not be paid for a short time.
[63] Counsel for Avon New Zealand argued that Adidas was readily distinguishable because that licence agreement required the manufacturer supplying adidas in New Zealand to be approved by adidas AG. Counsel said this was central to that Court's conclusion that the payment of the royalties was a condition of the supply of goods to adidas NZ. Counsel for Avon New Zealand submitted that the reality was that the royalty provision in this case was a legitimate mechanism, unrelated to the supply contract, for transferring part of the New Zealand profits back to the parent company.
[64] The Court of Appeal observed that the narrow answer to that argument is that the licence agreement between Avon Products and Avon Australia specified what could be manufactured and distributed by Avon Australia (here to Avon New Zealand). The broader answer is that all the transactions and arrangements were in-house, and Avon Products retained control through Avon New Zealand's dependence on Avon Australia as its supplier. The expression "as a condition of the sale of goods ... " is necessarily wider than "as a condition of the contract of sale of the goods".
[65] The Court considered that this wider interpretation is reflected in the judgments in Adidas and in cases in other jurisdictions. [Remembering that the “sale” that is relevant here is the transaction wherein the New Zealand company acquires the goods.] When the true nature of the arrangements was considered, part of the purchasing arrangement was an obligation on the New Zealand company to pay royalties to the parent company. Therefore, it was caught by cl 3(1)(a)(iv).
Chief Executive of the New Zealand Customs Service v Nike New Zealand Limited
[66] Nike NZ’s parent company is Nike Inc. The proprietor of the Nike’s intellectual property is another subsidiary of Nike Inc, Nike International Ltd (NIL). NIL had a licence agreement with Nike NZ, under which Nike NZ was allowed to use Nike trademarks, copyrights, designs and other intellectual property rights in New Zealand and certain Pacific Islands (the licenced territory).
[67] Nike NZ also received a non-exclusive licence for the manufacture of licenced goods, provided they were sold in the licenced territory in accordance with the licence agreement. Nike NZ also had an exclusive licence to sell those goods within the licenced territory and it was the exclusive distributor of those goods. In return, Nike NZ agreed to use reasonable efforts to sell and promote the licenced goods in New Zealand. Nike NZ was also obliged to pay a royalty of 2.5 per cent of net annual sales revenue from the sales in the licenced territory to NIL.
[68] This appeal was by heard by a full court of the Court of Appeal. Justices Keith, Blanchard, and McGrath were in the majority.
[69] The majority found that a royalty for the purposes of cl 3(1)(a)(iv) comprised the following two features:20
(a)the royalty had to be payable to the manufacturer or to another person as a consequence of the export of goods to New Zealand; and
(b)the party being paid the royalty had to have the ability to determine whether the export to New Zealand could actually occur. The Court characterised this as going beyond the ordinary rights of a licensor of intellectual property, who exercised no control over an importation prior to any default in the payment of royalties.
[70] The goods in question were only able to be exported to New Zealand because of the licensing agreement, which provided for the manufacture of the licensed goods and Nike NZ’s right to sell them in New Zealand.21 The agreement, in turn, also required the payment of the royalty.
[71] Importantly, although the agreement was not expressly related to the question of export to New Zealand, the Court found that it implicitly required the export of goods to New Zealand. That was because Nike NZ was obligated under the agreement to make reasonable efforts to sell and promote the licenced goods in New Zealand. It therefore followed that Nike NZ had to import the goods to New Zealand from their country of manufacture to fulfil their obligation under the licensing agreement. The Court reasoned that the royalties were “payable, in part, for the right to bring the goods to New Zealand”.22
[72] The Court also found that Nike Inc exercised an overall control over Nike NZ.23 Nike Inc had control over the board of directors of Nike NZ, which ensured that royalty payments would be made. The extent of that control supported that the reality of the arrangement was that the goods could not be imported and sold in New Zealand without the royalty payment being made.
20 At [67].
21 See [68].
22 At [68].
23 See [69].
[73]Accordingly, the royalty payment was caught by cl 3(1)(a)(iv).
Decision of the minority
[74]Gault P understood cl 3(1)(a)(iv) to be targeted at cases where:24
(a)a seller was obliged to pay royalties for the right to manufacture and/or sell the goods in the country from which the goods were being exported; and
(b)that seller required payment or reimbursement of those royalties from the New Zealand importer.
[75] In coming to this conclusion, Gault P relied on the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade.25
[76] Gault P found that the royalties in question were payable for use of the trademark and other rights, such as the right of sale, in New Zealand. He also found that since the royalties were a fixed percentage of the net annual sales revenues of licensed goods in the licensed territory, the royalties would be the same whether they were manufactured in New Zealand or imported. Gault P therefore considered that the royalties in question could not be a condition of the sale of goods for export and did not fall within the ambit of cl 3(1)(a)(iv).
[77] Gault P also disagreed with the majority on the significance of the relationship between Nike NZ and the rest of the Nike group. In doing so, he determined that the Court in Avon had misinterpreted cl 3(1)(a)(iv). Avon concerned similar facts to the present case and was also decided on the basis of the relationship between a New Zealand importer and the Australian seller and their common parent and licensor.26 Gault P said of Avon:27
24 At [12].
25 At [13].
26 At [23].
27 At [23].
I am unable to accept that, merely because it could be said that Avon New Zealand would not have been able to import and sell goods without a licence to sell in New Zealand for which royalties were payable, their payment was a condition of the sale for export to Avon New Zealand. Every licensor with trademark or other relevant intellectual property rights in New Zealand would be able to prevent importation and sales by the licensee if royalties were not paid so that the existence of company relationships giving that power adds nothing.
[78] Further, Gault P distinguished Adidas on the facts, noting that was a case where “the payment of the royalties by the importer was a condition of the right to have goods manufactured in their Asian country of source in which the licensor had intellectual property rights”.28
[79] Gault P concluded that the royalty payment should not be caught in these circumstances. Anderson J agreed.
Preliminary observations
[80]I make two preliminary observations.
The Customs Appeal Authority seems to have adopted the wrong test
[81] First, counsel accept that the Authority misunderstood the analysis it was required to undertake to determine the value of the goods. The Authority focused on whether the price paid for the goods was at market value (or arm’s-length). The Authority viewed the objective of this exercise as being “to establish a price that removes any element affecting the transactional price due to the relationship between the parent company and [CRNZ]”. The Authority viewed cl 2(2) of sch 2 as supporting that analysis because where the sale is between related persons, the importer must produce evidence that the transaction value of the goods was not influenced by the relationship.
[82] However, the purpose of cl 2(2) is to determine whether the “transaction value” method should be used to determine the true value of the goods in a given case. Where the price paid or payable for the goods is influenced by the relationship between the
28 At [22].
parties, the transaction value method is not appropriate, and one of the alternative valuation methods should be used.
[83] Given that the parties both accept the price of the goods was not affected by the relationship between CRNZ and CRAU, it is appropriate to use the transaction value method to determine the value of the goods. Therefore, the key issue in this case is whether the price paid for the goods by CRNZ should be adjusted to include the licensing/royalty payments. That analysis is something quite different to what was undertaken by the Authority.
[84] Counsel agree that this approach was in error because it essentially used the taxation principle of arm’s-length transfer pricing to determine a question relating to customs duties. Accordingly, counsel agreed that I would be required to consider the matter afresh, which would include, if I thought it necessary and justified, a re- consideration of the factual findings.
This is a very finely balanced decision
[85] Second, as counsel acknowledged, this is a finely balanced decision. Both arguments, in their own way, are persuasive. I have reflected on the question for some time. As will be obvious, this is a highly fact specific case and its resolution relies on the application of cl 3(1) to the specific contractual arrangements that exist between CRNZ and CRAU.
[86] I have come to the conclusion that the “royalty payments” are properly caught by cl 3(1)(a)(iv) so that the price paid by CRNZ for the goods should be adjusted to include these payments. I rely on four key reasons, which I set out as follows.
First reason: the reality of the contractual arrangements between CRNZ and CRAU do not support a clear separation between the licensing/royalty payments and the goods themselves
[87] The foundation of CRNZ’s argument is that the evidence before the Authority and accepted by it, established a clear demarcation between the loaded sale price of the goods and the licensing/royalty payments for the sale process used by CRNZ. The Authority accepted the latter payments were licensing/royalties which were levied for
the sale process for those goods—what CRNZ called the intellectual property—rather than in respect of the goods themselves.
[88] It is necessary to unpack that evidence. Mr Geldenhuys emphasised, and I agree, that the evidence is the proper staring point. As emphasised by the authors of Sherman and Glasshoff, which was adopted by the Court of Appeal in Adidas:29
What will have to be determined in the first place is the type, scope and value of the rights, information or services covered by the royalty or licence fee. If there is nothing of value other than the imported goods passing from the exporter to the importer, the (refutable) conclusion is appropriate that there is no ‘royalty or licence fee’ at all but simply a separated part of the purchase price.
[89] As I understand it, the evidence identifies three categories of payments that CRNZ makes to CRAU. I set them out a little more fully as follows:
(a)The sale price CRNZ pays CRAU for the goods which is said to include a 10 to 15 per cent loading. Ms Bronwyn Gorr explained this loading in her affidavit. She affirmed that “[t]he sale price for the purposes of customs duty consists of the final product cost, plus approximately 10– 15% loading to compensate for design, sourcing and distribution”. In cross examination she explained that [for customs purposes and separate from the licensing/royalty payment] the only thing it [the 10– 15% loading] would cover would be “the use of the trademark on the sizing label, that would be included as part of design”.
(b)The licence and royalty payments for intellectual property. This was specifically described in the Country Road Consolidated Group and Country Road Clothing (New Zealand) Limited Transfer Pricing Compliance Report prepared for the year ended 30 June 2014, which defined it in this way: “Licensing of valuable Intellectual Property (IP) by CR Australia to CRNZ for use in the local market being know how in relation to the successful retailing of the Country Road and Trenery brands (i.e. strategic direction, brand development and positioning, and
29 Adidas, above n 6, at 561. Saul L Sherman and Hinrich Glashoff Customs Valuation: Commentary on the GATT Customs Valuation Code (ICC Publishing SA, New York, 1988) at [293].
product development and merchandising) and the exclusive right to distribute these brands in the local market”.
(c)Payments for the provision of routine retail management and administrative services.
[90] I did not understand the parties to raise any issues over the payments contained in (c), which reflect the administrative services provided by CRAU for CRNZ’s operations and which I do not set out in detail or further discuss. It is the relationship between (a) and (b) and the services to which they relate that is at the heart of the issue.
[91] CRNZ invited me to carefully consider the nature of the intangible intellectual property rights contained in the licensing/royalty payment. CRNZ characterises the licensing/royalty payment as being for the complex retail formula provided by CRAU to CRNZ. It says that intellectual property is something quite distinct from the goods themselves—sufficiently so that it cannot be captured by cl 3(1)(a)(iv).
[92] Ms Gorr explained that the royalty payment is calculated using a profit split methodology which is “outside the transaction cost for the product between the two parties.” CRNZ says that the purpose of this licensing/royalty is to share in the profit of CRNZ—profit that CRAU has helped create.
[93] CRNZ was at pains to paint the licensing/royalty payment as relating only to intellectual property involved in the sale of the goods—not intellectual property attached to the goods themselves.
[94] On this point the Authority certainly concluded that there was a clear difference between the loaded sale price and the licensing/royalty payment:
[48] On this evidence I must conclude that there are certainly design elements that are incorporated into the garments. However, they are created by services which are included in the price paid by the Appellant for the imported goods, with a margin added. Certainly, I have been unable to find on the evidence that there is any underpayment for the goods. That is the apparent intention of the pricing methodology, by taking all the identifiable costs that are incorporated into the inherent and intrinsic qualities of the goods; and there is a margin and allowance for profit for the parent company added. The evidence is that the cost is as close to arm's-length as possible (within a transfer pricing regime).
[95] The Authority further concluded that it was unable to determine any component of the value of the goods at the border that is incorporated into the licensing/royalty payment. That is because the royalty payment has no nexus with the cost or value of the imported goods.
[96] I have analysed and considered all the evidence carefully. I am very reluctant to take a different view of the evidence from an expert Tribunal. This should only happen in rare cases. However, this is not a case where there is any advantage in seeing and hearing the witnesses. The transcript and the affidavits speak for themselves. In my view, the Authority’s assessment of the facts is generous to a fault. Perhaps this assessment was also guided by the Authority’s (mistaken) belief that it had to determine whether the price of the goods was influenced by the parties’ relationship.
[97] Having reviewed all the material myself, the first thing to say is that I find it is difficult to discern exactly what goes into the loaded sale price compared to the licensing/royalty payment. That is perhaps a result of the commercial arrangements between the parties having been rather informal during the relevant period and not being reduced to writing.
[98] For instance, the “10–15% loading” hardly speaks of a specific component and does not seem to be even mentioned in the transfer pricing reports. And Ms Gorr’s evidence that for relevant purposes the loading would only refer to the trademark on the sizing label is very narrow. It is difficult to discern how other components of the goods’ design are paid for. For instance, it is unclear whether the branding involved the Country Road name appearing on the outside of some of the goods is included in the loaded sales price—or whether that falls into the licensing/royalty payment. There are obvious difficulties in the evidence, as I will explain.
[99] In my view, on the evidence before the Authority, there is no “bright line” between the loaded sales price and the licensing/royalty payments. More importantly, there seems to be aspects of the licensing/royalty payment that clearly relate to the products themselves. For instance, in the explanation in the 2014 Transfer Pricing Report, the licensing/royalty payments are said to include product development, which
can only sensibly be taken as referring to the goods themselves. The same explanation includes, “the exclusive right to distribute these brands in the local market”. This surely, at least in part, refers to the goods themselves. That phrase alone would count decisively against the Authority’s findings.
[100] Of more significance, is the evidence of Mr Davies, an independent expert in the field of intellectual property, who provided an affidavit for CRNZ. His evidence is telling. He affirmed that in his opinion “the majority of the brand values and characteristics are expressed through retail services, rather than through the individual products” (emphasis added). The point being, and left unsaid, is that some of those matters are expressed through the products. He further concludes that the marketing promotes the services of CRNZ and “not just the products” (emphasis added). The point, again left hanging, is that the marketing does, in part, also relate to the products. And, the brand values, at least to some extent, are inseparable from the products themselves. In fact, throughout his evidence, Mr Davies concedes that some of the characteristics of the brand are indeed exhibited by the products themselves; that the “IP” includes “the presentation of the products” and that “few of the products are visibly branded”—which leaves unsaid that some products are so branded.
[101] As I have mentioned in passing, I also examined the many photos of shop layout, included in the Case on Appeal. Most show goods without any clear association with Country Road, other than the store layout. But some do. For instance, two of the photographs depicts clothing, and other products, emblazoned with “Country Road” in very conspicuous positions within the store. So, on Mr Davies evidence alone, as a matter of fact, I find it difficult to see that the licensing/royalty payments have no relationship with the goods themselves.
[102] In reaching this conclusion, I fully accept that the evidence of Ms Gorr; the Head of Visual Merchandising; the Head of Merchandising; and, the Head of Retailing, endeavours to paint a picture where CRAU’s intellectual property relates entirely to the sales process and “know how” and is divorced from the goods themselves.
[103] Generally, as I assess their evidence, I consider this distinction is artificial. I think it is unrealistic to say that the “intellectual property” has no relationship to those goods. In their evidence the intellectual property includes things like store set-up and product placement—strategies which involve the positioning of the products in a way that maximises the appearance of the Country Road branding. The retail strategy ensures that CRNZ sells Country Road goods in a “Country Road way”; thereby creating a uniform retail experience across all Country Road stores.
[104] Given the strategy is solely focused on the sale of those goods, it would be artificial to say that the retail strategy was not in respect of the imported goods. The goods cannot be separated from the way they are sold. The services involved in the licensing/royalty payment are just too interconnected with the goods themselves, to reach any other conclusion. For instance, it is difficult to read the evidence of the Head of Merchandise when he talks of the importance of the colour of the products, as not referring to the goods themselves.
[105] As a final, but not insignificant point, I note that the licensing/royalty payments are described using the word “Licensing …” in the relevant transfer pricing report; and in the agreed statement of facts, variously as “royalty payments” and “royalty agreements”. In this way the descriptions used conform closely with the wording of the schedule and on their face are thus within the schedule. Mr Geldenhuys sought to persuade me that these descriptions were a misnomer that did not reflect the reality of the situation. I agree that it is the substance of the payments, not their labelling, which is important. Nevertheless, the words chosen are a pointer to the inclusion of these payments within the relevant schedule’s wording. And in my view, the words used by CRNZ are in fact entirely appropriate.
[106] For these reasons, I take a different view of the evidence from that of the Authority. On this different view of the evidence, the inevitable conclusion is that the licensing/royalty payments must fall within a plain reading of cl 3(1)(a)(iv), given the clear connection between those payments and the goods for export to New Zealand.
[107] However, if I am wrong on this point, then even on the evidence as found by the Authority, for the remaining reasons, I would still allow the appeal.
Second reason: even on the facts found by the Authority, the application of the Court of Appeal authorities means that the licensing/royalty payment is properly caught by cl 3(1)(a)(iv)
[108] Even proceeding on the factual basis adopted by the Authority, the wide approach of the Court of Appeal in its trilogy of cases interpreting cl 3(1)(a)(iv), means that the licensing/royalty payments should be included in the price paid or payable for the goods.
[109] It is worth again setting out cl 3(1)(a)(iv) which provides that the price paid or payable for goods should be adjusted by the amount equal to:
… royalties and licence fees, including payments for patents, trademarks, and copyrights in respect of the imported goods that the buyer must pay, directly or indirectly, as a condition of the sale of the goods for export to New Zealand, exclusive of charges for the right to reproduce the imported goods in New Zealand …
(Emphasis added)
[110] Two phrases are of importance. First, “in respect of the imported goods”. Second, “as a condition of sale of the goods for export to New Zealand”. I deal with each in turn.
“…in respect of the imported goods”
[111] Mr Geldenhuys properly drew my attention to the Court of Appeal discussion of the words “in respect of” in Phonograhic Performances (NZ) Ltd v Lion Breweries Ltd, as follows:30
The phrase "in respect of" has been described … as difficult of definition but having "the widest possible meaning of any expression intended to convey some connection or relation between the two subject-matters to which the words refer” … It has also been described as "colourless" … Clearly however the significance to be attributed to it must depend on the nature of the two subject-matters to which the words refer in their particular context.
[112] As I have set out already, CRNZ sought to convince me that the intellectual property represented in the licensing/royalty payment was not “attached” or in any meaningful way related to the goods. It was for quite a different thing—intellectual
30 Phonographic Performance (NZ) Ltd v Lion Breweries Ltd [1979] 2 NZLR 252 (CA) at 258 (citations omitted).
property in the sales process, etc. CRNZ argued that the licensing/royalty payment, therefore, was not in respect of the goods. Instead, as I have already observed, it characterised the payments as being for the complex retail formula provided by CRAU that made CRNZ’s business successful.
[113] I understand that argument. However, in this context, a wide interpretation of “in respect of” is called for. In that way the “intellectual property”, even as classified by the Authority, is sufficiently connected to the goods because for what purpose other than the sale of the very goods exported is the intellectual property utilised? The connection could hardly be said to be distant, nor unrelated to the sale of the goods.
[114] The Court of Appeal trilogy adopts a consistently wide approach to interpreting this clause. Indeed, in the Nike case, for instance the minority, on a different matter, took a narrow and precise view. Effectively Mr Geldenhuys invites me to take a similarly narrow view on the different issue of “connectedness” between the licensing/royalty payment and the goods. That approach is not consistent with the Court of Appeal authorities. I cannot accept Mr Geldenhuys’s invitation. That ship has sailed.
[115] Also, the Court of Appeal trilogy makes it plain that the focus of cl 3(1)(a)(iv) is whether there is a link or connection between the exported goods and the payments made for royalties to satisfy the “in respect of” element. To answer that question, a Court must ask whether the goods could have been purchased for the purpose of resale without also purchasing the intellectual property rights.
[116] It is clear from the cases that the fact the payment is made after import is not fatal. Nor is the fact the payment is calculated by reference, here, to a “profit-sharing” formula. What matters is whether the contract for sale requires the importer, here CRNZ, to pay for the intellectual property represented in the licensing/royalty payment.
[117] Neither have I overlooked Mr Geldenhuys’s argument that the formula for calculating the licensing/royalty payment is tied to sales profitability and might not be triggered. That the payments theoretically might not fall due in any one year, does not
render them any less connected to the goods that are the subject of the export into New Zealand. In other words, the way the licensing/royalty payments are calculated, does not affect the applicability of the provision in the schedule.
[118] It is true that the licensing/royalty agreement does not itself require importation to occur. However, in reality, the subsequent sale of the goods cannot occur without their prior importation. And the only reason CRNZ is importing the goods is to sell them. In that way, even on the finding made by the Authority as to the nature of the ‘royalties”, the licensing/royalty payment is entirely related to the goods exported.
“…as a condition of sale of the goods for export to New Zealand”
[119] The second phrase, “… as a condition of sale of the goods for export to New Zealand”, presents little difficulty here.
[120] The Court of Appeal trilogy is also clear that in making the assessment of whether the payment must be made as a condition of sale, a Court is to consider the “commercial reality” of the transaction.
[121] The evidence of Ms Gorr made it clear that the commercial reality of the transaction is that CRNZ has no ability to acquire the goods from CRAU without making the licensing/royalty payment. And CRNZ has no ability to sell the goods in any other way. That view is reinforced by the extent of control that CRAU exercises over CRNZ.
[122] Ms Gorr conceded in cross-examination that the commercial arrangement between the parties means that CRAU has a large degree of control over CRNZ. She said that CRNZ would not have an ability to import, and subsequently sell, the products without paying the loaded sale price and the licensing/royalty payment.
[123] That control effectively means that CRNZ must pay for both forms of intellectual property if it wants to import the goods. And the control actually goes a step further in this case: CRNZ cannot sell generic goods in its stores either. In the scenario that CRNZ refuses to import goods from CRAU, its stores would empty of merchandise.
[124] The commercial reality of these arrangements is that CRNZ must import goods from CRAU, and that importation requires CRNZ to pay for the intellectual property involved in the so-called retail strategy. Thus, the intellectual property cannot be separated from the goods themselves.
[125] The reality of the commercial relationship between CRAU and CRNZ supports the conclusion that the licensing/royalty payment is a condition of the sale. This relationship is relevant to the assessment, but not (as the Authority concluded) for the purposes of determining whether the price paid or payable was equivalent to the market price or market value. It is relevant because the relationship meant CRAU had the ability to control whether the export of the goods to New Zealand could or could not occur. That level of control supports viewing the licensing/royalty payments as a condition of the sale of the goods for export, because CRAU would not export the goods without the royalty.
[126] I acknowledge Mr Geldenhuys’s argument that this would mean, taking that principle to its logical conclusion, that anything that was a condition of sale for export could qualify for inclusion as part of the true cost of the goods for the buyer. One can imagine examples where a wholly unrealistic and unintended result in terms of custom duties might eventuate. But this is not such case. There is no need for me to address that argument, because here the “condition of sale of the goods for export” is well enough and sufficiently connected to the goods to satisfy the wording of the provision. I reiterate that the approach established by the Court of Appeal is a broad one. Adopting that broad interpretation leads to one conclusion only: the licensing/royalty payment is both a payment in respect of the exported goods and is a condition of that sale.
Third reason: applying cl 3(1)(a)(iv) to these facts is consistent with the purpose of the Act and the schedule.
[127] It appears that there is no purpose provision in the legislation that sets out the purpose and intention of the customs regime.
[128] The closest there is to a settled purpose is found in the Adidas Court of Appeal decision. There, the Court observed that the apparent purpose of the schedule is to establish the “true cost of the goods to the importer at the time they cross the border”.31 In my view, the true cost of the goods to CRNZ in this case includes the licensing/royalty payments—because CRNZ has no ability to receive the goods without making those payments. In that way, the goods themselves cannot be separated from those payments. That interpretation is utterly consistent with the purpose of the schedule espoused by the Court of Appeal. Although I accept there is an element of circularity in this conclusion, to adopt a contrary view would plainly defeat the purpose of the Act by artificially reducing the price paid for the goods so as to allow a legitimate duty to be avoided.
Fourth reason: there are sound policy reasons for applying cl 3(1)(a)(iv)
[129] Finally, I am of the view that there are strong policy reasons to conclude this case falls withing the cl 3(1)(a)(iv). The Court of Appeal cases have provided a clear interpretation of the legislation and approach to the schedule that I should not and cannot now disturb.
[130] In tax and customs law, certainty and simplicity are desirable wherever possible. Importers need to know in advance what the law is so they can manage their, and their companies’, affairs accordingly. If I was to hold that duties were not payable here, that would be an idiosyncratic approach to the existing New Zealand authorities, which would create uncertainty.
[131] Additionally, it would also allow agreements of this type to become a playground for lawyers. It would invite ingenious drafting to circumvent customs duties for payments expressed to relate to intellectual property in sales and marketing processes for the goods. As a result, every contract would have to be “parsed” by lawyers and customs officials to ascertain the meaning of the contractual provisions. The true situation would likely have to be unpacked often with the need to provide
31 Avon Cosmetics Ltd, above n 6, at [20]. Adidas NZ Ltd, above n 6, at 564 per Henry J.
detailed evidence. The situation that has arisen in this case is to be avoided if at all possible. I agree with the submissions of Ms Courtney in this respect.
[132] Also, I acknowledge, but do not discuss, the arguments from both parties as to overseas jurisprudence which is said to support their respective positions. It is unnecessary to do so, to decide this case.
[133] The proposition for Customs is that the New Zealand Court of Appeal has taken a position that deliberately distances itself from the Canadian and Australian law on the issues to be determined on this appeal. I am told that New Zealand law, as it currently stands, is consistent with the approach taken by Europe and South Africa.
[134] Customs again observes, and I understand this not to be disputed by Mr Geldenhuys, that the New Zealand Court of Appeal approach is settled and globally recognised. It is said by Customs that it is important that there be consistency of interpretation and harmonised application of a materially identical provision in an international treaty. In my view, if I were to uphold the approach advocated by CRNZ, I would be upsetting that consistency and introducing a discordant application.
Alternative argument: are the licensing/royalty payments part of “the proceeds of a subsequent resale of the goods” under cl 3(1)(a)(v)
[135] It will be helpful to again set out the provisions of cl 3(1)(a)(v) which provides that the price paid or payable for goods should be adjusted by the amount equal to:
the value of any part of the proceeds of any subsequent resale, disposal, or use of the goods by the buyer that accrues or is to accrue, directly or indirectly, to the seller; …
[136] Given my conclusion above, it is not necessary to consider in any detail whether the licensing/royalty payments might also be caught by this alternative provision. Customs’ argument is that given the Authority’s finding that those payments are a form of “profit sharing” then the provision plainly applies.
[137] As it turned out, I did not hear detailed argument on this provision. Suffice to say, on its face, there would seem to be a strong case for Customs, as advanced by Ms Courtney, that this clause provides an alternative basis for the conclusion that the
price payable for the goods should be adjusted to include the licensing/royalty payments. This is because part of the proceeds of the subsequent resale of the goods by the buyer (CRNZ) accrues at least indirectly to the seller (CRAU) through the required licensing/royalty payments. Put another way, it is hard to interpret the royalty payment, with its sales-dependent formula, as being anything other than a value of part of the proceeds of subsequent resale by CRNZ, that must accrue to CRAU.
Result
[138] Having determined the issue afresh, I am satisfied that the licensing/royalty payments by CRNZ to CRAU are caught by cl 3(1)(a)(iv).
[139] Accordingly, the appeal is allowed, and the decision of the Customs Appeal Authority is quashed. The customs duty re-assessment made by Customs now stands.
[140] It remains for me to thank counsel for their very full and comprehensive submissions. They were of considerable assistance.
[141] As a side note, I hope that the correct approach to the calculation of customs duties is made just a little clearer, and perhaps even slightly more certain, by this decision.
Costs
[142] As to costs, my view is that this is a matter where costs should lie where they fall. The issue in this case was not without difficulty. The Authority supported CRNZ’s self-assessment. CRNZ should not be penalised as a result. Customs’ appeal was necessary to clarify the position—as supporting what might be said to be the public interest in maintaining the integrity of the customs duties regime. In these circumstances, CRNZ should be relieved from the usual burden of it paying costs. I hope that the parties agree. Or perhaps they can agree on some alternative resolution to costs. It is sufficient to say I am not minded to award costs.
[143] If either party wishes to dissuade me from this course, succinct submissions (by which I mean no more than two pages) can be filed. Counsel for Customs has 15 working days to do so from the date of this decision. Counsel for CRNZ has 15 further working days from receipt of those submissions to respond. I will then decide the matter on the papers.
Becroft J
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