Australia's highest court rules on tariff classification – wins and losses for industry
The Australian High Court has found against the Comptroller-General of Customs and handed down a decision that vita-gummies are classified as a duty free medicament and not as food. However, in reaching its decision it made a number of findings that could have a wide impact on future tariff classification decision. These findings include that when interpreting the tariff it is appropriate to have reference to the French version of the harmonised code.
The key issue
Comptroller-General of Customs and Pharm-A-Care Laboratories Pty Ltd involves the tariff classification of certain vitamins and a plant extract design to assist with weight loss. Both products are sold as gummies, meaning the active ingredient is delivered by a lolly type product.
The issue was whether the gummies should be classified to heading 3004 (medicaments for therapeutic or prophylactic uses), 2106 (food preparations) or 1704 (sugar confectionery). The AAT found that the gummies had health benefits so therefore fit within heading 3004 unless note 1(a) to chapter 30 applied. Heading 1(a) provides that the chapter does not cover:
"Foods or beverages (such as dietetic, diabetic or fortified foods, food supplements, tonic beverages and mineral waters), other than nutritional preparation for intravenous administration (Section IV)."
The AAT and Full Federal Court both held that the wording of note 1(a) meant that the examples in brackets are only excluded if they are "foods or beverages". In particular, it was held that for a food supplement to be covered by the note, the food supplement must first be a "food".
The High Court held that although the AAT and the Federal Court incorrectly interpreted note 1(a) (see discussion below), this did not produce the wrong result. This was because the AAT had correctly found that the vita-gummies were not a "food supplement" and had found that that the vita-gummies were correctly described as having a therapeutic or prophylactic use. As such, classified to heading 3004 was appropriate.
French vs English Text
Customs had argued that the clear introductory words of note 1(a) "Food or beverages (such as…" should be read in a different way as those same words are completely absent from the French version of the harmonised code.
The High Court accepted this argument and said that the note should be interpreted as only excluding the words in brackets, being "dietetic, diabetic or fortified foods, food supplements, tonic beverages and mineral waters". This had the outcome that note 1(a) does not exclude food or beverages generally, but rather only the specific examples provided. Further, a good must only meet this description and need not also be categorised as a food or beverage.
This is a dramatic change in the meaning of the note and one that is not open on a fair reading of the English words alone. This shows the impact of adopting an interpretation consistent with the French wording. It raising the following implications:
When should customs brokers and ABF officers refer to the French version of the tariff over the version adopted by the Australian parliament?
How would those administering the tariff even know when there is a material difference between the French and the English versions.
If the English version is required to be tested against the French version, could any ABF officer or Customs Broker properly do their job without being able to read French?
Even if you find a difference between the English and French versions, what guidance is there to which version should be preferred?
The approach put by Customs and accepted by the High Court has the potential to turn tariff classification into a linguistic nightmare.
Are "food and beverages" no longer excluded by the note to Chapter 30
This may be a case of being careful for what you wish for. Prior to this decision it was a given that a food or beverage was excluded from Chapter 30 by reason of note 1(a) stating that the chapter does not cover "food or beverages…". However, the High Court has held that the note only applies to "dietetic, diabetic or fortified foods, food supplements, tonic beverages and mineral waters" and not food and beverages more generally.
Of course the food or beverage must still be fit within the term "medicament" and have a therapeutic or prophylactic benefit to fall within heading 3004. However, if this hurdle is reached, it may not be a case of the Court having to consider two competing headings (heading 3004 and a food chapter) as some of the food chapters have notes saying that the chapter does not cover goods of 3004. The potential for unexpected outcomes seems high.
Reference to bracketed tariff headings in notes
At the end of note 1(a) were the bracketed word "(Section IV)". Then Full Court held that the words in brackets meant that note 1(a) only excluded food or beverages falling within section IV of the tariff.
Customs argued, and the High Court agreed, that the words "(Section IV)" are merely a guide to the reader, indicating where the items listed in note 1(a) might be classified if excluded from chapter 30.
Reference to section, chapters and headings in brackets should only be taken as a guidance note and do not have the force of including or excluding particular goods. This should be contrasted to a note that specifically states "excluding goods of …".
Again, this is a problematic outcome as bracketed chapter/heading references have acted as a good aid to tariff classification. These words will now be taken as having no legal influence over the correct classification of goods.
There was some good news
Conventional tariff classification has followed an approach of objective identification of goods followed by a separate step of classifying the goods as identified. The correctness of this approach was strongly upheld by the High Court.
This was a rejection of a confused approach to classification argued by Customs which seemed to involved firstly breaking complete goods down into their ingredients and classifying according to the various ingredients by reference to terminology in tariff headings. The High Court expressly reject classifying a good as if it is a mixture, if it can in fact be classified under interpretative rule 1 (according to headings and notes).
The Court highlighted that in classifying the goods, the Tribunal had correctly asked the basic questions "what really are the goods, and what really is it that they do". This seems like a common sense starting point when classifying goods.
What next – Refunds, legislative change and testing the limits of the judgement
This case represents the end of the judicial process – there will be no further appeals.
Refunds - Import
ers of heath and cosmetic products (including vitamins) need to review the past and future classification of their goods. There may be refund opportunities for products previously classified as food. This will be of particular importance for goods from Europe where there is no Free Trade Agreement.
Legislative change – Clearly the Government did not want the outcome that vitamins were duty free. The taxation of imported vitamins is a policy decision. However, Australia will not be able to raise tariffs for heading 3004 above its WTO commitments. An alternative may be for Australia to amend the legislation to specifically list vitamins as subheadings in its desired chapter
Where does it end – Importers are likely to review their range of products to identify goods that have either a therapeutic, preventative or cosmetic purpose and form a view as to which should fall to chapter 30. The primary area of focus is likely to be foods sold for a specific health benefit rather than to be consumed for general nourishment.
Re-test the issue – In its closing paragraph, the High Court noted that it had not expressed an opinion on whether vitamins actually have a health benefit as it was not a point of appeal raised by Customs. This may have been a suggestion that the issue is still open. Customs may consider one option is to tackle future attempts to classify edibles to heading 3004 by arguing a lack of health benefits. If it does so, it should remember that the garcinia extract was classified to heading 3004 despite it having only cosmetic benefits.