Federal Commissioner of Taxation v F H Faulding and Co Ltd
(1950) 83 CLR 5949 ATD 201
[1950] ALR 862
(Judgment by: Fullagar J)
Between: Federal Commissioner of Taxation
And: F H Faulding and Co Ltd
Judges:
Latham CJ
Webb J
Fullagar J
Subject References:
Sales tax (Cth)
Judgment date: 2 November 1950
Judgment by:
Fullagar J
By the combined effect of s. 5(1) and item 36(3) in the First Schedule of the Sales Tax (Exemptions and Classifications) Act 1935-1948 the following are exempt from tax under the Sales Tax Assessment Acts Nos. 1 to 4 and 9:
"Essences, concentrates and cordials, consisting wholly or principally of juices of Australian fruits, for the making of non-alcoholic beverages; non-alcoholic beverages consisting wholly of juices of Australian fruits."
The respondent manufactures and sells two preparations under the respective names of "Lemon Squash Cordial" and "Raspberry Balm Cordial". On sales of these the Commissioner claims that sales tax is payable. The respondent maintains that they fall within the exemption as being "cordials consisting . . . principally of juices of Australian fruits for the making of non-alcoholic beverages". Rich J. has held that the contention of the respondent is correct, and from his decision this appeal is brought. (at p599)
It was stated, and accepted as common ground, that the respondent's lemon cordial contained, by volume, 29 per cent of fruit juice and 71 per cent of other constituents, and, by weight, 26.4 per cent of fruit juice and 73.6 per cent of other constituents, and that its raspberry cordial contained, by volume, 13.4 per cent of fruit juice and 86.6 per cent of other constituents, and, by weight, 11.44 per cent of fruit juice and 88.56 per cent of other constituents. The fruit juice was Australian fruit juice. The main constituents apart from fruit juice were sugar and water, the percentages of other ingredients being trifling. (at p599)
Item 36 (3) seems to me extremely difficult to understand. I should have thought that, whatever else a "cordial" may be, the common understanding of it is that it is a beverage, and this view is supported by the dictionaries. But there is no escape from the plain fact that the Schedule treats it not as a beverage but as an ingredient of a beverage. It distinguishes in the plainest way between a "cordial for the making of a non-alcoholic beverage" on the one hand and "a non-alcoholic beverage" on the other hand. (at p599)
In order to be exempt from tax, a cordial must be a cordial "for the making of a non-alcoholic beverage". The respondent's products can only be brought within these words by virtue of a fact which was not given in evidence but was stated by counsel before us at the very end of the argument and not contradicted. That fact seems to be (though it was not stated precisely in these terms) that each of the respondent's products is intended and adapted to be drunk not in its neat state but only after being mixed with water or some other diluent such as soda water. On this basis the relevant "making" of the "non-alcoholic beverage" is the act of the ultimate consumer. This seems to me to be a strange view in itself. It may very well be that the respondent's products, though not normally drunk without dilution, are quite capable of being drunk without dilution, as are whisky and brandy. At least there is no evidence that they are not. Are we to say that the question whether a liquid is "for the making of beverages" is to be answered by reference to the probability of dilution before consumption or to the intention or belief of the manufacturer that there will be dilution before consumption? But, if the view stated above is strange in itself, it becomes even stranger when we look at the context in which the word "cordial" is found. The Schedule exempts "essences, concentrates and cordials . . . for the making of non-alcoholic beverages". The witness Phillips defined an "essence" as an "alcoholic solution of an oil". That, no doubt, is its specific meaning in pharmacy, but that meaning is clearly excluded here because only things which are non-alcoholic are included in item 36(3).
The Oxford Dictionary gives as the pharmaceutical meaning the meaning given by Phillips, but it gives the general meaning of the word as
"an extract obtained by distillation or otherwise from a plant or from a medicinal odoriferous or alimentary substance and containing its characteristic properties in a concentrated form".
The same dictionary gives the relevant meaning of "concentrate" as "the product of concentration", which is near enough to that given by Phillips, "a substance, the volume of which has been reduced either by evaporation or by sublimation". In connection with the preparation of food and drinks the general idea conveyed by both words is, I think, that of a flavouring substance in concentrated form, and that is what I am of opinion that the words mean here. Essences and concentrates (which may or may not be liquid) are, one would suppose, substances which would normally be used as ingredients in non-alcoholic beverages and could, and perhaps normally would, be used by the manufacturer in the making of a non-alcoholic beverage. It is difficult to believe that it was intended to place on the same footing a product which can only be said to "for the making of non-alcoholic beverages" in the sense that it could, and probably would, be diluted by the consumer before he drank it. (at p600)
It seems to have been assumed throughout this case that the respondent's products were "cordials for the making of non-alcoholic beverages", and the only question to which attention has been directed is the question whether they "consisted principally of the juices of Australian fruits". But the considerations which I have mentioned lead me to doubt whether the assumption is well founded. It may well be that the intention of item 36(3) is to exempt the three classes of products mentioned if, but only if, they are for use as ingredients in the manufacture of non-alcoholic beverages for sale. On this view the first limb of item 36(3) would cover ingredients in manufacture, and the second limb the completely manufactured product, the ingredient being exempt if it consists wholly or principally of Australian fruit juice, the completely manufactured beverage only if it consists wholly of Australian fruit juice. The respondent's products would then be "beverages" within the meaning of item 36(3), and, as such, not exempt, because they do not consist wholly of the juices of Australian fruits. (at p601)
I have thought it proper to call attention to the considerations outlined above, and I think that I should have been prepared to decide this case on the basis indicated. I am very conscious of the fact that the view which I have suggested might be affected by evidence, but the burden of proof rested on the respondent, and it was for the respondent to adduce the evidence. However, since I have formed a clear opinion on the question actually argued, I think it more satisfactory to decide the case on that question. That question is whether the respondent's products "consist principally of fruit juice". Rich J. has held that they do. (at p601)
I am, with great respect, quite unable to agree with his Honour's view. I feel in some doubt as to the basis on which that view really rests. His Honour says that "the word 'principally' is not used entirely as a quantitative expression. It refers to the dominant element in the cordial". But the word "principally" must be used either as a quantitative expression or as some other kind of expression. It cannot be used partly as a quantitative expression and partly as some other kind of expression. It does not seem to me, in any case, to be possible to say on the evidence that sugar is not the dominant element in the respondent's products. But, in my opinion, the word in question refers to quantity or proportion, not to "dominance" or relative importance. The view accepted by his Honour, that what is required is that Australian fruit juice shall be "the essence or characteristic constituent which gives a substance its essential properties" means that quantity is of no importance whatever. An extremely small percentage of a highly concentrated essence could be the "characteristic constituent", as is shown by his Honour's example of the potassium chlorate gargle.
But the truth is that the "characteristic constituent" of a substance or a liquid may be something entirely different from that of which the substance or liquid principally consists. It could hardly be seriously suggested that beer did not "consist principally" of water, though it is quite impossible to say that water gives it its essential characteristics. The words which purport to interpret really substitute an expression which has a very different meaning. The natural meaning of the words "consist . . . principally" is emphasized in item 36(3) by the presence of the words "wholly or". The reference must be to quantity. And, if we read the words in the Schedule in a quantitative sense, the proportions of sugar and water were such as to make it impossible to say that it was proved that the respondent's products consisted principally of the juices of Australian fruits. (at p602)
In my opinion the appeal should be allowed with costs and the judgment below set aside. In lieu thereof judgment should be entered for the plaintiff in the action for the amount claimed with costs. (at p602)