Re Lnc (Wholesale) Pty Limited v the Collector of Customs [1988] FCA 5 (22 January 1988)

FEDERAL COURT OF AUSTRALIA

Re: LNC (WHOLESALE) PTY LIMITED
And: THE COLLECTOR OF CUSTOMS
No. NSW G307 of 1987
Appeal from the Administrative Appeals Tribunal

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Sweeney(1), Davies(2) and Einfeld(2) JJ.

CATCHWORDS

Appeal from the Administrative Appeals Tribunal - Customs - valuation of goods - goods paid for in Japanese Yen - forward exchange contracts entered into by applicant - principles to be applied in calculating the fair rate of exchange - relevance of forward exchange contracts.

Customs Act 1901 (Cth) ss.154, 159, 161B

HEARING

SYDNEY
22:1:1988

Counsel for the applicant: Mr M.H. Tobias, Q.C. with Mr J.S. Hilton

Solicitors for the applicant: Dunhill Morgan

Counsel for the respondent: Mr C. Darvall, Q.C. with Mr G. Rowling

Solicitors for the respondent: Australian Government Solicitor

ORDER

The appeal be dismissed.

The applicant pay the respondent's costs.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

This appeal from a decision of the Administrative Appeals Tribunal ("the Tribunal") turns upon the construction of sub-sec. 161B(1) of the Customs Act, 1901 ("the Act") which provides -

"Where an amount that is, in accordance with
this Division, required to be taken into
account for the purpose of ascertaining the
value of any imported goods is not an amount
in Australian currency, the amount to be so
taken into account shall be the equivalent in
Australian currency of that amount,
ascertained according to a fair rate of
exchange at the date of exportation of the
goods".

2. The respondent ("the Collector") having ascertained the rate of exchange in respect of certain Subaru motor vehicles exported from Japan on account of the applicant ("LNC") and LNC having appealed against its decision, the Tribunal affirmed that decision saying -

"... the proper decision on this issue is that
the respondent is correct in deciding that a
fair rate of exchange is not to be taken as
fixed under forward exchange contracts and
that it is the duty of the respondent to
ascertain an actual rate of exchange on the
date of exportation of the goods. ... the
amount under section 161B(1) of the Act in my
opinion is a question of fact to be
ascertained in accordance with the market
value of the foreign currency in Australia at
the date of exportation of the goods".

3. The Tribunal applied the observations of Isaacs and Rich JJ. in Alexander Stewart & Sons Limited v. Robinson [1920] HCA 78; (1920) 29 CLR 55 p 53 in relation to the predecessor of the present sub-section, that:-

"The 'fair rate of exchange' from the
standpoint of section 157 is the sum which at
the time of exportation the Australian
importer would, in the circumstances, have to
pay in sterling in Australia to obtain a
credit in the country of exportation
sufficient to pay the amount of the invoice in
the currency there. That is the practical
method, and, being the practical method, it is
also the legal method (for that, we must take
it, was meant by the Legislature) of
ascertaining what the goods have as a matter
of fact, according to the invoice, cost the
importer at the port of export".

4. On 2 December 1985 LNC arranged with Westpac Banking Corporation that it would provide to LNC on 2 June 1986 500 million yen and agreed that on that date it would pay to Westpac $US 2,474,276.62. The exchange rate was 202.8 yen to one U.S. dollar.

5. On 23 April 1986 LNC purchased through Westpac the sum of $US one million to be available on 2 June 1986 for $A 1,379,881.33. On the same day it purchased through Commonwealth Banking Corporation the sum of $US one million to be available on 2 June 1986; for $A 1,379,881.33. The rate of exchange for each of these transactions was $A .7247 to one U.S. dollar.

6. On 27 May 1986 it purchased through Australia and New Zealand Banking Group the sum of $US 650,000 for which it paid $A 902,777.70, at an exchange rate of $A .7200 to one U.S. dollar. It used $US 474,267.62 of that sum of $US 650,000 together with the two sums each of $US one million to produce the total of $US 2,474,267.62.

7. The vehicles were exported on 30 and 31 May 1986 and on 4 June 1986 sight drafts for a total amount of 552,062,579 yen were negotiated by Citibank, Tokyo, in order to pay the exporter for the vehicles.

8. When the forward exchange contract for 500 million yen matured on 2 June 1986 some of the money which then became payable was used to meet another commitment of LNC then due, and the remaining sum of 445,100,157 yen was refinanced by being placed on deposit to 9 June 1986. LNC also arranged for a further 106,962,422 yen (being the balance required to put Westpac in funds to reimburse Citibank in full for the amount of the sight drafts) to be financed under a forward exchange contract due on 3 July 1987.

9. The total outlay in $A by LNC for the overall transactions was $A 3,934,944 resulting in an average cost to LNC of one Australian dollar per 141.20 yen.

10. LNC relied on the two transactions on 23 April, the transaction on 27 May and the later transactions on or about 2 June 1986 as the steps going to establish 141.20/1 as what it contended was the "fair rate of exchange at the date of exportation" for the purposes of sub-sec 161B(1) in respect of the importation of the vehicles and the assessment of Customs duty.

11. The transactions of 2 June 1986 took place after the date of exportation but, according to LNC, should still be taken into account in ascertaining what was the fair rate of exchange at the date of exportation.

12. The exchange rate applied by the Collector, based on the 'spot' rates as at the dates of exportation of the vehicles on 30 and 31 May 1986, was 123.44/1.

13. This resulted in an increase in the value of the vehicles for duty purposes of some $A 562,590 over the amount in Australian dollars actually outlaid by LNC. The parties agreed that if the Collector's approach to the question were correct, there was no challenge to his use of the rate of 123.44/1.

14. LNC chose to enter into the purchase of the $US 2 million on 23 April. It could have made this purchase at any other time, when the exchange rate between $US and $A was different. It seems strange that the decisions made by LNC on the dates of purchase of the $US, selected for its own reasons, should lead to the answer to the question of what the fair rate of exchange was at the date of exportation.

15. In any event, up to 2 June 1986, LNC, as its counsel rightly conceded, was free to decide whether to use any of the $US so purchased to meet its commitment to Westpac to enable it to reimburse Citibank in respect of the purchase of the vehicles or to use any of those dollars for other purposes.

16. Following the exportation of the vehicles the letter of credit held by Citibank was used to facilitate payment to the exporter. The moneys available from the first forward exchange contract were applied at a slightly later stage to reimburse Citibank towards reinstating the letter of credit, but LNC was free to effect such reinstatement without the use of that forward exchange contract if it so wished. In fact to meet its full commitment it had to procure at the time additional funds to ' up' the amount available from that forward exchange contract.

17. In my opinion, sub-section 161B(1) should not be construed so as to be enable the importer to determine for itself as the rate of exchange which would best suit its purposes, either the average cost of its earlier currency purchases or the rate of exchange current at the date of exportation (whichever may be preferable), as being a "fair rate of exchange at the date of the exportation of the goods". Nor should it be construed so as to permit an importer to rely in part upon currency transactions which took place after the date of exportation in the process of ascertaining a fair rate of exchange at the date of exportation.

18. One may compute the eventual cost to LNC in Australian dollars per yen resulting from its arrangement on 2 December 1985 to pay on 2 June $US 2,474,276.62 in return for Westpac's agreement to provide it with 500 million yen on that date, and its later arrangements to pay the amounts in Australian dollars necessary at that time to obtain delivery to it of the U.S. dollars to complete its purchase of the 500 million yen, plus the provision of additional yen to effect repayment to Citibank of the total export price of the vehicles. However, in my opinion, the resulting figure is not a rate of exchange in the ordinary meaning of that phrase at all and certainly not "a fair rate of exchange at the date of the exportation of the goods". It merely represents a figure arrived at as the result of a series of transactions entered into by LNC showing what was the cost per yen to LNC in Australian dollars. So far from being a fair exchange rate, in my opinion it is not a rate of exchange at all.

19. If LNC's submissions were to be accepted, there may, on a given day in periods of currency fluctuations, be as many "fair rates of exchange" as there are importers and the differences between them may be great. Indeed, an individual importer using differing forward exchange facilities in respect of identical batches of goods exported on the one day may be entitled to the application of different rates of exchange in relation to each batch, all of which are to be regarded as "fair".

20. The duty of the Collector under the sub-section, where an amount is expressed in yen, is to determine "the equivalent in Australian currency of that amount, ascertained according to a fair rate of exchange at the date of the exportation of the goods".

21. The Collector is not called upon, and is not entitled, to ascertain the cost at which an importer could purchase the necessary foreign currency by entering into a series of purchases of other currencies, eventually producing that foreign currency. It is notorious that on any particular day a currency fluctuates in different ways against other currencies. The Collector would reach a different result if he calculated, for example, the cost of using Australian dollars to buy Swiss francs to use to purchase yen or the cost of using Australian dollars to buy U.S. dollars to use to purchase yen.

22. In my opinion, it would not have been permissible for the Collector to embark upon such an indirect course even if he used the rates of exchange prevailing between the different currencies at the date of exportation. It was not open to LNC to rely upon intermediate purchases of currencies other than yen, choosing U.S. dollars rather than, say, Swiss francs at different dates of its own selection, as a means of establishing "a fair rate of exchange at the date of exportation".

23. After the close of argument, counsel for LNC referred as to the case of AMI Toyota Limited and the Comptroller-General of Customs and the Commonwealth of Australia (CL70 and CL71 of 1987) in which Marks J. delivered judgment on 19 November 1987 in respect of two exportations of Toyota vehicles from Japan to Australia, the price in each case being expressed in yen.

24. His Honour said:

"At the date of the Bill of Lading in each
case the plaintiff had available to it, under
forward exchange contracts, an effective rate
of exchange between the Australian dollar and
Japanese yen, which was more favourable to it
than others then generally available. All
payments of the plaintiff were made at an
effective rate of exchange which was more
favourable then the rate which was taken into
account and applied by the Comptroller-General
of Customs ("the Comptroller") when he
demanded and imposed customs duty on the motor
vehicles in the shipments. The plaintiff paid
the duty so demanded under protest and thus
preserved such rights as it had under s.167(2)
of the Act.

It was submitted on behalf of the plaintiff
that the rate of exchange which it had
available to it and actually used to make the
payments, was th

25. His Honour rejected the argument of the defendant and accepted that of the plaintiff. In doing so, he referred to the fact that the parties before him agreed that the importer "obtained in advance an effective exchange rate for Japanese yen which was not otherwise available on the date of payment". In the case with which we are concerned the Collector did not agree that LNC had obtained in advance an effective exchange rate for yen.

26. The Toyota case may be distinguishable on that ground, but to the extent that it conflicts with the opinion I have formed, I would respectfully disagree with it.

27. I would dismiss the appeal, with costs.

This is an appeal from a decision of the Administrative Appeals Tribunal with respect to the rate of exchange to be adopted in the valuation of Subaru motor vehicles imported by LNC (Wholesale) Pty Limited ("LNC"). Certain of the motor vehicles were exported from Yokohama, Japan, by the vessel, Andes Highway, on 30 May 1986 and certain from the same port on the following day, 31 May 1986 on the vessel, Arabian Breeze.

2. Section 161B(1) of the Customs Act 1901 (Cth) ("the Act") provides:-

"(1) Where an amount that is, in accordance with this
Division, required to be taken into account for the
purpose of ascertaining the value of any imported
goods is not an amount in Australian currency, the
amount to be so taken into account shall be the
equivalent in Australian currency of that amount,
ascertained according to a fair rate of exchange at
the date of exportation of the goods."

3. As the prices payable by LNC for the subject goods were prices calculated in Japanese Yen, it was necessary to convert them into Australian currency according to a fair rate of exchange at the dates of exportation of the goods.

4. The issue litigated before the Administrative Appeals Tribunal was not the determination of the precise rates of exchange, for it was agreed by the parties that the matter should be remitted to the respondent to calculate the appropriate rate. What was in dispute, however, was the principle to be applied in calculating the rate. In substance, the respondent contended that the rates to be adopted were the commercial or market rates prevailing on the dates of exportation while LNC contended that the fair rates of exchange should accord with or take into account rates derived from certain forward exchange contracts into which it had entered.

5. A somewhat similar issue had been considered by an Administrative Appeals Tribunal in Re Thiess Toyota Pty Limited and Collector of Customs, New South Wales, delivered 24 September 1985. In that case, the Tribunal rejected as a guide to the rate of exchange on the date of exportation certain forward exchange contracts which had been entered into by the importer five days after that date. The Tribunal said that those contracts were irrelevant and, in fixing a fair rate of exchange, the Tribunal relied upon the evidence of a senior foreign exchange adviser with Westpac Banking Corporation as to the state of the Sydney market on the date of exportation.

6. In the present case, LNC had entered into a foreign exchange transaction with Westpac Banking Corporation ("Westpac") whereby Westpac sold to LNC on 2 June 1986 500 million Japanese Yen for $US 2,474,267.62. That transaction occurred on 2 December 1985. Subsequently on 23 April 1986, LNC entered into a further arrangement with Westpac whereby LNC purchased, on 2 June 1986, $US 1,000,000 for the price of $A 1,379,881.33. On the same day, LNC agreed to purchase from the Commonwealth Banking Corporation a further $US 1,000,000 on 2 June 1986. The consideration in Australian dollars was not expressed but a rate of .7247 was given. On 27 May 1986, LNC agreed with the ANZ Bank to purchase $US 650,000 on 2 June 1986 for the consideration of $A 902,777.70. The result of these transactions was that LNC had adequate US dollars available on 2 June 1986 to pay for the purchase of the 500 million Japanese Yen. The availability of this sum enabled LNC to meet its obligations with respect to the prices of the imported Subaru vehicles.

7. It was the contention of LNC that, from these arrangements, a rate of exchange could be deduced, that those arrangements were on foot on the dates of exportation with a view to meeting the liability for the prices of the Subaru vehicles and that the deduced rate of exchange should either be adopted as, or taken into account in calculating, the fair rate of exchange with respect to the subject goods on the dates of their exportation.

8. The Administrative Appeals Tribunal concluded:-

"In my opinion, the proper decision on this issue is
that the respondent is correct in deciding that a
fair rate of exchange is not to be taken as fixed
under forward exchange contracts and that it is the
duty of the respondent to ascertain an actual rate of
exchange on the date of exportation of the goods.
Section 161B does not speak of parts of the day and
the law does not usually take into account parts of a
day or date. It will therefore be necessary to take
into account in fixing that rate the vicissitudes of
the Australian dollar throughout the day of export.
The rate specified in a forward exchange contract,
being a rate fixed in a currency transaction might in
some cases be a matter to be taken into account in
arriving at that value."

9. In our opinion, the Tribunal was correct in the view that it expressed.

10. The applicant's forward exchange contracts did not provide a rate of exchange available on the dates of exportation. No doubt the cost of Japanese Yen in terms of Australian dollars could be ascertained from the contracts and a rate deduced therefrom. But that was not a rate of exchange available or current as at the dates of exportation, 30 and 31 May 1986. We leave on one side the obvious point that these contracts provided for settlement on 2 June 1986 and not on the dates of exportation. But that apart, the rate was not a rate of exchange on the dates of exportation. The deduced rate of exchange resulted from a transaction entered into, so far as the Japanese Yen were concerned, on 2 December 1985, and transactions entered into, so far as the US Dollars were concerned, on 23 April and 27 May 1986. It in no way reflects the rates of exchange prevailing on the dates of exportation.

11. The very purpose of a forward exchange arrangement is to protect the forward purchaser of foreign exchange against unfavourable fluctuations in the exchange rate and therefore to protect against the exchange rate actually prevailing at a relevant time. The Act, on the other hand, specifically directs that the rate of exchange prevailing at the date which the Act prescribes as the relevant date, the date of exportation, is the rate of exchange to be adopted.

12. As was held in Re Thiess Toyota Pty Limited and Collector of Customs, New South Wales, cited above, s.161B requires the adoption of commercial or market rate of exchange, current on the day of exportation. The rate chosen should be a fair rate having regard to the sum involved in the transaction, the nature of the transaction and the nature of the importer's business. Thus, Knox C.J. said in Alexander Stewart & Sons Ltd v. Robinson [1920] HCA 78; (1920) 29 CLR 55 at p 59 as to a precursor of s.161B:-

"I think the phrase 'rate of exchange' when used in an
Act of Parliament prima facie means, as it does in
ordinary parlance, the commercial rate of exchange,
that is to say, the rate at which drafts for payment
in a foreign country in the currency of that country
can be purchased for sterling at the relevant date.
Where a debt is payable in foreign currency the
amount of English currency required to pay it 'must
be arrived at by taking the real value in English
currency of the foreign currency where payable as a
purchasable commodity - i.e., in practice, according
to the rate of exchange existing at the particular
time between the currencies' (see per Vaughan
Williams L.J. in Manners v. Pearson & Son (1898) 1
Ch, 581, at p 592)."

Another example of this concept is found in Atlantic Shipping & Trading Co. v. Louis Dreyfus & Co. and Stathatos & Co. v. Louis Dreyfus & Co. (1922) 10 Ll LR 446, 703 wherein Lord Sumner, with whom Lord Dunedin and Lord Carson agreed, when considering the rate of exchange to be applied with respect to monies payable under a charter-party, said at p.705:-

"The charter is made in London, between parties in
London: it is expressed in English and governed by
English law. In my opinion the place of payment for
both dispatch money and commission on freight is
English, the payment is to be made in sterling, and
the rate of exchange, at which the amount of dispatch
money and commission should be inserted in a ship's
account, made out in Buenos Aires, is the commercial
rate of exchange of the day for converting English
money into Argentine money. The charterers do not
enlarge their rights by debiting these sums in an
Argentine account or in Argentine currency; and they
can claim no more than the actual amount of English
money due, or the Argentine currency into which it
could be turned at the rate of the day."

13. We see no room for giving to the forward exchange arrangements into which the applicant entered weight other than that, if any, which the market gave them on the dates of exportation. No doubt the existence of forward exchange contracts is not a matter entirely irrelevant to the market. The existence of a futures market and of forward dealings may well play a part in the establishment of a price which prevails in the market on a particular day. To the extent to which forward exchange transactions do so, they have a relevance; but that relevance is reflected in the price which prevails on the day.

14. The facts of the present case are different from those considered by Marks J. in AMI Toyota Limited v. The Comptroller General of Customs and The Commonwealth of Australia (Supreme Court of Victoria, Nos. CL 70 and CL 71 of 1987, delivered 19 November 1987). In that case, his Honour noted that "It was assumed ... that the rate of exchange (deduced from forward exchange contracts) which the plaintiff achieved to make payment for the shipment was available to it on the date of exportation whatever precise date that was". In the present case, the rate of exchange deduced from the applicant's forward exchange contracts was a rate deduced from transactions which took place over many months commencing before and concluding after the relevant dates of exportation. It was not a rate of exchange of the particular days on which exportation occurred. It is therefore unnecessary to make any further observations on his Honour's judgment.

15. For these reasons, we would dismiss this appeal with costs.