Jurisdiction - appeal from Administrative Appeals Tribunal - whether appeal on a question of law.

Administrative Appeals Tribunal Act 1975, s.44(1).

Counsel and Solicitors R.J. Ellicott QC with D.M. Yates

Counsel and Solicitors D. Jackson QC with A. Robertson

for Respondent: instructed by Australian Government Solicitor

2. Set aside the decision of the Administrative Appeals Tribunal.

3. Declare that the cathode mix and the anode mix described in the reasons for judgment are materials of Singapore for the purposes of s.151(10)(b) of the Customs Act 1901.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

In these proceedings, the applicant, Eveready Australia Pty. Limited ("Eveready") appeals from a decision of the Administrative Appeals Tribunal affirming a decision of the respondent, the Collector of Customs, that certain batteries imported by Eveready ("the batteries") from Singapore, were not eligible for preferential duty rates under s.151 of the Customs Act 1901 ("the Act"). As a preliminary point, the Collector has objected to the competency of the appeal. In order to understand the nature of the objection, it will be necessary to explain the relevant legislative scheme and then to refer to the background to the present dispute which involves the question whether, for the purposes of s.151 of the Act, the batteries were the manufacture of a "Developing Country", the country being Singapore.

2. By s.22 of the Customs Tariff Act 1987 ("the Tariff Act"), where goods imported into Australia are the produce or manufacture of a "Preference Country", a preferential rate of duty is allowed. Under the provisions of the Tariff Act, in relation to a "Developing Country", a preferential rate applies. Under the Tariff Act, Singapore is classified as a "Developing Country" and thus goods that are the manufacture of Singapore qualify for a preferential rate of duty. By s.18 of the Tariff Act, goods are the manufacture of a country if they are, under s.151 of the Act, the manufacture of that country.

3. So far as is presently relevant, s.151 deals with the question when goods are to be treated as the produce or manufacture of a country as follows:

"151. (1) ....

(2) Goods are not the produce or manufacture of a

country for the purposes of this Act unless they are such

produce or manufacture under this section.

...

(5) For the purposes of this Act, goods are the produce

of a country if they are its unmanufactured raw products.

...

(10) For the purposes of this Act, goods are the

manufacture of a country, being a Developing Country, if:

(a) the last process in their manufacture was performed in

the country; and

(b) not less than 50% of their factory or works cost is

represented by the value of labour or materials, or of

labour and materials, of one or more of Australia,

Papua New Guinea, Forum Island Countries and

Developing Countries.

(Emphasis added)

...

(13) For the purposes of this section, the Comptroller

may, by notice in writing published in the Gazette:

(a) specify the manner in which the factory or works cost

of goods is to be determined; and

(b) specify the manner in which the value of labour, the

value of materials or the value of labour and

materials is to be determined.

...

(15) In this section, 'Forum Island Country', 'Developing

Country' and 'Preference Country' have the same meanings as

they have in the Customs Tariff Act 1987 and, for the

purposes of this section, a place that, for the purposes of

that Act, is to be treated as a Developing Country shall be

taken to be a country that is a Developing Country and a

Preference Country."

4. Pursuant to s.151(13), by notices published in the Gazette dated 18 August 1988, the Comptroller specified the following:

"The factory or works cost of goods shall be the sum of the

following:

(a) the cost of materials received into factory but not

including any duties or other taxes paid or payable in

the country of manufacture of the goods in respect of

such materials;

(b) manufacturing wages;

(c) factory overhead expenses; and

(d) the cost of inside containers.

.....

The value of labour and materials shall be the sum of the

following:

(a) (i) in the case of materials wholly produced or

manufactured in the country or in Australia or

in the country and in Australia, but not

including any duties or other taxes paid or

payable in the country of manufacture of the

goods in respect of such materials - the cost of

those materials; or

(ii) in the case of materials partly manufactured in

the country and Australia - the proportion of

the cost of manufacture of those materials

incurred in the country or in the country and in

Australia, but not including any duties or other

taxes paid or payable in the country of manufacture

of the goods in respect of such materials;

(b) manufacturing wages;

(c) factory overhead expenses; and

(d) the cost of inside containers of the manufacture of the

country or of Australia, or of the country and Australia."

5. Pursuant to s.151(15), by virtue of the provisions of the Customs Tariff Act, Singapore is designated as a Developing Country.

6. The application before the Tribunal was an application under s.273GA of the Act to review a decision of the Collector to demand duty from Eveready on the basis that the goods were not eligible for preferential rates of duty by virtue of s.151. The goods are batteries, manufactured in Singapore by Eveready Singapore Pte. Ltd. and imported by Eveready into Australia. As has been said, the Tribunal affirmed the Collector's decision.

7. The essential reasoning of the Collector's delegate in deciding that the goods "fail to satisfy the criteria in s.151(10)(b) of the Act and are ineligible for entry at developing country preferential rates of Customs duty" was as follows:

"4. The goods were Eveready batteries code E91 (size AA),

code E93 (size C) and code E95 (size D), as

manufactured by Eveready Singapore Pty. Ltd.

5. On 17 June 1988 information was submitted by the

applicant which indicated that the Developing Country

qualifying area content for the labour and/or

materials was:

- code E91 55.4% of factory or works cost of Singapore

- code E93 55.6% of factory or works cost of Singapore

- code E95 57.0% of factory or works cost of Singapore

...

18. The goods being imported were alkaline batteries, and

in ensuring that these goods were eligible for

preferential rates of duty, I first identified the

materials used in the manufacture of the batteries and

then considered the origin status of the materials.

19. Invoices and documentation supplied by the applicant

revealed that costs of the following materials were

not separately taken into account as the materials

used in the manufacture of batteries:

CONFIDENTIAL

20. The cathode and anode mixes that the appellant has

claimed to be of Singapore origin are the result of a

mixing process of the above materials. However, I

considered that the manufacture of the goods

(batteries) commenced when the Singapore manufacturer

began to use the imported materials in his factory.

That is, the manufacturing process had begun prior to

the use of intermediate materials in the applicants

factory. Accordingly, my calculations reflected the

costs of the imported materials to make batteries.

The results of these calculations were as follows:

- code E91 - 65.5% (import content)

- code E93 - 71.7% (import content)

- code E95 - 80.0% (import content)."

8. Before the Tribunal, it was common ground that the last process in the manufacture of the batteries was performed in Singapore. On behalf of Eveready, it was contended that there should be included in the term "material" where used in s.151(10)(b) the anode and cathode "mixes" contained in the batteries as discrete materials manufactured in Singapore, rather than the "raw" substances which went into the mixes. All the materials within the mixes were imported into Singapore and were, in immediate terms, sourced from countries not eligible for consideration within the preference area. By transferring Eveready's own cost of the components of the mixes from the "preferential area cost" to the "foreign cost", the foreign content of the final product was increased, incorrectly, according to Eveready, to an amount greater than 50 per cent. Eveready argued that the mixes were the appropriate starting point for the calculation of eligible content.

9. Alternatively, Eveready contended that, if the anode and cathode mixes were not "materials" in their own right, they were made up of a number of materials some of which could be traced to Developing Countries.

10. Before the Tribunal, there was no real dispute about the primary facts. The Tribunal made the following findings of primary fact, which are not challenged. The anode and the cathode were basic to the functioning of a battery. In the manufacturing operations leading to the production of anodes and cathodes, expensive and lengthy treatment of various chemicals brought into the Singapore factory took place. The production of the two electrodes was carried out in two separate parts of the large factory premises in purpose-built areas. The processes were separately costed. From a combination of chemical substances, there emerged in the cathode production a solid cylinder with electrolytic properties different from those of its constituents but with the same chemical composition. From the production line of the anode emerged a gel with special electrolytic properties, but chemically no different from its ingredients.

11. The Tribunal first rejected the "tracing" argument. In its opinion, all the primary substances had been so processed before they reached the manufacturer that they had ceased to have any identity as produce or manufactured goods of a Developing Country. In order to meet the specifications of Eveready, it was necessary for the supplier of the substances to carry out processes which themselves, in the Tribunal's opinion, amounted to manufacturing. The Tribunal was of the view that a "tracing" exercise was not called for by s.151(10). In its opinion, "materials" were "those that are brought into the process of manufacturing from the beginning and which form ingredients of the finished product, irrespective of what important subsidiary processes they must undergo prior to final assembly." The Tribunal was of the opinion that, in the present context, the dictionary meaning of "material" applied, that is, "anything delivered to the factory and intended to be used in the manufacturing process." The Deputy President of the Tribunal said:

"19. I accept the submission of counsel for the applicant

that the anodes and cathodes are not simple admixtures of

known substances. I accept that they are important

components of batteries in their own right. I am unable to

accept the applicant's argument, however, that this thereby

makes them the 'materials' of the battery and that the

imported ingredients are merely 'substances making up those

materials'. The sub-section does not qualify 'materials' in

any way with adjectives such as essential, important, basic

or expensive. It refers simply to the totality of the

materials used in the manufacture.

20. It is also not necessary to accept counsel's argument

that a 'factory door approach' would require each of the

materials of the battery to be traced through each substance

of which each material is comprised until it in turn is

broken down to its constituent substance. A factory door

approach, it seems to me, is to apply the plain meaning of

materials, calling for no further analysis of the substances

prior to their arrival at the starting point of manufacture.

Put figuratively, materials are everything that comes in

through the factory back door. Batteries are what go out

through the factory front door."

12. For these reasons, the Tribunal decided that the goods did not satisfy the provisions of s.151.

13. The "appeal" to this Court provided by s.44(1) of the Administrative Appeals Tribunal Act 1975 in the exercise of the Court's original jurisdiction, is on a question of law only. There is no appeal on a "mere" question of fact (see Waterford v Commonwealth [1987] HCA 25; (1987) 163 CLR 54 per Brennan J. at 77-8). By his objection to competency, the Collector says that in these proceedings, only a question of fact, and not a question of law, is raised.

14. The grounds of appeal relied upon by Eveready in its notice of appeal are as follows:

"4. GROUNDS:

(a) The Tribunal erred in law in that it misconstrued the

word 'materials' in section 151(1) of the Customs Act

1901 as meaning or only meaning:

(i) those materials 'that are brought into the

process of manufacturing from the beginning and

which form ingredients of the finished product,

irrespective of what important subsidiary

processes they must undergo prior to final

assembly'; or alternatively

(i) 'everything that comes in through the factory

back door'; or alternatively

(i) 'anything delivered to the factory and intended

to be used in the manufacturing process'.

(b) The Tribunal erred in law in excluding from the

meaning of the word 'materials' where used in section

151 of the said Act (discrete) materials which come

into being as part of the manufacturing process and

which are components of the manufactured goods.

(c) The Tribunal erred in law in not holding that the

anode and cathode of the applicant's said goods are

each 'materials' within the meaning of section 151 of

the said Act."

15. On behalf of the Collector, it is submitted that, in the present proceeding, Eveready seeks, in substance, to challenge a decision applying the ordinary meaning of the word "materials" to the circumstances of the case, and that this is a question of fact and not a question of law. Reliance is placed by the Collector upon the reasoning in The Jedko Game Company Pty. Limited v Collector of Customs New South Wales (1987) 12 ALD 491. As has been mentioned, by s.44(1) of the Tribunal's statute, "a party to a proceeding before the Tribunal may appeal to (this) Court, on a question of law, from any decision of the Tribunal in that proceeding." By s.44(4), the Court shall hear and determine the appeal and may make such order as it thinks appropriate by reason of its decision. By s.44(5), without limiting the generality of s.44(4), the orders that may be made on an appeal include an order affirming or setting aside the decision of the Tribunal and an order remitting the case to be heard and decided again by the Tribunal.

16. On behalf of Eveready, reliance is placed upon Collector of Customs (Tasmania) v Davis [1989] FCA 308; (1989) 23 FCR 378, where an objection to competency was overruled in circumstances which are said to be similar to the present case. In Davis, as here, the primary facts were not in dispute. In Davis, it was held, applying the reasoning of Kitto J. in the Blue-Metal Quarries Case [1956] HCA 80; (1955) 94 CLR 509 at 511-512, that a question of law arose in the appeal notwithstanding that the relevant words in the statute had their dictionary meaning. Yet, as was pointed out by Beaumont and Burchett JJ. in Jedko, the appeal must be "on" a question of law and it is therefore necessary to identify the subject matter of the appeal. In order to identify that subject matter, consideration must be given to the arguments advanced in support of the appeal.

17. In support of the appeal, Eveready first referred to the detail of the factual material before the Tribunal, primarily in the evidence of Csaba Stephen Trombitas, the managing director of Eveready Singapore. According to the evidence of Mr Trombitas, the source and use of the "raw" materials and components used in the manufacture of the alkaline batteries the subject of the proceedings were as follows:

18. According to the evidence of Mr Trombitas, the two principal features of an alkaline battery are a manganese dioxide cathode in conjunction with a steel can which serves as a cathode current collector and a powdered zinc anode of high surface area in contact with the electrolyte.

19. Mr Trombitas referred to the following diagram of a cutaway view of a cylindrical alkaline cell.

20. In his evidence, Mr Trombitas gave a description of the five processes involved in the manufacture of standard alkaline batteries, which evidence may be summarised as follows:

21. This is undertaken to produce an essential component of the alkaline battery cell, the cathode mix. The process is performed in a specifically designed building in the Singapore plant and consist of:

22. The result of this specialised process is the bringing into existence of a "discrete" product called cathode mix. This is an intermediate product for use in the manufacture of alkaline cells and the product is uniquely different from its "raw" materials. It has a definitive and maximum shelf life of CONFIDENTIAL After this shelf life, use of the product would result in a battery the performance of which would not be to specifications and the battery would be rejected in the final electrical testing undertaken in the manufacturing process. For this reason, the product is separately stored by Eveready Singapore in controlled conditions for no longer than the shelf life.

23. The manufacture of the cathode and the anode (dealt with below) are critical steps in the overall manufacturing process undertaken to produce an alkaline battery. Technological improvements in the manufacture and formula of the cathode, and the anode, have made the most significant contributions to improvement in alkaline battery performance.

24. The cathode moulding operation consists of prefilling a steel cathode can with a specific quantity of cathode mix followed by compression moulding of the prefill into a hollow, cylindrical, high density solid cathode having certain specified dimensions.

25. The function of the anode is to provide zinc which reacts with manganese dioxide to produce an electrical potential for the raw cell.

26. The result of this specialised process is the bringing into existence of a "discrete" product called anode mix. This is an intermediate product for use in the manufacture of alkaline cells and the product is different from its raw materials. It has a definitive and maximum shelf life of CONFIDENTIAL After this shelf life, use of the product would result in a battery the performance of which would not be to specifications and therefore the battery would be rejected in the final electrical testing undertaken in the manufacturing process. For this reason, the product is separately stored by Eveready Singapore in controlled conditions for no longer than the shelf life.

27. Technological improvements in the manufacture and formula of the anode over the last 20 years have made the most significant improvement in alkaline battery performance.

28. It is the anode and the cathode which differentiate Eveready's alkaline cell from the alkaline cells of other battery manufacturers who also undertake their own research and development activities in this regard. To the extent that alkaline cells of different manufacturers compete on performance, such competition lies to a large extent in the production of the anode (and of the cathode) and to the formulation used by the manufacturers.

29. The raw cell assembly process consists of a number of operations and different pieces of equipment as follows:

30. According to the evidence of Mr Trombitas, the components of an alkaline battery are known and consist of well defined materials. However, the actual processes involved and adopted in battery manufacture, especially the manufacture of the cathode and the anode, are unique.

31. On behalf of Eveready, it is contended that the manufacture of the cathode, in particular, is not a simple mixing process but a process which yields a product having electro-physical properties which differ from the totality of its constituent elements, and which has been brought about by specifically controlled processes upon specially selected substances. Relying upon the opinion expressed by Mr Trombitas, it is said that, although the components of an alkaline battery are known and consist of well defined substances, the actual processes involved and adopted in battery manufacture, especially the manufacture of the cathode and the anode, and the specifications applicable to the products, are "unique". It is then submitted that: (a) each of the cathode and anode undergoes its own specialised process of manufacture according to stringent requirements not only as to the quality of the substances used but as to the nature and quality of the process of manufacture itself; (b) the formulation and process in each case is the result of extensive research and development and is regarded as highly valuable and confidential information; (c) the quality of the anode and the cathode have a vital role to play in the function of the assembled battery, such that the quality and the performance of these components sets one manufacturer's battery apart from another's; (d) the resultant component in each case is a material which has electro-physical properties which are quite distinct from any of its inputs; the resultant material in each case is quite distinct from all of its relevant inputs which have not undergone the specialised manufacturing process; (e) both the anode and cathode are manufactured in specially dedicated areas in the plant at Singapore; the manufacture of batteries is not merely the adding of substances such as CONFIDENTIAL rather the cathode and the anode are separately manufactured, created, tested and stored in Singapore before battery assembly commences, in the same way as the other components of the battery are separately manufactured, created, tested and stored before battery assembly commences; (f) both cathode and anode manufacture are regarded as separate cost centres within Eveready Singapore and, accordingly, the administrative and financial treatment of the manufacture of these components is separate from the battery manufacture itself.

32. Therefore, it is said, it is appropriate and correct to regard both the anode and the cathode as being "materials" from which the battery is manufactured and hence comprising part of the "materials" referred to in s.151(10)(b) of the Act.

33. The first question that arises is the meaning of s.151(10)(b). In particular, a question arises as to the meaning of the phrase "materials of (a) Developing Countr(y)" in the context of the words used in s.151(10)(b) - "if not less than 50% of (the) factory or works cost (of the goods) is represented by the value of...materials of (a) Developing Countr(y)."

34. It is convenient to consider first the meaning of "material". The Macquarie Dictionary offers several definitions of the noun "material". The following appear to be in point for present purposes:

"1. the substance or substances of which a thing is made or

composed. 2. Any constituent element of a thing. 3.

Anything serving as a crude or raw matter for working upon

or developing..."

35. For the plural of the noun, the dictionary offers the following:

"7. Articles of any kind requisite for making or doing

something: writing materials."

36. The noun "materials" is ordinarily used in connection with the concept of manufacture, which is the present general context. As Williams J. said in Federal Commissioner of Taxation v Jack Zinader Proprietary Limited [1949] HCA 42; (1949) 78 CLR 336 at 350:

"The ordinary meaning of the verb manufacture is to work up

materials into forms suitable for use."

37. In M.P. Metals Pty. Ltd. v Federal Commissioner of Taxation [1968] HCA 89; (1967) 117 CLR 631, Windeyer J. said (at 637):

"Broadly speaking, any goods created by man out of other

materials can, I suppose, be described as manufactured

goods. Ordinarily, however, the term is restricted in

various ways."

38. See also Genex Corporation Pty. Limited v The Commonwealth of Australia 91 ATC 4,564 per Hill J. at 4,572-3.

39. Turning next to the ordinary meaning of the word "of", the Macquarie offers the following definitions of this preposition which appear to be presently relevant:

"2. Derivation, origin, or source: of good family; the

plays of Shakespeare... 6. belonging or possession,

connection, or association: the queen of England; the

property of all..."

40. It has been held that, prima facie, a contract of the goods "of" a person means goods of his manufacture, and not merely that they will come out of his hands (see Powell v Horton, [1836] EngR 635; 2 Bing NC 668). Tindal C.J. said (at 676):

"A party who agrees to buy Bramah's locks, expects to have

locks made by that manufacturer; as he who buys a picture

bearing the name of a particular artist is entitled to

require that it should be the work of such artist. So here,

when the Plaintiff buys pork bearing the brand of a certain firm,

he is entitled to have an article manufactured by that firm."

"As to the meaning of this contract, it is a fair and

reasonable construction to say that pork of Scott and Co.

means pork manufactured by Scott and Co. If I speak of the

literary work of a given author, I imply that it was written

by that author; that the picture of a given artist was

painted by that artist; and that manufactured articles

stamped with a name are the manaufacture of the party whose

name they bear. The Defendant's counsel says it imports

merely that they have the credit and sanction of that name,

and that the judgment of the consignor has been exercised in

the selection of the article. I do not see why so narrow a

construction should be adopted; but this, at all events, is

a mercantile contract, and the evidence which was properly

received to explain the acceptation of the terms in the

market is all on one side."

42. As has been said, the instant question concerns the meaning of the composite expression "materials of a Developing Country" in the context of a definition of the location of manufacture of goods. In that context, applying the relevant dictionary definitions already mentioned, I think that the expression is intended to refer to articles of any kind requisite for making the subject goods which articles have a connection or association with the Developing Country. Applying the first of the definitions, the cathode mix and the anode mix were articles requisite for making the batteries. Further, in my view, the mixes had a connection or association with Singapore. The connection or association arose from the circumstance that the substantial processes undertaken to produce the mixes were carried out in Singapore by a company carrying on its manufacturing operations there. This is not to say that any treatment of an article, however insignificant, will suffice to establish a connection or association which would justify the description of materials as "of" a particular country. Questions of degree are involved but, in the present case, the processes undertaken were both significant and substantial, sufficiently so, I think, to warrant the attribution of the mixes to the Republic of Singapore. It follows, in my view, that the mixes were materials "of" Singapore for the purposes of s.151(10)(b).

43. In these circumstances, it is not necessary to deal with Eveready's alternative "tracing" argument.

44. The question of jurisdiction remains for decision. From what has been said, it must follow, in my opinion, that the present proceeding raises for resolution a question of law, and not one of fact. The primary facts are not in dispute. In its reasoning, the Tribunal construed "materials" in s.151(10)(b) to mean only articles delivered to Eveready's Singapore factory for use in manufacture. With respect, although the interpretation of the Act in this respect is not free from difficulty and doubt, I am unable to accept that construction. In this way, a question of law is raised by the proceeding and the jurisdiction of the Court is thereby attracted.

45. The appeal will be allowed, with costs, and appropriate declaratory relief granted.