Case: Commissioner of Taxation v Jax Tyres Pty Ltd (1984) 5 FCR 257
Outcome: applied
Caltex contended that the residual oils were neither "manufactured" nor "produced" according to the ordinary meaning of those words. In reliance on Commissioner of Taxation v Jax Tyres Pty Ltd (1984) 5 FCR 257 ( Jax Tyres ), Caltex said that the essence of manufacturing or producing is that what is made shall be a new and different article having a distinctive character or use from that out of which it is made. The residual oils are not made from crude oil, it said, but are an undesirable material left over at the completion of a process designed to manufacture other products (for example, petrol, diesel and jet fuel). Caltex focussed on the objectives of its refinery operations. It said that far from those operations being directed to making the residual oils, their existence was neither intended nor desired and Caltex at all times sought to minimise their creation. Rather than being manufactured goods, it said, the residual oils are an inevitable consequence of making the goods that Caltex intended for sale. 62 At the core of Caltex's argument was a characterisation of the residual oils as a type of "waste" produced as part of a manufacturing process but requiring "disposal" in some manner. Disposal by burning as a refinery fuel it said was analogous to scrap wood being burnt by a carpenter to heat his or her factory. 63 The Macquarie Dictionary meanings of "manufacture" include: [T]o make or produce by hand or machinery, especially on a large scale; to make in any manner; to work up (material) into form for use ... 65 In the context of the sales tax legislation, Lockhart J said in Jax Tyres (at 261): The primary meaning of the word "manufacture" when used as a verb is to make something by hand; but since the industrial revolution the word has come to mean manufacture by machinery, often on a large scale and with a division of labour. This accords with the dictionary definition. ... ... To manufacture an article necessarily involves producing a different article from the articles, materials or ingredients from which it was made. As Darling J said in McNicol v Pinch [1906] 2 KB 352 at 361: "I think the essence of making or of manufacturing is that what is made shall be a different thing from that out of which it is made." That passage was approved and applied by Dixon J in Federal Commissioner of Taxation v Jack Zinader Pty Ltd [1949] HCA 42 ; (1949) 78 CLR 336 the leading case in this field. Whether the article which results from the process of manufacturing is a different article from the constituents or ingredients from which it was made is a question of fact: the Jack Zinader case. "Production" ... is a word of wide import; but it still involves the element of producing something different from the materials from which it was made. It is not possible to formulate precise definitions of such general terms as "manufacture" and "production"; but they do not bear a restricted meaning. Whatever answers the description of "manufacture" or "production" of goods according to accepted usage of the English language is within the Act. 66 The courts have attributed an ordinary meaning, within the "accepted usage of the English language", to the terms "manufactured", "manufacture" and "manufactured goods" in a number of cases: see Federal Commissioner of Taxation v Rochester [1934] HCA 17 ; (1934) 50 CLR 225 at 226 (Dixon J); MP Metals Pty Ltd v Federal Commissioner of Taxation [1968] HCA 89 ; (1978) 117 CLR 631 at 649 (Menzies J); Jax Tyres at 261; Federal Commissioner of Taxation v Jack Zinander Pty Ltd [1949] HCA 42 ; (1949) 78 CLR 336 at 344-355 (Dixon J); Commonwealth v 5 Star Foods Pty Ltd (2002) 167 FLR 214. In 5 Star Foods , Byrne J said at 222: The cases to which I was referred also emphasise that the word ["manufacture"] should be given its meaning in ordinary everyday language: Cooper Brookes (Wollongong) Pty Ltd v Commissioner of Taxation (Cth) [1981] HCA 26 ; (1981) 147 CLR 297 at 304-305 per Gibbs CJ. To my mind this meaning comprehends the application of a repetitive process, especially a mechanical process, to a thing or things to bring it or them to a form or condition specified. This process may be directed to producing a thing in a state fit for sale, for consumption by the end user, for attachment to or assembly with other things or for some further process. ... 71 Caltex laid emphasis on the fact that none of the residual oils is an intended object of the activities it undertakes at the refineries. Accordingly it said that to characterise the residual oils as manufactured or produced goods would lead to the strange result that Caltex was unintentionally manufacturing something. However for the purposes of s 5 of the Tariff Act, the critical question in my view is whether objectively speaking the goods in question can be said to have emerged from a process as a "new and different article ... having a distinctive character or use": see Jax Tyres 5 FCR at 264 (Lockhart J). The focus of s 5 is on the extant goods that are made subject to duty, not on the person who manufactures them or that person's stated objectives. Duty is imposed "on" goods by reference to their quality as manufactured goods. It is not imposed with any reference to the relative value of the goods or the subjective intentions of the manufacturer. This is not to say that the principle objectives of a commercial operation will not be relevant to the question of characterisation. They provide the context for the task of characterisation and are an important factor to take into account. They are not however determinative of the question. In any event I do not think it is accurate to say that Caltex unintentionally manufactures the residual oils. They are not the principal products created at the refineries, but it is clear that Caltex intends to bring about all of the known consequences of the refining process, which includes the production of the residual oils. In doing so its objective is to extract as much value as possible from the crude oil. I do not accept Caltex's pejorative characterisation of the residual oils as waste or rubbish. It did not dispose of them as if they were waste; it consumed them in a productive manner. 72 Caltex made a further submission that the residual oils were not "produced" for the purposes of s 5 because the word "produced" is there concerned only with tobacco production. The Excise Act draws a distinction it said between goods manufactured and goods produced, because the Act has distinct licensing arrangements for "licensed manufacturers" and "licensed producers", the latter of which are held only by producers of tobacco: see Division 2 of Part III of the Excise Act . Caltex said that "produced" should be construed with that context in mind and limited to the production of the various tobacco products identified in the Schedule. 73 I cannot accept that the word "production" must be limited in that way. The contention that it should was not developed by Caltex in any detail. It amounted to not much more than an assertion that a narrow construction was required because of the existence of the specific licensing arrangements for tobacco "producers" in Division 2 of Part III. Division 2 regulates the production of tobacco seed, tobacco plant and tobacco leaf by requiring a producer to hold a "producer licence". A "producer licence" is "a licence granted under Part IV , the holding of which authorises the licence holder to produce tobacco seed, tobacco plant or tobacco leaf". There is nothing express in Division 2 of Part III of the Excise Act that could be said to limit the ambit of the word "produced" in the Tariff Act. Further, s 5 of the Tariff Act gives no indication that "produced" is intended to be limited to tobacco production. To the contrary s 5 is in wide terms and applies to " all goods ... manufactured or produced". The Schedule itself reflects the intended width of the term. It describes various goods as "products" including those in issue in this case and refers to some goods (other than tobacco) as having been manufactured or produced (see, for example, item 11(a) describing "diesel fuel produced or manufactured by the process of refining waste oils ..."). The word "produced" is not defined in the Tariff Act, which one would expect if it were to be given the restricted meaning Caltex contends for. In my view it should be given its ordinary meaning. 74 Neither party referred me to the legislative history of Division 2 of Part III or s 5 of the Tariff Act. I note however that the words "manufactured or produced" have appeared in s 5 of the Tariff Act since its inception in 1921 (and the section itself has remained in the same form since then). At that time no equivalent to Division 2 of Part III appeared in the Excise Act . Division 2 of Part III was introduced in the relevant form in 2000 and I see no reason why its introduction at that time should alter the ordinary meaning of "produced" in s 5 of the Tariff Act. Further, it may be observed that the version of the Excise Act in force in 1923 contained specific provisions relating to the "manufacture" of tobacco and included separate licensing arrangements for "producers" of "material". "Material" included "all material used in the manufacture of excisable goods and declared by proclamation to be material within the meaning of this Act". There could be no suggestion that the word "produced" in s 5 of the Tariff Act was to have borne a restricted meaning relevant only to "material", because "produced" in s 5 quite clearly related to "goods dutiable under the Schedule" (excisable goods) and not the more limited concept of "material" or, for that matter, tobacco. 75 Caltex made a number of submissions regarding the constitutional conception of duties of excise, which it said bore importantly on the proper construction of the words "manufactured" or "produced". It submitted that the "essence" of a duty of excise is that it is a tax on a step in the production or distribution of goods that are intended to be passed on by a manufacturer to consumers , that is, third party consumers. Consistently with that understanding, it said, the Tariff Act imposes duties of excise directly on or in respect of goods that are destined for consumption by consumers, the relevant excise step being the step of manufacturing or producing the goods before they are passed down the line to consumers. Accordingly it said the terms "manufactured" and "produced" should be construed as applying only to the step of manufacture or production taken with respect to goods intended to reach third party consumers (i.e. not goods that are consumed by their manufacturer). On that basis Caltex said it does not "manufacture" or "produce" the residual oils because it takes no step to bring them into existence as part of a process that ends in their receipt by third party consumers. Instead they are created because they are an inevitable consequence of the process of producing other goods which are intended to reach consumers.