Case B69

Judges:
JL Burke Ch
RC Smith M
RE O'Neill M

Court:
No. 1 Board of Review

Judgment date: 25 September 1970.

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J. L. Burke (Chairman) and R. C. Smith, Q.C., and R. E. O'Neill (Members): The question before the Board is whether the operations carried on by the company in the treatment of quarried limestone constitute operations by means of which manufactured goods are derived from other goods for the purposes of sec. 62AA of the Commonwealth Assessment Act 1936 (as amended) thus entitling the company to the special deduction provided for by that section in respect of investment in manufacturing plant. In sec. 62AA(1) ``goods'' is defined, for the purposes of the section, as including ``substances'' and ``manufactured goods'' as including ``goods manufactured for the purpose of use as parts or materials in the manufacture of other goods''.

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ATC 334

2. The raw product handled by the company is limestone (calcium carbonate) which is delivered to it (after site crushing by its vendor) in lumps ranging in size from approximately six inches to two inches. In its raw state it frequently has clay adhering to it but it also contains metallic elements in the form of silica, alumina and iron which affect its colour and potential use particularly in industrial processes.

3. The end products distributed by the company, which may be loosely described as crushed limestone, fall into two broad categories, those intended for agricultural use and those for industrial purposes.

4. The agricultural products represent about 30% by weight of the company's output. In this category poultry and chicken feed are, in effect, crushed limestone coming in sizes ranging from 3/16ths to 1/16th of an inch. Agricultural lime on the other hand is milled to a particular fineness so that it will dissolve at a predetermined time to lower the acid content of soil. Likewise whiting or microfine which is used for the early germination of clover seeds. In size it is an extremely fine product.

5. The industrial uses to which the company's products are put include glass making and as a filler in a variety of industries such as the manufacture of putty, paint, linoleum and vinyl tiles. For all of these uses the product must satisfy stringent requirements as to chemical purity, size and colour.

6. Even in the agricultural field chemical standards have to be met; poultry feed has to have low magnesium content and agricultural lime must have a high percentage of calcium carbonate. For industrial purposes the specifications are more stringent. Take, for example, the product supplied to a glass manufacturer, the company's largest ``industrial'' customer. It specifies powder containing, variously, not more than.05%,.10% or.15% of ferrous oxide as against the average.4% ferrous oxide in the raw material as delivered to the company's works. The sizing of the powder is according to its capacity to satisfy ``mesh'' tests, e.g., a ``200 mesh'' representing 200 apertures per lineal inch each aperture being.0029'' in size. A typical specification for ``glass'' powder is 95-100% passing 14 mesh and 15-25% passing 200 mesh standards. Due to metallic content and in particular the presence of silica, alumina and ferrous oxide the colour of limestone in its raw state is far removed from the colour requirements (off white to very white) set for the powder as ordered for glass manufacture, industrial fillers and whiting.

7. The company tendered in evidence samples of limestone as delivered to it in bulk in sizes 2-6'' (Exhibits G1 and G2), pieces of limestone in sizes 1-2'' after preliminary crushing (Exhibit H) and samples of end products (Exhibits L1 to L7) and we may say that as a matter of impression, limited of course as to colour and size, those products have the hallmarks of manufactured goods. The final product, with the possible exception of the poultry feed, impresses one, visually at least, as being commercially distinct from the untreated limestone from which it was produced.

8. The processes by which the company achieves its end result involves much more than a mere crushing or reduction in size. When the crude stone is delivered it is chemically tested and placed into stock piles according to its general colour and metallic content. The initial crushing (reduction to sizes 1-2'') and screening is the first step in removing foreign matter such as clay (after heating the clay breaks off and the conveyor belt is so operated as to divert it) and reducing iron content. The large lumps of stone tend to break along the layers of iron oxide thus allowing the iron to be screened out. The colour of limestone is a strong indication of its metallic content and the stone reduced in size as above is submitted, within the crushing section, to an electronic colour sorter which rejects pieces which are unlikely to measure up to colour and chemical specification. Further crushing reduces the stone to pieces ½'' down to sugar size and with the aid of intense chemical testing the crushed product is diverted to bins for further treatment according to the chemical analysis. The product thus separated is finally submitted to the milling section which not only reduces the product to powder form but also effects a further liberation of inherent impurities. This final reduction in size is achieved by milling in conjunction with a de-dusting procedure (air classification) to remove finer particles where customers have set a maximum limit on fine powders in the product.

9. In
M.P. Metals Pty. Ltd. v. F.C. of T. (1968) 117 C.L.R. 631 the Full High Court held that the processing of scrap metal into a condition suitable for sale did not involve manufacture for the purposes of sec. 62AA.

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ATC 335

The judge of first instance, Windeyer J., speaking of the company's operations, said (at p. 641)-

``These operations do not create a thing having a new industrial use; and according to what seems to me the ordinary usages of the language of commerce, the processed scrap is not manufactured goods.''

In dismissing the appeal from the decision of Windeyer J., Menzies J., whose judgment was agreed in by the other members of the Full Court (Barwick C.J., McTiernan and Kitto JJ.), prefaced his reasons-

``... with the preliminary observation that my conclusion is very much one of general impression based upon what seems to me a common usage of ordinary language: see
F.C. of T. v. Rochester (1934) 50 C.L.R. 225, per Dixon J. at p. 227.''

And see also
Adams v. Rau (1931-1932) 46 C.L.R. 572 at p. 577 and
In Re Searls Ltd. 2 A.T.D. 129 at p. 131.

10. In resisting the company's claim the main argument put forward by the Commissioner was that the raw material started off as calcium carbonate and without being subjected to any chemical change finished up as calcium carbonate but in a crushed or ground form. Having had the benefit of a detailed explanation of the elaborate steps taken by the company in the course of processing the raw material which was delivered to it in large untreated lumps, we think that the Commissioner's proposition is an over-simplification of the position. We have seen the raw material which is fed to the company's plant and we have examined samples of the end products which are produced as a result of sophisticated techniques employed by the company in treating the raw material. The crushing, screening, milling and other processes whereby the end products are derived from limestone delivered in lumps to the taxpayer's plant are more than mere processes for adapting limestone for sale; rather do those processes create things having new industrial uses and we do not think that it strains the language of the section to say that the end products are manufactured goods derived from other goods. The substances produced by the company by means of its treatment of the raw material are different in content and quality from the raw material; they represent commodities commercially distinct, as we have said, from the limestone from which they are produced. As a matter of distinct impression and using the term ``manufacture'' as it is ordinarily applied in English speech (Rochester's case, supra) we think that the company's processes constitute manufacture and that its claim for a deduction under sec. 62AA of $11,672.83 for the year ended 30 June 1966 (there is no dispute as to quantum) should be allowed.

Claim allowed