FEDERAL COURT OF AUSTRALIA Customs - import duty - rebate - reimbursement for repairs to vehicles defective on importation - whether reimbursements give rise to rebate - meaning of "rebate of, or other decrease in" price. Customs Act 1901 - ss 154, 159, 161, 163 Customs Regulations 1926 - r 126(g) Toyota Motor Sales Australia Ltd v Collector of Customs (1991) 28 FCR 27 - considered Queensland Independent Wholesalers Limited v Commissioner of Taxation (1991) 29 FCR 312 - considered HYUNDAI AUTOMOTIVE DISTRIBUTORS AUSTRALIA PTY LTD v CHIEF EXECUTIVE OFFICER, AUSTRALIAN CUSTOMS SERVICE NG 215 of 1996 JUDGE: BEAUMONT J PLACE: SYDNEY DATED: 27 JUNE 1997 IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) NG 215 of 1996 ) GENERAL DIVISION ) BETWEEN: HYUNDAI AUTOMOTIVE DISTRIBUTORS AUSTRALIA PTY LTD Applicant AND: CHIEF EXECUTIVE OFFICER, AUSTRALIAN CUSTOMS SERVICE Respondent JUDGE: BEAUMONT J PLACE: SYDNEY DATED: 27 JUNE 1997 MINUTES OF ORDER THE COURT ORDERS THAT: 1. The appeal be dismissed, with costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) NG 215 of 1996 ) GENERAL DIVISION ) BETWEEN: HYUNDAI AUTOMOTIVE DISTRIBUTORS AUSTRALIA PTY LTD Applicant AND: CHIEF EXECUTIVE OFFICER, AUSTRALIAN CUSTOMS SERVICE Respondent JUDGE: BEAUMONT J PLACE: SYDNEY DATED: 27 JUNE 1997 REASONS FOR JUDGMENT INTRODUCTION By s 163(1) of the Customs Act 1901 ("the Act"), it is provided that refunds of duty may be made in respect of goods generally, or in respect of the goods included in a class of goods. By s 163(1A)of the Act, the Customs Regulations may prescribe the amount or the means of determining the amount of any refund. Regulation 126(1) of the Customs Regulations prescribes several circumstances for the purposes of s 163 of the Act including where: "(g) the price of goods for the purposes of Division 2 of Part VIII of the Act was taken into account in determining under that Division the customs value of the goods and a rebate of, or other decrease in, that price accrues to the importer of the goods by reason: (i) of a fault or defect in the goods; or (ii) that the goods did not conform to contract specifications furnished by the importer to the manufacturer or supplier; and the rebate, or decrease, was not taken into account in determining that customs value;" The applicant applied to the Administrative Appeals Tribunal ("the Tribunal"), to review a decision of the respondent to refuse to make a refund of duty. The Tribunal, constituted by Deputy President B. J. McMahon, affirmed the respondent's decision. The applicant now appeals to this Court on a question of law. THE TRIBUNAL'S REASONS In order to understand the issues that arise on the appeal, it will first be necessary to outline the facts found by the Tribunal and its reasoning as follows: · The applicant purchased and imported passenger motor vehicles from an unrelated company, Hyundai Motor Corporation of Korea ("HMC"), pursuant to the terms of a specific importation agreement. The relationship between the parties was also regulated by another instrument, a service and warranty agreement, which will be mentioned later in these reasons. The transaction price was accepted as the customs value and duty was paid accordingly. Whilst the vehicles were in bond, they were inspected by Prixcar Pty Ltd ("Prixcar"), on behalf of the applicant, for defects. · Work was carried out on the vehicles in order to bring them up to marketable condition. The applicant met this cost to Prixcar accepting that, under cl 6.02 of the service and warranty agreement, the applicant had liability in relation to pre-delivery inspection and conditioning. The applicant later recouped this expenditure from HMC which remitted the amount claimed from time to time to the applicant's account at the Standard Chartered Bank. The applicant then sought to have the costs of the work treated by the respondent as a reduction in the price of the imported vehicles, with a consequent reduction in customs value and a refund of some duty. The principal issue for the Tribunal was whether the payments so made by HMC to the applicant, whilst the vehicles were in bond, constituted "a rebate of, or other decrease in" the price for the purposes of reg 126(1)(g). The learned Deputy President noted that the importation agreement between HMC and the applicant provided for basic warranty obligations, but having regard to the decision in Toyota Motor Sales Australia Ltd v Collector of Customs (1991) 28 FCR 27, the Tribunal further noted that the applicant accepted before it that a warranty claim was not "a rebate of, or other decrease in" the price within reg 126(1)(g). The Tribunal said (at para 14) that there was no evidence that the importer and exporter intended to treat the payments by HMC to the applicant as price rebates. The Deputy President referred to the Macquarie Dictionary definition of "rebate" as follows: "1 A return of part of an original amount paid for some service or merchandise; repayment, as a part of charges. 2 To allow as a discount. 3 To deduct (a certain amount) as from a total." Mr McMahon said: "16. There is no evidence that the moneys passing from HMC to the applicant were treated in accordance with any of these senses. The documentation does not support a submission that the reimbursement for each claim was a return of part of an original amount paid for the vehicle. The way in which the refunds were treated indicates, as I have pointed out, that in fact they were not deductions from the total purchase price. They were treated, for reasons which no doubt are good reasons from HMC's point of view, as payments collateral to the principal obligations between the vendor and the purchaser." The Tribunal said (at para 18) that it could not distinguish this case from the situation in Toyota, citing the following passage from that case (at 28 FCR 29): "Secondly, we do not think that in the ordinary parlance of commercial life the reimbursements can fairly be said to be rebates of, or decreases in, the prices of the relevant vehicles accruing to Toyota Australia by reason of faults or defects in those vehicles. They were payments made to Toyota Australia under arrangements essentially collateral to the purchase of the motor vehicles pursuant to which Toyota Australia was entitled to claim reimbursement in respect of at least some of the expense incurred in meeting its warranty obligations to owners of Toyota vehicles. The contractual arrangements made between the two companies pursuant to which reimbursements were made were plainly independent of the contractual arrangements pursuant to which the motor vehicles were imported. Thus a claim by Toyota Australia for a reimbursement was not a claim against its parent for a rebate of, or decrease in, the price of a vehicle. Rather it was a claim for reimbursement of the cost of repairs for which it had made itself contractually liable. In these circumstances the reimbursements did not fall within reg [1]26(g)." The Deputy President then concluded: "19. In the ordinary parlance of commercial life, moneys paid to the applicant's account with Standard Chartered Bank debited, we may assume, to an account other than the vendor purchaser account, and payable for the services which I have outlined, can not fairly be said to be rebates of or decreases in the prices of the relevant vehicles. As this is the only basis upon which, relevantly, a refund can be made in the circumstances it seems to me that the applicant must fail." THE APPLICANT'S SUBMISSIONS IN SUPPORT OF THE APPEAL The applicant advanced the following grounds of appeal: "(1) The Tribunal misconstrued the expression 'a rebate [of], or other decrease in' the price of goods in Regulation 126(1)(g) of the Customs Regulations. (2) The Tribunal misconstrued the expression 'the price of goods for the purposes of Division 2 Part VIII' of the Customs Act, in Regulation 126(1)(g) of the Customs Regulations. (3) ... (4) The Tribunal wrongly ignored or failed to take into account important considerations which were material to the proper characterisation of the payments made by HMC to the Applicant, being the payments the subject of the proceedings, namely:- (a) it was a term of the contract between the Applicant and HMC that the vehicles would upon importation into Australia be in marketable condition and would not have FAULTS OR DEFECTS (as defined in paragraph 10 of the Applicant's Statement of Facts and Contentions filed in the proceedings); (b) the vehicles the subject of the payments were not in marketable condition and/or had FAULTS OR DEFECTS; (c) the payments reflected the cost of putting the vehicles into marketable condition and/or rectifying FAULTS OR DEFECTS; (d) by reason of (a), (b) and (c) HMC was liable to make those payments to the Applicant; (e) the payments referred to in (c) are properly characterised as a 'rebate of, or other decrease in, the price of the motor vehicles', either because the liability to make them would found an equitable set off against a demand by HMC for the price of the goods, or by virtue of the provisions of clause 6.5 of the Importation Agreement, or both. (5) Clause 6.02 of the Service & Warranty Agreement between HMC and the Applicant, on its true construction, was not the source of the obligation in HMC to make the payments in question, nor did it have any relevant operation in relation to the making of those payments. There was no evidentiary basis for a conclusion that the payments in question were referable to clause 6.02. (6) The matters referred to in paragraphs 14, 16 and 19 of the Tribunal's reasons do not indicate, support or require the conclusion which the Tribunal reached. (7) The Tribunal erred (paragraph 16) in treating a payment made consensually, but by reason of a vendor's failure to ship goods in conformity with a contractual specification, as being a payment 'collateral to the principal obligations between vendor and purchaser'. Such a payment is not collateral to the contract, but referable to a breach of it. (8) The Tribunal wrongly treated (paragraph 17) Toyota Motor Sales Australia Limited v Collector of Customs 28 FCR 27 as indicating or determining the proper outcome of the application, when it was irrelevant. (9) The factors relied upon by the Tribunal as supporting its decision are incapable of sustaining the conclusion expressed in paragraph 19, and incapable of sustaining an affirmation of the decision under review." Senior Counsel for the applicant submitted that the case arose for decision in the following unchallenged factual context: 1. Whilst the vehicles were in bond they were inspected; damage or deficiencies in the goods were discovered and the goods were then repaired to bring them up to marketable condition. 2. The cost of the rectification work was initially paid by the applicant to Prixcar and then claimed by the applicant from HMC and paid by HMC to the applicant. 3. The market value of the faulty or defective vehicles was diminished by an amount not less than the cost of rectification. 4. The vehicles were entered into Australia at their transaction value and customs duty was assessed and paid at the transaction value; the customs duty refund claims related to faults or defects identified whilst the vehicles were in the bond warehouse. Senior Counsel next referred to aspects of the legislative scheme as follows: By s 159(1) of the Act it is provided: "159. (1) Unless the contrary intention appears in this Act or in another Act, the value of imported goods for the purposes of an Act imposing duty is their customs value and the Collector shall determine that customs value in accordance with this section." By s 159(2) it is provided: "159. (2) Where a Collector can determine the transaction value of imported goods, their customs value is their transaction value." "Transaction value" is dealt with by s 161. By s 161(1) it is provided: "161. (1) The transaction value of imported goods is an amount equal to the sum of their adjusted price in their import sales transaction and of their price related costs to the extent that those costs have not been taken into account in determining the price of the goods." "Adjusted price" is defined in s 161(2) by deducting certain items, for instance, insurance. These items are immaterial for present purposes. "Price related costs" is defined in s 154(1) to mean production assist costs in respect of the goods and certain other items. Again, these cost items are not presently relevant. "Price" is defined in s 154(1) to mean an amount determined by the Collector, after disregarding "value unrelated matters", consisting of, in substance, the sum of all payments made to the vendor or a related party in accordance with either the contract of sale or under any related contract forming, together with the contract of sale, a single transaction. "Value unrelated matter" is defined in s 154(1) to mean, relevantly: "(a) any rebate of, or other decrease in, the price other than such a rebate or decrease the benefit of which has been received when the price is being determined; or (b) ...." In that statutory context, the applicant contends that the following is beyond argument: · A sum of money accrued to the applicant as the importer of the goods and was paid to the applicant. · This sum of money was paid by HMC as the seller of the goods to the applicant. · The rationale or explanation for the payment was that there was a fault or defect in the goods for which HMC was responsible. · The quantum of the payment reflected: (a) the costs of making good the fault or defect; and (b) the diminution in the market value of the vehicle which was thereby occasioned. · The two claims, that is, for the price and for the recovery of the costs of making good the defects, could, at law or in equity, be set off one against the other. It is then submitted that these payments "reflected a return of part of the price which had been paid for the goods" and as such were within reg 126(1)(g). The applicant seeks to distinguish Toyota by submitting that the payments in the present case were not made independently of the contractual arrangements pursuant to which the vehicles were imported. Rather, the applicant argues that the payments were "the product of those arrangements" because sums of money were paid by HMC, as seller, to the applicant, as buyer, to compensate for defects in the goods, which defects were: (a) identified and made good whilst the vehicles were in bond; and (b) necessary to bring them up to marketable condition. The applicant also challenges, as being without evidentiary foundation, the Tribunal's conclusion that the applicant accepted liability for all payments to Prixcar for the work done to rectify the defects and that this was an aspect of the applicant's liability in relation to pre-delivery inspection and conditioning under cl 6.02 of the service and warranty agreement between HMC and the applicant. In this connection, Senior Counsel for the applicant referred to the following provisions of the importation agreement: By cl 6.2 of the importation agreement, dealing with "Risk of Loss", it is provided: "6.2 Risk of Loss All title and risk of loss of HMC Products sold hereunder shall pass to Importer at such time as they shall have effectively passed the ship's rail at any Korean port of shipment." By cl 6.5 of the importation agreement, dealing with "Claims", it is provided: "6.5 Claims All claims for shortages and discrepancies in shipments of HMC Vehicles must be in a form approved by HMC and must be sent to HMC by Importer within 90 days after shipment on which such shortage or discrepancy is claimed, and claims submitted after 90 days have lapsed will not be considered or allowed. And, all claims for shortages and discrepancies in shipments of HMC Parts must be in a form approved by HMC and be sent to HMC by Importer within 60 days after the arrival at the port of destination of any shipment on which such shortage or discrepancy is claimed, and claims submitted after 60 days have lapsed will not be considered or allowed." Section 9 of the importation agreement deals with "Warranty". Clause 9.1 dealing with "Basic Obligations" provides: "9.1 Basic Obligations HMC shall extend to Importer a limited warranty on HMC Products sold by HMC to Importer under this Agreement as provided in a Warranty and Claim Manual prepared by HMC. The terms and conditions of any warranty provided to Importer hereunder shall be decided by HMC after giving due regard for the warranty provided by HMC on similar HMC Products sold to HMC's distributors. In the event that Importer requests any increase in the warranty coverage then being provided by HMC, HMC shall effect such increase in the following Model Year and HMC may adjust the price of the affected HMC Vehicles to reflect the cost of such increase in warranty coverage." Clauses 9.2, 9.3 and 9.4 deal respectively with "Establishment of Reimbursement Rates", "Customer Complaints" and "Recordkeeping". Clause 9.5 deals with "Separate Warranty Agreement" as follows: "9.5 Separate Warranty Agreement HMC may enter into with Importer a separate Warranty Agreement that will address terms and conditions of the parties' warranty obligations hereunder not otherwise provided for herein, or if so provided for, supplemented as the parties may mutually agree." Senior Counsel for the applicant then referred to the following provisions of HMC's warranty and claim manual. Section 1.1 of the manual deals with "General Policy" as follows: "1 - 1 General Policy HMC's responsibility for damages or shortages extends only to the loading dock at the point of shipment. The Distributor must make every effort to institute and assign New Vehicle Receipt and Inspection responsibilities and make sure those responsibilities are carried out. Failure to properly inspect and report damages to delivered vehicles may result in Distributor having to absorb damaged vehicles and related costs. Damages and/or missing parts incurred during the inland transportation of vehicle from the port to the Distributor and/or from the Distributor to the Dealership will not be covered by HMC Warranty. Examples are: · Any vehicle surface damage (paint scratches, dents, chipping etc.) · Pilferage (missing spare tire, radio, cigarette lighters, owner's manual, etc.)" It is then noted in the manual that "the following items will be covered by warranty": "1. Production shortages .... 2. Missing parts or production errors A missing part is a part which was omitted in production of the car. A side mirror, for example, shown on the invoice but with no holes drilled for it, would be a missing item, rather than a production shortage or a transportation loss. 3. Incorrect specifications ..." The manual proceeds to deal with receipt, inspection and storage procedures as follows: "1 - 2 Receipt Procedures The Distributor should provide a designated area where vehicles being delivered can be unloaded and inspected. A specific individual(s) should be assigned the responsibility for supervising and/or performing the inspection of the delivered vehicles at the time they are off-loaded from the carrier's ship prior to the departure of the carrier. 1 - 3 Inspection Procedures When receiving a new vehicle, the vehicle is to be inspected immediately for damage and obvious missing parts and/or options as listed. This inspection is to be completed before the carrier's delivery receipt is signed. The carrier's delivery receipt must be clearly signed and dated (noting time of delivery) by both the Distributor's and carrier's representative for all vehicles. All damage notations should be agreed to by the Carrier's representative. 1 - 4 Storage Procedures The protection and maintenance of new vehicles awaiting delivery to the retail customer and/or the dealer is the exclusive responsibility of the Distributor. Any claims arising from deterioration, damages, or shortages that occur during or resulting from storage of new vehicles will not be considered for reimbursement." Reference was then made on behalf of the applicant to Section II of the manual dealing with a different area, presently immaterial, it is said, of inspection procedures adopted by the distributor (the applicant), before a delivery to the customer, but after the vehicle is removed from bond. None of the costs incurred by the applicant in this connection are claimed to be the subject of the rebates in these proceedings. Reference was made in this connection to the unchallenged evidence of Mr R. J. Smart, a service manager of the applicant's group of companies, as follows: "16. The pre-delivery inspection procedure at paragraph II-1 (page 114) is carried out by the dealer after clearance from bond. The costs of rectifying FAULTS OR DEFECTS identified during that inspection procedure are not the subject of customs duty rebate claims." Senior Counsel for the applicant next referred to certain provisions of the service and warranty agreement as follows: "1.00 WARRANTY The Company [HMC] shall provide a limited warranty on Company Vehicles (collectively the "Company's Warranty") as follows: The Company agrees to reimburse the Distributor for repair and/or replacement of any part (except tires) of Company Vehicles manufactured and supplied by the Company that is found to be defective in material or workmanship under normal use and maintenance for the time and/or mileage period identified below." The warranty period is dealt with by cl 2. Under that provision, the vehicles are: "...warranted to be free from defects in material and workmanship for a period of 36 (thirty-six) months from the date of delivery to the first retail customer or the date the vehicle is first put into service or 100,000 (one hundred thousand) km whichever shall occur first..." Clause 6 deals with "Distributor Responsibility". Clause 6.02, which, as has been noted, was mentioned by the Tribunal, is as follows: "6.02 Pre-Delivery Inspection and Conditioning If requested by the Company [HMC], the Distributor [the applicant] shall ensure that each new Company Vehicle will be inspected and conditioned before delivery to a retail customer, at its expense, in accordance with schedules and instructions furnished from time to time by the Company." It is submitted for the applicant that cl 6.02 relates to an activity at a different point from the inspection in bond, the subject of these proceedings. Reference was then made on behalf of the applicant, to the evidence of Mr J. K. H. Ng, the applicant's general manager of finance and administration, as follows: "5. Clause 6.5 of the Importation Agreement deals with claims for shortages and discrepancies. Customs Duty refund claims for manufacturing defects identified and repaired in bond are made under this clause. There is no other basis for the making of those claims. If a vehicle is delivered by HMC with FAULTS OR DEFECTS then there is a discrepancy between the quality or specification of the vehicle ordered and the quality or specification of the vehicle delivered. If a vehicle is delivered missing items which are ancilliary to but are not attached to and part of the vehicle, that is a shortage and a discrepancy." Then Senior Counsel for the applicant said that, in any event, the obligation to repair the vehicles and to fix their defects was an incident of the seller/buyer relationship and that, even if cl 6.02 of the service and warranty agreement were the true source of the legal obligation imposed on HMC to make the payments, these circumstances do not affect the proper characterisation of the payments. Specifically, the applicant's argument runs, because it would be wrong to characterise these payments as "collateral" in the sense explained in Toyota, it should not follow that the approach taken in Toyota be applied here. It is submitted that the Court should have regard to the substance of the matter and conclude that the payments were, in truth, rebates. In this connection, reliance is placed upon the reasoning of Hill J (with whom Davies and Lee JJ agreed) in Queensland Independent Wholesalers Limited v Commissioner of Taxation (1991) 29 FCR 312, especially at 319 and 322. CONCLUSIONS ON THE APPEAL Although it has been necessary to describe the statutory and factual context of the appeal at some length, the real matter for determination by the Court can be addressed quite shortly. As I indicated during the course of argument, the present question is, in my view, a point of impression. That is to say, whilst there is little room for serious argument as to the true meaning of the statutory scheme when it is considered in general terms, there can yet be circumstances, as here, where the application of these general statutory provisions will give rise to difficulty. It is at this stage, that is, at the stage of the application of these provisions, that the parties' arguments arrive at a point of departure. In that sense, the question is one of impression. I accept, as the applicant contends, that due weight needs to be given to the substance of the relevant transaction as well as its form. I would add, however, that, without in any way casting doubt upon the observations of Hill J in Queensland Independent Wholesalers, the question there was different from the present matter. In that case, although discretionary rebates were involved, the question was whether the rebate should be taken into account to determine "the amount for which ... goods are sold" and thus, whether there had been a reduction in the sale price of the relevant goods as a matter of commercial reality. It was in that context that Hill J said (at 322): "The fact that rebates were deferred and were discretionary would not prevent them being taken into account in determining the amount for which goods were sold provided that the nature and manner of payment of the rebate remained sufficiently proximate to and connected with the sale transactions to allow them to be accounted for in that way." Hence, the meaning and application of reg 126(1)(g) were not in issue in Queensland Independent Wholesalers. But accepting, as I do, that due weight should be given to the substance of the relevant transaction as well as its form, it is then a question of judgment, essentially factual as I see it, and involving necessarily, in marginal cases, a matter of degree, to determine whether the subject payments were truly "collateral" in the sense explained in Toyota. As I followed the reasoning in Toyota, their Honours, in that case, were undertaking a similar exercise to that required to be undertaken by the Tribunal here. In other words, their Honours formed the judgment that the payments there in question were essentially collateral and, in that sense, divorced from the purchase transaction itself. In my opinion, it was open to the Tribunal to make a similar finding, essentially, as I have said, one of fact, in the present circumstances. I note in particular, in this connection, that amongst the present circumstances, is the fact that the subject payments were both in form and in substance, in the nature of unliquidated compensation, which reflected the amount required to rectify the defects. That is to say, the determination of the amount of the payments in question bore no relationship inherently, logically or otherwise, to the amount of the price of the vehicle itself. In this sense, it was open, I think, for the Tribunal to conclude that the subject payments could truly be seen as collateral to the obligation of the applicant to pay the agreed price for the vehicles. As I have noted, reference was made, on behalf of the applicant in the course of argument, to the possibility that, either at law or in equity, a court may allow a set-off in the present circumstances. Attention was directed to Mondel v Steel (1841) 151 ER 1288. The question is generally discussed by K.C.T. Sutton, "Sales and Consumer Law", 4th Ed. (at 670-1), but it need not be pursued in the present case. With respect, I agree with the observations and approach taken by Morling, Gummow and Hill JJ in Toyota (at 29), that the important consideration in applying the present statutory provision is to take into account whether: "...in the ordinary parlance of commercial life the [payments in question] can fairly be said to be rebates of, or decreases in, the prices of the relevant vehicles..." In other words, whatever the technical position at law or in equity may be, and whether, specifically, a court would allow a set-off, is immaterial for present purposes. The Court here is concerned with the ordinary parlance of commercial life. In that ambience, it was, in my opinion, open to the Tribunal to conclude that the present payments were not of the character described in reg 126(1)(g). It follows, in my view, that no error of law on the part of the Tribunal has been demonstrated. ORDERS 1. The appeal be dismissed, with costs. I certify that this and the preceding eleven (11) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Beaumont Associate: Dated: 27 June 1997 Counsel for the Applicant: P G Hely QC and A Robertson SC Solicitor for the Applicant: Garden & Montgomerie Counsel for the Respondent: S Gageler Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 26 March 1997 Date of Judgment: 27 June 1997