The Comptroller of Customs v Terminals (NZ) Ltd

JurisdictionNew Zealand
JudgeRanderson
Judgment Date12 December 2012
Neutral Citation[2012] NZCA 598
Docket NumberCA366/2012
CourtCourt of Appeal
Date12 December 2012
Between
The Comptroller of Customs
Appellant
and
Terminals (NZ) Limited
Respondent

[2012] NZCA 598

Court:

Arnold, Randerson and Wild JJ

CA366/2012

IN THE COURT OF APPEAL OF NEW ZEALAND

Appeal from High Court finding that adding locally made butane to imported motor spirit (petrol) did not constitute manufacturing for the purposes of the Customs and Excise Act 1996 — excise duty on motor spirits approximately 48 cents per litre — excise duty on butane approximately 10 cents per litre — respondent added 5 per cent by volume of butane to motor spirit — butane increased the percentage of butane present as motor spirit already had butane in it — respondent commenced adding butane in 2003 — respondent pleaded it had made inquiries of Customs Service in 2002 and in consequence of assurances given, understood the excise duty at the motor spirit rate would not be imposed on product resulting from the mixing processes — whether blending of butane and motor spirit amounted to manufacturing — whether respondent had legitimate expectation based on communications with Customs in 2002, that process would not attract the greater excise duty of manufacturing.

Counsel:

M S R Palmer and S Kinsler for Appellant

R E Harrison QC for Respondent

JUDGMENT OF THE COURT

A The appeal is allowed.

B The parties may file a memorandum if any formal declaration is required or if any issue arises in respect of the interim order made in the High Court.

C The cross-appeal is dismissed.

D The respondent must pay costs to the appellant on the appeal and cross-appeal on a band A basis with usual disbursements. We certify for second counsel.

REASONS OF THE COURT

(Given by Randerson J)

Table of Contents

Para No

Introduction

[1]

Background

TNZ's facility and processes

[12]

The constituent elements and their characteristics

[16]

Ethanol licences

[22]

The scheme of the CE Act

[25]

The Duties Table

[40]

Does the blending of butane and motor spirit amount to manufacturing?

The judgment in the High Court

[44]

Case law

[50]

Historical background

[75]

Legislative history of the definition of manufacturing

[80]

The text of the definition

[88]

The purpose of the CE Act

[91]

Conclusion on the manufacturing issue

[98]

The Comptroller's deemed manufacturing argument

[103]

TNZ's argument based on legitimate expectation

Factual background

[108]

The Judge's findings

[119]

Legitimate expectation – principles

[121]

Conclusions on the legitimate expectation argument

[153]

Promissory estoppel

[156]

Conclusions and disposition

[158]

Introduction
1

The main issue in this appeal relates to a process undertaken by the respondent (TNZ) involving the addition of locally made butane to imported motor spirit. The question is whether this process amounts to the “manufacturing” of motor spirit for the purposes of the Customs and Excise Act 1996 (the CE Act). The appellant, the Comptroller of Customs, contends the process does amount to manufacturing with the consequence that TNZ ought to be paying duty at a higher rate on the full volume of motor spirit resulting from the process.

2

In broad terms, the CE Act imposes excise duties on specified categories of imported goods and on locally manufactured goods. Butane and motor spirits are both specified goods for excise duty purposes. The issue on appeal arises because the rates of duty for butane and motor spirits are different. The rates vary from time to time but, for the purposes of simplicity, we adopt rounded rates of 10 cents per litre for butane and 48 cents per litre for motor spirit.

3

In this case, motor spirit is imported into New Zealand and excise duty is paid on it at the 48 cent rate. The butane is manufactured in New Zealand and duty paid on it at the 10 cent rate. On average, about five per cent by volume of butane is added to the motor spirit at a facility operated by TNZ at Mt Maunganui within the Port of Tauranga. The Port is a customs controlled area (CCA) under the CE Act. The total volume of the pre-existing motor spirit is increased during this process so that, for every 100 litres of the pre-existing motor spirit, the volume of the resulting product is increased to an average of 105 litres after the addition of the butane.

4

The Comptroller maintains that TNZ should be paying the higher duty rate for motor spirit on the increased volume because the process of adding the butane and mixing the two constituents amounts to the manufacturing of dutiable goods for the purposes of the CE Act. She has made a provisional assessment of the duty payable on the resulting product at 48 cents per litre but allowing a credit for the duty already paid on the two constituent goods. Using the figures we have adopted, this means that TNZ would effectively be liable for duty at 38 cents per litre (48 cents less 10 cents) on every additional litre of motor spirit resulting from the mixing process. On the example given above, there would be an addition of five litres of motor spirit.

5

TNZ's position is that no further duty is payable, submitting that manufacturing requires the production of something different from the constituent parts in order to amount to manufacturing. In this case, the goods were motor spirit before the process and remain motor spirit after it is completed. No new goods are created and the process does not therefore amount to manufacturing.

6

As a fall-back position, TNZ says that if duty is payable, then the Comptroller is breaching a legitimate expectation arising from discussions and correspondence between representatives of TNZ and the Comptroller in 2002. TNZ alleges that assurances were given that duty would not be levied on the goods resulting from the process at issue. TNZ also maintains that the Comptroller is estopped from levying the duty in consequence of the alleged assurances.

7

In the High Court, Mallon J found in favour of TNZ1 on the manufacturing issue and concluded that no duty was payable. Although not strictly necessary for her decision, Mallon J found that the assurances relied upon did not give rise to a reasonable expectation that the duty would not be levied. In the circumstances, TNZ could not establish an estoppel.

8

The Comptroller now appeals against the High Court's finding on the manufacturing issue. She also raises an alternative argument that the product resulting from the mixing process is deemed to be a manufactured good by virtue of s 69(b) of the CE Act. Under that section, goods may be deemed to be manufactured if worked upon by a contractor. The Comptroller's contention is that TNZ is a contractor who worked on the goods and that manufacturing is deemed to have occurred.

9

TNZ cross-appeals against Mallon J's finding on the legitimate expectation and estoppel issues.

10

We record that the proceedings issued by TNZ were brought by way of judicial review of the Comptroller's provisional assessment and alternatively sought declaratory relief under the Declaratory Judgments Act 1908. In the High Court, the Comptroller initially raised an objection to the suitability of judicial review and declaratory relief to resolve the issue given the dispute resolution procedures in the CE Act but, in the interests of efficiency, she did not pursue that objection. We proceed on the basis that there is no objection to the procedural vehicle adopted.

11

On 16 March 2012, Gilbert J granted interim relief restraining the Comptroller from making an assessment of excise duty and additional duties. 2

Background
TNZ's facility and processes
12

TNZ commenced business in New Zealand at Mt Maunganui in 1998. TNZ is associated with Gull New Zealand Limited, a retailer of motor spirits which commenced retail sales in New Zealand from 1999. Both companies have ownership in common. TNZ stores motor spirit, diesel and other products both for Gull and BP under contractual arrangements.

13

Initially, TNZ was the importer of motor spirit for Gull. From 1 July 2007 Gull became the importer. Currently, the importer is Mobil. The imported motor spirit arrives at Tauranga Harbour from overseas by tanker. Excise duty is paid on the imported motor spirit in accordance with the importer's entry for those goods. The motor spirit is delivered to TNZ's facility via a pipeline directly from the vessel.

14

The butane is produced in New Zealand by OnGas as a by-product of refining petroleum. Initially, OnGas supplied the butane directly to TNZ but on 13 June 2007, TNZ assigned the supply contract to Gull. The butane continues to be supplied to TNZ's facility where it is stored in an underground storage tank. Excise duty on the butane is paid when it is produced before it arrives at TNZ's facility.

15

TNZ's facility comprises storage tanks, pipes and pumps of various sizes and capacities. The outlet pipes are linked to a gantry from which the various fuels are dispatched. The motor spirit at issue in this appeal is discharged into fuel tankers in the gantry area. The composition of the motor spirit varies according to customer requirements. Within TNZ's CCA, other products are added to the motor spirit. Relevantly for present purposes, butane, ethanol or both may be added. The mixing process is regulated by computer-controlled valves and flow-metering to ensure the correct quantities are added and that the resulting product is consistent with fuel specifications. The blending of the motor spirit with the additives takes place within the pipeline systems and, subsequently, in the tankers into which the product is loaded.

The constituent elements and their characteristics
16

Motor spirit is a blend of ingredients, primarily a number of liquid hydrocarbons. Butane is one of the ingredients of motor spirits and is therefore already present in the motor spirit TNZ...

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