High Court of Australia BARWICK CJ Gibbs and Stephen JJ Commissioner of Taxation (Cth) v Utah Development Co ORDER Order Appeal dismissed with costs. Barwick CJ The Supreme Court of Victoria constituted by Newton J heard and allowed two appeals by the respondent taxpayer. The Commissioner has appealed to this Court seeking the dismissal of the taxpayer's appeals against the disallowance of its objection to assessments. Those assessments disallowed claims by the taxpayer for a deduction in each of 2 years covered by the assessments for expenditure of a capital nature on new manufacturing plant for use by it in Australia for the purpose of producing assessable income under the provisions of s 62AA of the Income Tax Assessment Act 1936-1972. The taxpayer's claim was that the plants which are sited on or adjacent to coal mines operated by it are used by it primarily, principally and directly as part of the operations by which manufactured goods are derived from other goods. The taxpayer claimed that by a process of manufacture it derived coking coal from the coal which it had won by mining. The Commissioner disallowed those claims for the reason that the product of the plant was not manufactured goods or for the reason that the operations in which that product was produced were mining operations and so outside s 62AA by reason of s 62AA(3). The learned judge who heard the taxpayer's appeals at first instance described the plant that the the taxpayer used in some detail in his reasons for judgment, when he said ( (1975) 5 ATR 334 at 337-40): "Essentially what each of the preparation plants does is to break up the run of mine coal into small pieces so as to separate to a considerable extent the different entities of which the coal is composed, although it is impossible to do this 100% completely, and the plant then concentrates as a new coal entities taken from the run of mine coal, which in combination will constitute a metallurgical coking coal, possessing the requisite qualities. Thus the entities of the new coal produce or constitute a coal which has, for example, a reduced ash and sulphur content as compared with the run of mine coal, and a greater strength, the strength depending on a proper combination in the new coal of reactive entities and inert entities. The residue of the run of mine coal are rejected, or at all events placed to one side as a separate coal or coals; these residues have some heating value, and could be used for power generation, as Mr Bateman explained in his evidence, although so far they have not been so used; however, negotiations for their use in this way have been and are taking place. At Blackwater the metallurgical coking coal produced by the preparation plant is equal to about 65% of the run of mine coal on an air dried weight basis, and at Goonyella and Peak Downs the proportion is about 75%. I should say that I have taken my description of the essential functions of the preparation plants principally from Mr Cudmore's evidence. "The operations by which the coal preparation plants carry out the functions just described involve very expensive equipment, some of which is of large size, and complicated and sophisticated technical processes. Each plant consists of a large, high building, together with adjacent ancillary plant. The Peak Downs preparation plant building, for example, is about 100 ft cubic, with five storeys. The plants were very expensive, the approximate total cost of the Peak Downs plant (which was the most expensive) being over $12,000,000. Photographs of the plants and of many of their items of equipment are included in Ex 'A'. "The three preparation plants operate in substantially the same way, although there are minor differences. I shall give a short and simplified description of the process. "Run of mine coal, which consists of pieces of coal up to a size of 4 ft, is screened and broken, so that it is reduced to pieces not exceeding about 1¼ins, that is pieces from 1¼ins to almost nil. Coal which is too hard to break would not be suitable for metallurgical coking coal and is rejected at this stage. The coal reduced to pieces of 1¼ins or less is then placed on a stockpile from which it is taken by conveyor into the preparation plant building, being loaded on to the conveyor in a way which will tend to mix it up and homogenize it. In the preparation plant building the coal is mixed with water, and after that the coarser parts of the coal, that is pieces between about 1¼ins and half a millimetre, are separated from the finer parts by sieve bends and screens. The coarse parts and the fine parts are thereafter separately dealt with. "The coarse parts are mixed with a heavy medium of magnetite and water, and are then pumped under high pressure to cycloids (ie heavy medium cycloids), where a separation on a specific gravity basis takes place between the parts suitable for metallurgical coking coal and the parts not so suitable. The suitable parts, that is the product coarse coal, which are the lighter, then leave the top of the cycloids and are drained and rinsed of magnetite, and are dried in high speed centrifuges. They are then mixed with the product of fine coal, to which I shall come in a moment. The unsuitable or reject parts of the coarse feed coal leave the bottom of the cycloids and are then drained and rinsed and conveyed to a large bin, whence they are taken by truck to a disposal area. Most of the magnetite, which is a fairly expensive commodity, is recovered from both the coarse product coal and the coarse reject coal is prepared for re-use. "The fine parts of the feed coal (ie half a millimetre and smaller) are pumped, after separation from the coarse parts, to desliming cyclones, where the smallest particles (which could not be economically treated for use as metallurgical coking coal) are separated from the rest, each cyclone operating as a size separator with the finer particles flowing out at the top. The remainder of the fine coal feed is then rediluted to a controlled water/solids ratio, to which is added a mixture of frothing and collecting reagents. It is then pumped to froth floatation cells where the mixture is subjected to controlled agitation and subaeration, which creates bubbles. The particles in the mixture which are suitable for metallurgical coking coal, namely those rich in the entity or maceral vitranite, are attracted by the bubbles and carried to the surface, whence they are collected and removed by paddles. These particles constitute the fine product coal, and they are then pumped to large vacuum disc filters, where water is removed. The fine product coal then proceeds to join the coarse product coal, as earlier stated. The fine coal feed in the froth floatation cells which is not attracted by the bubbles and carried to the surface (ie the fine reject coal) is removed and is ultimately pumped to fine reject ponds after a separation process by a tailings cyclone and processing of the finer parts in a thickener tank. The fine rejects from the desliming cyclones also go to the thickener tank and thence to the fine reject ponds. "The proportion of the feed which is dealt with as fine coal is between about 20% and 28%, the proportion varying as between the three preparation plants. "The plants have equipment whereby the water used in their operations is recovered and clarified and then re-used. "After the coarse product coal and the fine product coal have been united together, they are transported by conveyor out of the preparation plant building to a radial stacker and stacked on a stockpile, whence they are loaded on to another conveyor and transported to a rail bin for loading into railway trucks for transport to the coast for export. The methods used in stacking the product coal on the stockpile and in loading it on to the conveyor to the rail bin are such as to mix the coal, thereby homogenizing it. At Goonyella and Peak Downs about half the product coal is of sizes of less than 1/8in, and only 1 to 2% is more than lin. There was, I think, no evidence about the sizes of the Blackwater product coal. "At several stages of the operations of each of the preparation plants samples of coal are taken, which are tested in a laboratory. In the light of these tests adjustments to the processes of the preparation plant are frequently made from the plant control room, so as to ensure that the product coal meets the required specifications, for example by altering the concentration of magnetite in the coarse coal feed to the heavy medium cycloids, or by altering the concentration of the reagents in the fine coal feed to the froth floatation cells. "At Blackwater, but not at Goonyella or Peak Downs, run of mine coal from a particular part of the mine is often added by 'Bypass' conveyor to the product coal stockpile after crushing to sizes of 1¼ins maximum, without going through the preparation plant. Although this coal would not by itself meet all the contract specifications, nevertheless it is of such a quality that it can be blended with the product coal from the preparation plant so as to produce a coal which does meet the contract specifications. But of the total product coal from Blackwater, never more than 20% consists of this 'bypass' coal. I mention this matter of the Blackwater 'bypass' simply for the sake of completeness. It was not suggested by counsel for the Commissioner that it made any difference to Utah's claim under s 62AA with respect to the Blackwater preparation plant as compared with its claims under s 62AA with respect to the Goonyella and Peak Downs plants. "The production rates of the three plants are approximately 4,000,000 tons per annum for Blackwater, approximately 4,500,000 tons per annum for Goonyella, and approximately 5,000,000 tons per annum for Peak Downs. About 30 to 35 men, who work in three shifts per day for 5 days a week, are employed in operating each preparation plant, and a further 25 men or thereabouts are employed in maintenance." His Honour, having considered relevant decisions of this Court and of the courts of Northern Ireland and Canada, concluded that the operations carried on with the plant were operations by means of which product coal suitable for making metallurgical coke was derived from the run of mine coal. In my opinion, his Honour was not in error in concluding that the treatment in the plants was a process of manufacture and that the product of the plants was manufactured goods within the operation of the section: in other words, that the coal already won by the mining operation was treated so as to be coking coal suitable for a specific purpose. That treatment, unlike shearing and baling operation in M P Metals Pty Ltd v FC of T (1968) 117 CLR 631; 10 AITR 385; 543, did more than merely change the form of the recovered material for ease of its transport or its use. The concentration of the coking coal elements in the recovered coal to produce homogeneous coking coal did produce a product essentially different, in my opinion, from the recovered coal. In considering the Commissioner's second reason for disallowing the deduction, his Honour referred to certain of this Court's relevant decisions, particularly FC of T v Broken Hill Pty Co Ltd (1969) 120 CLR 240; 1 ATR 40. His Honour concluded that — and I read the passage from his judgment: "Applying the tests formulated by their Honours in this passage, it appears to me that the preparation plants, although they may be said to be situated on the mining properties, are not for use 'in mining operations'. In my opinion what Utah seeks to obtain by mining at each of the three mines is the run of mine coal which is extracted from the open cut pits. I would characterize the operations of the preparation plants as treatment of what is mined for the purpose of its better utilization. Indeed it would in my view be quite wrong to say that what Utah seeks to obtain by mining is the metallurgical coking coal, which is later produced by the preparation plants from the run of mine coal. For the metallurgical coking coal as such simply does not exist in the mine. It is only by the separation and reconstitution of entities or minerals found in the run of mine coal, which is affected by the complex and sophisticated operations of the preparation plants, that the metallurgical coking coal is brought into existence." I am not persuaded that his Honour was in error in either of his conclusions. In my opinion, he made no error of law in approaching what, in my opinion, was ultimately a question of fact, nor did he overlook any factor or give undue weight to any factor, proper to be considered in reaching that ultimate conclusion. His conclusion is not disconformable to any decision of this Court in the relevant field. It was, in my opinion, fully open to his Honour to consider that the mining operation finished with the extraction of coal from the ground that the subsequent treatment of the mined substance to obtain therefrom homogeneous coking coal was not part of the mining operation, but on the contrary was, at least, the treatment of the mineral recovered for the better utilization of that mineral, to use the language of the judgment of the majority of this Court in FC of T v Broken Hill Pty Co Ltd , supra. I am content, for these reasons, to dismiss this appeal. Gibbs J I agree. Stephen J I agree. I have had the opportunity of considering the judgment just read by the Chief Justice and have nothing further to add.