The Commissioner of Inland Revenue v. International Importing Ltd.

Members: Turner P

Richmond J
Macarthur J

Tribunal:
Court of Appeal (New Zealand)

Decision date: Judgment handed down 31 May 1972.

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Richmond and Macarthur JJ.: In this appeal the issue is whether the respondent is entitled to claim, in respect of the income year which ended on 31 March 1969, an incentive deduction for increased exports in terms of sec.129B of the Land and Income Tax Act 1954. In the Supreme Court, Wilson J. held in favour of the respondent and, for reasons which will presently appear, we agree with that conclusion.

Section 129B was originally inserted in the Land and Income Tax Act by sec.20 of the

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Land and Income Tax Amendment Act (No.2) 1963. It is a lengthy section and it is not necessary to set it out in full for the purposes of the present appeal, nor is it necessary to trace various amendments which have been made to the section from time to time. The general scheme of the section has been at all times to allow a deduction for income tax purposes calculated by reference to the amount of the ``increase in export sales for the income year'' which means any excess of the ``value of export sales'' of the taxpayer for the income year in question over one-third of the value of export sales for what is called the ``base period'' of that taxpayer. The phrase ``value of export sales'' is defined as meaning ``the amounts of consideration receivable by that taxpayer in respect of the sale or other disposal of export goods that have been sold or otherwise disposed of by him during that period.'' One is thus led to the definition of ``export goods'' contained in sec.129B(1). It is upon the correct interpretation of this definition that the issues involved in the present appeal depend. It is as follows -

```Export goods' means goods exported from New Zealand by a taxpayer, being goods -

(a) Which were sold or disposed of by the taxpayer; and

(b) Of which the taxpayer was the owner at the time of the sale or disposal -

but does not include -

(c) Goods exported by way of gift;

(d) Goods taken or sent out of New Zealand with the intention that they will at some later time be brought or sent back to New Zealand;

(e) Goods imported into New Zealand and subsequently exported from New Zealand after being processed, packed, graded, or sorted in New Zealand or incorporated with another product in New Zealand, if the consideration receivable for the sale or disposal of the goods so exported is less than fifteen percent greater than the cost of all imported goods included in the goods so exported, such cost being the landed cost of those imported goods (exclusive of New Zealand customs duty) at the time when they were imported into New Zealand;

(f) Goods imported into New Zealand and subsequently exported from New Zealand in the same form without processing, packing, grading, or sorting thereof in New Zealand;

(g) Goods exported to the Cook Islands (including Niue) or to the Tokelau Islands;

(h) Animals, animal products and by-products (including dairy produce, meat, meat products, wool, and their respective by-products), newsprint, and minerals;

Provided that the Governor-General may from time to time, by Order in Council, exclude any such goods or any specified class or classes of such goods from the operation of this paragraph;

(i) Any other goods specified by the Governor-General from time to time by Order in Council;''

The vital question is whether goods which were sold by the respondent (and of which it was admittedly the owner at the time of such sales) were exported from New Zealand by the respondent within the opening words of the foregoing definition.

The respondent owns and operates two shops in Christchurch, trading as the ``Christchurch International Duty Free Shops.'' One of these shops is at the airport and the other in the city. Duty free shops have existed in New Zealand since 1962 and for some years after sec.129B was inserted in the Act by the 1963 amendment, the Commissioner of Inland Revenue allowed the proprietors of such shops the deduction provided for by the section. From and including the income tax year ending (in the case of the respondent) on 31 March 1969, the Commissioner's ruling was changed and so it came about that the respondent's claim for a deduction in that year was disallowed and the present proceedings by way of case stated under sec.32 of the Act were commenced. There were certain issues raised by the case which are not now in question

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and in this appeal the judgment of Wilson J. is challenged on one question only, namely his finding that the goods sold to departing travellers in the respondent's duty free shops were exported by the respondent. The broad contention put forward by Mr. Mathieson in support of the appeal is that those goods were exported by the travellers. It becomes necessary at this stage to say something as to the method of operation of the respondent's business.

The great bulk of goods sold by the respondent are goods which it has imported from overseas. For that purpose it holds an import licence issued pursuant to the Import Control Regulations 1964 and this licence is expressed to be for the importation of duty free goods for supply to duty free shops only. Goods imported are entered under the Customs Act for warehousing and are delivered to one or other of two bonded warehouses owned by the respondent at the Christchurch International Airport. Goods sold from the duty free shops must be paid for in foreign currency. This requirement applies to all goods, whether imported or of New Zealand origin. The goods as they are sold are for customs purposes entered for export and thereupon the respondent becomes under the statutory duty imposed by sec.109 of the Customs Act 1966 to ``forthwith export the goods to a country outside New Zealand.''

The respondent at all material times was also the holder of a general export licence issued in accordance with the provisions of the Export Licences Regulations 1966. It was common ground that the provisions of the Export Licences Exemption Notice 1966/196 as subsequently amended by Reg.2 of 1968/118 were not applicable because although that notice exempts goods which are bona fide passengers' baggage and effects, there is no such exemption in the case of goods sold ex warehouse or under drawback of duty or sales tax. The respondent's bonded stores are ``warehouses''.

No distinction was made in argument between the course of dealing adopted by the respondent in its airport shop and in its city shop. In both shops goods of the kind currently held in the bonded stores are on display. Customers order goods by reference to the articles on display and receive a sales docket in return for payment of the price in foreign currency. This docket contains the following words in bold type: ``The goods described on this docket MUST be claimed by you prior to boarding the plane or in the event of surface travel will be left in the care of the purser''. At the bottom of the docket the following appears; `` NOTE. Duty free goods are for export only and must not be retained, consumed or otherwise disposed of within New Zealand''. Three other copies of the invoice are retained by the shop. The respondent's storeman then selects from the bond store articles of the kind described in the docket and places them in one or more open bags with carrying handles. In order to purchase the goods at all the customer has to produce his boarding pass to the aircraft and his flight number. The goods, in the open bags which I have described, are handed to the passenger at the call to board the aircraft. This is done by employees of the respondent and in the presence of Customs Officers who at the same time remove from the bags a pink copy of the sales docket which they retain for customs purposes. The goods are handed to the passengers on production of their copy of the sales docket and all this is done in what is called the ``clear area'' at the airport. All bottles of spirits and all packages greater than a certain size are then handed back into the possession of the respondent's staff and in respect of such goods the passengers are given the butt of an identification tag or label attached to their goods. This butt is used by them to obtain possession of the goods when the aircraft arrives at its destination. The goods, themselves in their bags, are placed in cartons supplied by the respondent and are then sealed by the respondent's employees for customs purposes and delivered to the hold of the aircraft. The reason for this procedure is that bottles of spirits and packages over a certain size are not regarded by the airlines as suitable to be carried in the passengers' cabin.

The case is not very informative as to the procedure when goods are sold to travellers departing by sea. The inference is, however, that such goods are delivered to the purser on board the ship by the respondent's

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employees, under customs supervision, and can later be claimed from the purser by the passengers on board.

All foreign currency received from the foregoing operations is duly accounted for, through the banking system, to the Reserve Bank. There was also evidence given in the Supreme Court as to the procedure which is followed should an aircraft have to return to the airport for any reason after take-off. In effect, it is a requirement of customs that all the goods be returned into the respondent's custody until the aircraft is again ready for take-off. A similar procedure is then used to re-deliver the goods to the passengers and to the aircraft. Sometimes a flight is completely cancelled and in that event all the goods are returned to the respondent and in practice the respondent has in such circumstances refunded the purchase price to its various customers.

It is convenient at this stage to mention one aspect of the case which carried some weight with Wilson J.. He thought that the property in goods sold to travellers departing by air remained in the respondent until the goods had been actually taken beyond the territory of New Zealand. In our view this question is not of any real importance but, in deference to the argument which was submitted to us by Mr. Rabone on this point, we should say that in our opinion the property in such goods passed to the buyers at the time when the goods were handed to them in the ``clear area'' at the airport. We have arrived at this conclusion having regard to the provisions of sec.19 of the Sale of Goods Act 1908 and also to Rule 5 as set out in sec.20 of that Act. It seems to us that the procedure which is followed when an aircraft has to return unexpectedly (but is later able to resume the flight) has no particular relevance. It means no more than that the respondent, for customs purposes, resumes temporary custody of goods which then belong to the passengers. As regards the exceptional case of a flight being cancelled, the procedure then followed can be explained either on the basis of a re-sale of the goods by mutual consent or else on the basis of an implied term whereby in such an event the sale would be cancelled so that the property in the goods would re-vest in the respondent and the purchase price would be refunded.

In the case of goods delivered on board ship, we are of opinion that the property would pass when the goods are delivered by the respondent into the custody of the purser. The result is that in all cases the ownership of the goods passes to the passengers at a point of time before the goods actually leave the port or airport.

We should also add that there is nothing in the evidence to suggest that the respondent is in any way a party to or instrumental in bringing about the contract of carriage between the passengers and the airline or shipping company.

It is convenient next to say something of the purpose for which sec.129B was introduced into the Land and Income Tax Act. Nowhere in the section itself is there any stipulation that to qualify as ``export goods'' the goods must have been sold in circumstances entitling the vendor to receive payment in a currency other than New Zealand currency. Nevertheless, the section was enacted at a time when the Export Licences Regulations 1938/160 were in force and those regulations contained various provisions designed to bring all foreign currency received from the sale of goods exported from New Zealand under the control of the Reserve Bank. Equivalent regulations are still in force. It is we think, quite apparent that although sec.129B appears in an Act which is primarily fiscal, its purpose nevertheless is to encourage taxpayers who carry on in New Zealand any business in which goods are sold or otherwise disposed of to increase their export sales and thereby increase the amount of overseas reserves owned by this country. There may be other purposes as well but this would appear to me to be the main and obvious purpose. It was indeed common ground between counsel that this is so. As then the Legislature has chosen to use this particular fiscal measure for promoting the general welfare of the economy, we think it is the duty of the Court to interpret sec.129B by giving to it ``such fair, large, and liberal construction and interpretation as will best

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ensure the attainment of the object of the Act...according to its true intent, meaning, and spirit'' ( Acts Interpretation Act 1924 sec.5(j)). Reference may also be made to the observations of Lord Denning in
Escoigne Properties Ltd. v. I.R. Commrs. 1958 A.C. 549 at pp.565-566 . In the course of those remarks Lord Denning observed that he found one of the best ways of understanding a statute is to take some specific instances which, by common consent, are intended to be covered by it. That was the approach made by Mr. Somers to the present case. In essence, he submitted that the critical words of sec.129B, namely ``goods exported from New Zealand by a taxpayer'' are not to be interpreted in too legalistic a manner as if this were done the effect would be to exclude from the benefit of the section numerous commercial transactions which obviously fell within the spirit of the section. He then went on to analyse the nature of various well known forms of contracts in use in the export trade. These contracts are of course commonly classified as C.I.F., F.O.B., F.A.S., F.O.R. and Ex-ship contracts. In practice there are all sorts of variations of these standard forms. As is well known, the respective duties of the seller and the buyer vary considerably under the different types of contract and there is also a considerable variation as to when possession of and property in the goods passes to the buyer. In some cases the vendor may have nothing to do with arranging the contract of carriage. In the case of an F.A.S. contract the seller's duty is merely to get the goods alongside the ship whereas in the case of an F.O.B. contract he has to see the goods on board; thereafter the goods will normally be at the risk of the purchaser and the property may well have passed to the purchaser. In such cases, therefore, the goods will belong to the purchaser at the time when the vessel leaves the port. Furthermore, the contract of carriage will be between the ship and the buyer and that contract may have been arranged by the buyer himself through his own forwarding agent some considerable time before the goods are put on board. This type of transaction is referred to in the judgment of Devlin J. (as he then was) in
Pyrene Co. Ltd. v. Scindia Navigation Co. Ltd. (1954) 2 Q.B. 402 at 424 where that learned Judge also referred to the fact that ``the F.O.B. contract has become a flexible instrument.''

If an importer in the United States placed a large order for topdressing aircraft with a New Zealand manufacturer, payment to be in American currency, then that general transaction, to adopt Lord Denning's approach, would be ``one which, by common consent, is intended to be covered by sec.129B''. For the purposes of that section it could not matter whether the goods were sold Ex-ship United States port or were delivered F.A.S. New Zealand port alongside a vessel chartered by the buyer for the special purpose of taking delivery of the shipment. In other contexts the question whether goods have been ``exported'' by one person rather than another, has been decided on narrow legal grounds.
Camelo v. Britten (1820) 4 B. & Ald. 184 ; 106 E.R. 906 is an example. We agree with Mr. Somers however that no such narrow approach could be made in the present case without defeating the plain and obvious purpose of sec.129B.

Indeed, Mr. Mathieson did not really contest this approach to the matter although both he and Mr. Rabone addressed some argument to us on the basis of a narrow approach to the interpretation of the section. Even on what he called the broad approach to the matter however, Mr. Mathieson sought to distinguish the circumstances of the present case from those surrounding the various types of commercial export transactions to which we have just referred. In particular he submitted that a taxpayer could not fairly be described as ``exporting'' goods unless he at least played some part in arranging the contract of carriage or sold goods under a contract which imposed on him some duty as regards the initial handling of the goods in the course of their transit overseas. Mr. Somers in reply to this submission pointed out that in the present case the functions actually fulfilled by the respondent in the case of airport sales were very similar indeed to those fulfilled by a vendor under a contract F.A.S.. In the case of sales to passengers on overseas ships the functions of the respondent were very similar

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to those of a vendor under a contract F.O.B.. Furthermore, in both contracts F.A.S. and F.O.B. the actual contract of carriage may easily have been arranged well in advance of shipment by the buyer either in person or through his agent.

It was common ground between counsel that the ordinary meaning of the word ``export'' is ``to send or take out of New Zealand.'' Mr. Mathieson contended that when the circumstances show a clear case of taking out of New Zealand by the buyer, no room is left for the concept of a simultaneous sending of the goods out of New Zealand by the vendor. It is to be observed however that sec. 129B is solely concerned with the actions of vendors. In our opinion a vendor may export either by taking or by sending. There will be many cases where it can be said that the buyer exports by taking, as for example in the-case of an ordinary contract F.O.B. New Zealand port. In such a case and in the words of Abbott C.J. in Camelo v. Britten (supra) ``the shipment having been made, the goods were the property and under the control of'' the buyer. In the context of sec.129B however, we think that ample room remains for the concept of a simultaneous exportation by sending on the part of the vendor. The Legislature has not attempted for the purposes of sec.129B to define the meaning of the word ``export'' and the Court can do no more than give to that word its ordinary meaning (as just described) and to decide as a matter of fact and degree in individual cases whether the part played by the taxpayer in bringing about the removal of the goods from New Zealand was a sufficiently immediate and effective cause of that removal to justify the description of the vendor as a sender (or taker as the case may be) of those goods out of New Zealand. Whether or not a person ``exports'' goods seems to us to depend more on the actual part which he in fact played in bringing about their removal than upon the terms of the contract between himself and the buyer. It is to be noted, incidentally, that sec. 129B is not so worded as to require the taxpayer to be the owner of the goods at the time of export. The section only requires that he should be the owner of the goods at the time of sale.

In the present case it was, in our opinion, a term of the airport sales that the respondent would deliver the goods to purchasers at a place which was very close to the departing aircraft and at a time very shortly before the actual departure of the aircraft. The whole course of dealings was such that the passengers had no practical choice but to take the goods with them out of New Zealand and the respondent also delivered bottles of spirits and bulky packages to or alongside the aircraft itself. In the case of passengers by sea, the goods were all delivered on board and again in circumstances where the passengers had no practical choice but to take them overseas. Payment was stipulated for in foreign currency and thus the whole course of business appears to fall within the general purpose of sec.129B. It results in an overall increase in overseas funds, namely the amount of the mark-up on the original duty free landed price. It is difficult to know what, if any, weight the Court should give to the fact that the respondent is regarded as an exporter by the Customs Department and also it would seem by the Reserve Bank. Certainly those circumstances do not detract from the case put forward by Mr. Somers. All in all, we have reached the conclusion, as a matter of fact and degree, that the whole nature of the respondent's specialised business and the circumstances under which it is conducted, taken together with the actual part played by the respondent in bringing about the removal from New Zealand of goods sold by it to departing passengers, justify the view that the respondent exported the goods in question by sending them out of New Zealand. We wish to make it clear, however, that while in the circumstances of this case we think that there can be a simultaneous export by a vendor sending and by a buyer taking the goods out of New Zealand, we do not thereby wish to infer that in some other case, and as between two vendor taxpayers who have successively sold the same goods, there would be any room for the concept of two vendors both able to claim a deduction under sec.129B where there has been only one actual export of the goods from New Zealand. Such cases must be left for determination as and when they arise.

For the foregoing reasons we are of opinion that the present appeal should be dismissed.