THE CHIEF EXECUTIVE OF THE NEW ZEALAND CUSTOMS SERVICE V NIKE NEW ZEALAND LIMITED CA CA124/02

THE CHIEF EXECUTIVE OF THE NEW ZEALAND CUSTOMS SERVICE V NIKE NEW ZEALAND LIMITED CA CA124/02 8 September 2003IN THE COURT OF APPEAL OF NEW ZEALAND CA124/02BETWEEN THE CHIEF EXECUTIVE OF THE NEW ZEALAND CUSTOMS SERVICE Appellant AND NIKE NEW ZEALAND LIMITED Respondent Hearing: 14 May 2003 Coram: Gault P Keith J Blanchard J McGrath J Anderson J Appearances: H S Hancock and A H Cecil-Gibson for Appellant J R F Fardell QC and M Austin for Respondent Judgment: 8 September 2003JUDGMENTS OF THE COURT Judgments Para No Gault P [1] – [27] Keith, Blanchard and McGrath JJ [28] – [72] Anderson J [73] – [74] GAULT P[1] I am in full agreement with the judgment of Blanchard J (which I have read in draft) as it relates to the commissions paid by Nike NZ to Nike Inc and to Nissho Iwai American Corporation. I am unable to agree, however with the application of cl 3(1)(a)(iv) of the Second Schedule to the Customs and Excise Act 1996 to the royalties paid by Nike NZ to Nike International Ltd. I consider that thecircumstances of this case are distinguishable from those considered in Adidas New Zealand Ltd v Collectors of Customs (Northern Region) [1999] 1 NZLR 558. Further, I am unable to agree with the application of the reasoning in that decision (as I interpret it) in the later case of Collector of Customs v Avon Cosmetics Ltd(1999) 1 NZCC 55, 014 and by Williams J in the present case. In my view they have applied the provision to circumstances it does not reach. [2] The Second Schedule sets out how the Customs value of goods is arrived at for the purposes of the Tariff. It implements the Rules on Customs Valuation in the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994. As appears from cl 2(1), the Customs value is the transaction value except in specified circumstances. The transaction value is the price paid or payable for the goods when sold for export. "Price paid or payable" is defined to mean the aggregate of all amounts paid or payable by the buyer to or for the benefit of the seller in respect of the goods. That price paid or payable is adjusted in accordance with cl 3 to determine the transaction value. [3] The transaction value is not the Customs value in specified circumstances. Those circumstances appear from cl 2(1) which sets out negative conditions which must exist for the transaction value to qualify as the Customs value. They are: 2. Transaction value as primary basis of valuation - (1) The Customs value of imported goods shall be their transaction value, that is, the price paid or payable for the goods when sold for export to New Zealand, adjusted in accordance with clause 3 of this Schedule, if – (a) There are no restrictions respecting the disposition or use of the goods by the buyer, other than restrictions that – (i) Are imposed by law; or (ii) Limit the geographical area in which the goods may be resold; or (iii) Do not substantially affect the value of the goods; or(b) The sale of the goods or the price paid or payable for the goods is not subject to some condition or consideration in respect of which a value cannot be determined; or (c) Where any part of the proceeds of any subsequent resale, disposal, or use of the goods by the buyer is to accrue, directly or indirectly, to the seller, the price paid or payable for the goods includes the value of that part of the proceeds or can be adjusted in accordance with clause 3 of this Schedule; or (d) The buyer and seller of the goods are not related at the time the goods are sold for export or, where the buyer and seller are related at that time, - (i) Their relationship did not influence the price paid or payable for the goods; or (ii) The importer demonstrates that the transaction value of the goods meets the requirements set out in subclause (2) of this clause. [4] Where the Customs value cannot be determined under cl 2 because the transaction value does not qualify, even when adjusted under cl 3, cl 2(5) provides: (5) Where, - (a) In the opinion of the Chief Executive, the Customs value cannot be determined under this clause, or (b) The Chief Executive has reason to doubt the truth or accuracy of the declared Customs value and, after having sought further explanation or other evidence that the declared Customs value represents the total amount actually paid or payable for the imported goods, the Chief Executive is still not satisfied that the Customs value can be determined under this clause – the Chief Executive may determine the Customs value of the goods by proceeding sequentially through clauses 4 to 8 of this Schedule to the first such clause of this Schedule under which the Customs value can, in the opinion of the Chief Executive be determined. (my emphasis)[5] The object of cl 3 is to bring into account in arriving at the transaction value, specified adjustments so that the transaction value (where it qualifies under cl 2) truly represents the amount actually paid or payable for the imported goods, which is the Customs value. [6] It is with that object in view that cl 3(1)(a)(iv) is to be construed. That requires that there be added to the price paid or payable to or for the benefit of the seller: (iv) Royalties and licence fees, including payments for patents, trademarks, and copyrights in respect of the imported goods that the buyer must pay, directly or indirectly, as a condition of the sale of the goods for export to New Zealand, exclusive of charges for the right to reproduce the imported goods in New Zealand; [7] The fact situation with which we are presented, as fully set out in the judgment of Blanchard J, involves the payment of royalties by Nike NZ to Nike International. The royalties are not paid to the seller of the goods. The seller and Nike NZ are not related persons, nor are the seller and Nike International. [8] The royalties are paid in accordance with the terms of a licence agreement in which Nike NZ is granted by Nike International the (qualified) exclusive licence to sell "Licensed Goods" as defined in New Zealand and certain Pacific Islands. The grant also includes a non-exclusive licence to manufacture or have manufactured Licensed Goods for sale in the licensed territory. The licensed manufacture is not geographically limited so that Nike NZ may have the goods manufactured outside New Zealand so long as they are sold in the licensed territory. [9] The Licensed Goods are those "which bear any of the Trade Marks (as defined) or which incorporate any of the Other Proprietary Rights" (also defined). Although the definition of "Other Proprietary Rights" is not expressly limited to intellectual property rights within the licensed territory, it is plain, from the definition of "Rights" (which encompasses both the Trade Marks and Other Proprietary Rights) when read with cl 5.1 and cl 6, that it is only territorial rights that are licensed.[10] The licence incorporates the usual quality control provisions required to ensure the licensed use of the trade marks enures for the benefit of the licensor: see s37 Trade Marks Act 1953. [11] The royalty is fixed as a percentage of the net annual sales revenues of all licensed goods in the licensed territory. Undoubtedly, in respect of licensed goods sold in New Zealand, the royalties are paid for the rights to use the New Zealand trade marks and other intellectual property rights. The royalty is the same whether the goods are manufactured in New Zealand or are imported. In that situation I am quite unable to see how the royalties paid to Nike International can be said to form part of the total amount actually paid or payable for the imported goods. [12] I turn to the words of cl 3(1)(a)(iv). It is to be noted first that the royalties to which it applies are those paid as a condition "of the sale of the goods for export to New Zealand". It is not directed to a condition of the purchase of the goods for importation into New Zealand. What I understand the provision to be intended for is a situation in which the seller is obliged to pay royalties for the right to manufacture or sell the goods in the country from which they are exported and requires payment or reimbursement of those royalties from the New Zealand importer. That truly would be part of the price paid for export to New Zealand. [13] I am fortified in my construction of the clause by reference to the Agreement on Implementation of Article VII of the GATT. The General Introductory Commentary to the Rules for Custom's valuation refer to the provisions for the adjustment of "transaction value". It states: Article 1 is to be read together with Article 8 which provides, inter alia, for adjustments to the price actually paid or payable in cases where certain specific elements which are considered to form a part of the value for customs purposes are incurred by the buyer but are not included in the price actually paid or payable for the imported goods. Article 8 also provides for the inclusion in the transaction value of certain considerations which may pass from the buyer to the seller in the form of specified goods or services rather than in the form of money.Payment by the buyer of a royalty obligation of the seller would constitute a service. [14] Article 8.1(c) provides for the addition to the price actually paid of: royalties and licence fees related to the goods being valued that the buyer must pay, either directly or indirectly, as a condition of sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable; That must be construed in light of the General Introductory Commentary. [15] In Sherman and Glashoff, Customs Valuation; Commentary on the GATT Customs Valuation Code, para 300 it is said: Art. 8.1(c) of the Code provides for the addition of the royalty or licence fee whether it is paid directly or indirectly. Therefore, royalties and licence fees that are paid to third parties can also be added to the Transaction Value under this provision; however, the payment of a royalty or licence fee to the third party will only be a condition of the sale if the seller was obligated to the third party to pay the royalty or licence fee and if the importing purchaser effects such payment for the benefit of the seller (and by agreement with the seller). The commentaries at paras 298, 299, 310 and 326 are confirmatory of this. [16] The Technical Committee on Customs Valuation, established under the Implementation Agreement to ensure uniformity in the interpretation and application of the Agreement explains in a "WTO Training Package on Customs Valuation" the definition of transaction value as: The price actually paid or payable is the total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods, and includes all payments made as a condition of sale of the imported goods by the buyer to the seller, or by the buyer to a third party to satisfy an obligation of the seller. (my emphasis) [17] The royalties in the present case are paid for the rights to use New Zealand trade marks and other intellectual property rights in New Zealand. The territorial nature of those rights is important. That is recognised by the express exclusion incl 3(1)(a)(iv) of charges for the right to reproduce the imported goods in New Zealand. [18] I am unable to see why the relationship between Nike International and Nike NZ is relevant. Clause 3(1)(a)(iv) is applied in determining the transaction value. The transaction value is not the Customs value if the sale for export to New Zealand is between related persons (unless it is shown that did not influence the transaction value). In any event the seller to Nike NZ is not a related person. [19] I recognise that the condition requiring the royalties to be paid need not be one imposed by the seller. It could be imposed by the owner of intellectual property rights in the country from which the sale is made. But there is no suggestion of that in this case. It is for this reason I would not go so far as the Supreme Court of Canada and limit the applicable clause to conditions (in the technical legal sense) of the contract for sale for export: Deputy Minister of National Revenue v Mattel Canada Inc (2001) 1999 DLR (4th) 598. [20] The reasoning attributed to the court in the Adidas case, which was followed in the Avon case and by Williams J in the present case, rests on the proposition that the obligation to pay the royalties is "closely related" to the importation. If it was decided in the Adidas case that this was sufficient to require the royalties to be included in the transaction value, I cannot accept it, but I am not sure that it was. In his judgment in Adidas Henry J, with whom the other Judges agreed, albeit with hesitation, said (p565): The licence agreement obliging adidas NZ to pay royalty is closely related to the importation, ie the sale for export. Adidas NZ's right to contract with the manufacture is governed by the licence agreement. The obligation to pay royalty was undoubtedly related, and in this case closely related, to the right of adidas NZ to contract with the Asian supplier, through another adidas related company, for the manufacture and its associated purchase or sale for export. Further, as previously noted, adidas NZ cannot purchase product which it later sells without having to pay royalty. The obligation goes hand in hand with the importation of product which is sold. [21] But that passage must be read with what Henry J said about the relevant documentation in that case (563):It is therefore the true nature of that transaction as evidenced by the relevant documentation which falls for consideration. Here under the licence agreement adidas NZ is granted the right, together with other rights, to use the protected property (trade marks, patents, etc) for manufacture of goods outside New Zealand, but only by manufacturers approved by adidas AG. Accordingly, adidas NZ was contractually restricted in its ability to import manufactured product. The effect of the licence provisions therefore is that adidas NZ could not through its approved manufacturers import product without incurring a liability to pay royalty on that product when it was sold. (my emphasis) [22] This indicates that the licence arrangements extended to (and so the royalties were payable for) "use of the protected property (trade marks, patents etc) for manufacture of goods outside New Zealand". Only if, on the facts of that case, the payment of the royalties by the importer was a condition of the right to have goods manufactured in their Asian country of source in which the licensor had intellectual property rights, does the decision accord with my construction of the relevant provision. If that was the factual position it represents a critical point of distinction from the present case in which there is no suggestion that the royalties were in consideration of an entitlement to have intellectual property rights used by the seller in the country of export. There is absent from the present case the feature I consider was an essential plank in the reasoning of Henry J. [23] That is not the way the Adidas case was interpreted in the Avon case however. In that case, as appears from the judgment of the Court delivered by Richardson P, the licensed intellectual property rights were defined as rights in New Zealand. The judgment records that counsel were agreed that the reasoning in theAdidas case applied. The point of distinction I have identified was not averted to. The case was decided on the basis of the relationship between the New Zealand importer, the Australian seller and their common parent and licensor. I am unable to accept that, merely because it could be said that Avon New Zealand would not have been able to import and sell goods without a licence to sell in New Zealand for which royalties were payable, their payment was a condition of the sale for export to Avon New Zealand. Every licensor with trade mark or other relevant intellectual property rights in New Zealand would be able to prevent importation and sales by the licensee if royalties were not paid so that the existence of company relationshipsgiving that power adds nothing. The "commercial and legal reality of the linked arrangements" between the related companies, which governed the decision in Avon,do not reflect the correct test for the application of the provision. [24] If the royalties were payable as a condition of being able to buy from a designated overseas producer (because of inter-company controls) they are not payments for patents, trade marks etc, but rather for commercial management. The inclusion in the licence from Nike International to Nike NZ of the conventional quality control provisions necessary to protect the validity of the New Zealand trade mark registrations cannot affect the position. They would apply equally if the goods were made in New Zealand. It is unreal to suggest that, taken with the pooling arrangement for ordering the goods, they render the payment of royalties a condition of the export sale within cl 3(1)(a)(iv). [25] Accordingly I consider cl 3(1)(a)(iv) was not correctly applied in the Avoncase. [26] In the present case the seller and buyer are unrelated, and there is no issue of royalties payable by the seller which the buyer has been required to pay. The royalties are payable for the use of trade mark and other rights in New Zealand. They are payable whether the goods sold in New Zealand are imported or manufactured locally. In those circumstances their payment is not a condition of the sale of the goods for export. [27] I would allow the cross-appeal in respect of the inclusion of the royalties in the Customs values.KEITH, BLANCHARD AND McGRATH JJ (DELIVERED BY BLANCHARD J)[28] This case is about the level of duty imposed on goods imported into New Zealand by Nike New Zealand Ltd (Nike NZ) and arises from four assessment notices issued by the NZ Customs Service (Customs) in relation to importations between 10 September 1988 and 31 March 2000.[29] Duties are levied under the Tariff Act 1988 but, in accordance with s4(2) of that Act, challenges to the application of the tariff are determined by a Customs Appeal Authority under Part XVI of the Customs and Excise Act 1996. There is a right of appeal on points of law or fact to the High Court (s272) but the further right to appeal to this Court is restricted to points of law only (s273). [30] The Tariff Act requires that the value of imported goods for the purpose of applying the tariff is the Customs value of the goods determined in accordance with the Second Schedule to the 1996 Act: ss2 and 5 of the 1988 Act. The beginning point is the price paid or payable for the goods. Then cl. 3(1)(a) of the Schedule provides for the price to be adjusted:(a) By adding thereto amounts, to the extent that each such amount is not otherwise included in the price paid or payable for the goods and is determined on the basis of sufficient information, equal to— (i) Commissions and brokerage in respect of the goods incurred by the buyer, other than fees paid or payable by the buyer to the buyer's agent for the service of representing the buyer overseas in respect of the purchase of the goods; and (iv) Royalties and licence fees, including payments for patents, trademarks, and copyrights in respect of the imported goods that the buyer must pay, directly or indirectly, as a condition of the sale of the goods for export to New Zealand, exclusive of charges for the right to reproduce the imported goods in New Zealand; and[31] The case concerns the meaning and application of the words which we have emphasised; namely whether: (a) certain commissions paid by Nike NZ to its United States parent company, Nike Inc, and to an unrelated company, Nissho Iwai American Corporation (NIAC), and (b) certain royalties payable by Nike NZ to another subsidiary in the Nike group, Nike International Limited (NIL), must be added to the value of the imported goods. [32] The Customs Appeal Authority (Barber DCJ) held that both these items must be added. Nike NZ's appeal to the High Court was allowed in part by Williams J,who held that only the royalties, not the commissions, were to be added. Customs now appeals against Williams J's findings on the commissions, and Nike NZ cross- appeals against his finding on the royalty question.Customs' appeal - commissions[33] The provisions in the contractual arrangements between Nike NZ, Nike Inc and NIAC which are relevant to Customs' appeal are not complicated. It is not suggested for Customs that they do not represent the true position. They can be briefly stated. [34] Nike goods are manufactured for the Nike group by manufacturers who are not directly or indirectly owned by the group. Nike Inc has a division in Hong Kong known as the Asian Pacific Apparel Office (APAO). When Nike NZ has made a decision on what goods it wishes to have manufactured for importation and sale in New Zealand, it sends a purchase order to APAO. Its order is coordinated with orders received by APAO from other Nike subsidiaries. Obviously that gives Nike NZ, a relatively small operation in world terms, the participation in the buying power of the Nike group. APAO selects a manufacturer for the goods which Nike NZ needs, negotiates prices and other terms and arranges for shipping of the goods when manufactured. (Nike NZ pays the shipping cost direct to the shipper through its own freight forwarder and Customs agent.) The goods are shipped at the risk of Nike NZ. APAO also monitors the performance of the selected manufacturer, particularly in relation to quality control. Another branch of Nike Inc inspects the goods and issues a certificate in respect of them. That becomes part of the shipping documentation. For these services Nike Inc charges Nike NZ a commission of 7% of the manufacturer's price. [35] It should be added that, just as Nike NZ is free to select the goods which it wishes to have manufactured for it, so also it retains a buyer's ability to seek variations in its orders where it has changed its mind. Part of APAO's function is to issue new varied orders where this occurs.[36] When a manufacturer has been selected APAO sends it a purchase order which names Nike NZ as the buyer from the manufacturer. NIAC's role then begins. A copy of the order is sent to NIAC which arranges finance, by Letter of Credit, on behalf of Nike NZ (again, coordinated with such finance for other Nike subsidiaries). NIAC confirms the order to the selected manufacturer and completes the contract documents. The confirming order names Nike NZ as the buyer. At the same time NIAC confirms to Nike NZ that the goods have been acquired on its behalf. It also arranges insurance in the name of Nike NZ and pays the premium. In relation to the financing of the transaction and the insurance cost Nike NZ has the benefit of the coordination of its requirements with those of other Nike subsidiaries. [37] When the goods are ready the manufacturer issues an invoice to NIAC "for account of Nike NZ" against the Letter of Credit. NIAC then invoices Nike NZ for the manufacturer's price, the insurance premium and the commission and bank charges incurred on the Letter of Credit. For its services NIAC charges Nike NZ a commission which has varied between .3% and 1% over the period covered by the importations with which this case is concerned. No point is taken about the variations in the commission level. [38] The question before the Court is whether the commissions paid by Nike NZ to Nike Inc and NIAC are "fees paidby the buyer to the buyer's agent for the services of representing the buyer overseas in respect of the purchase of goods". If so, they are not commissions required by cl 3(1)(a) of the Second Schedule of the Tariff Act to be added to the value of the goods for duty purposes.(a) Nike Inc's commission[39] The Customs Appeal Authority accepted an argument from Mr Hancock, for Customs, that Nike Inc (APAO) was not in its activities in relation to the goods ordered by Nike NZ, acting as the agent of Nike NZ and hence was not "a bona fide buying agent". The Authority agreed with Mr Hancock thatthe main factor, which determines whether a party is a bona fide buying agent, is the right of the buyer to control the agent's conduct with respect to those matters entrusted to the agent. The issue is who has control of the purchasing.The Authority considered that it was Nike Inc which had the right to control its wholly owned subsidiary, Nike NZ, and that the reality was that Nike NZ could only do what its parent permitted it to do. It could not control its parent company. The Authority referred to the size of Nike Inc's operations world-wide saying that the manufacturers were not "independent" of Nike Inc in the true sense of the word because of the influence which it, as a major international company with considerable buying power, was able to exercise over them. The Authority said that when arranging to supply goods to its various world-wide outlets and subsidiaries, such as to Nike NZ for the New Zealand market, Nike Inc was in fact carrying out its core function. While in the course of that core activity Nike Inc performed various functions which a bona fide buying agent might also perform, when regard was had to the totality of the evidence, Nike Inc was clearly in full control of Nike NZ and was not an agent of it. It was in reality acting in its own best interests. [40] In the High Court Williams J disagreed. He accepted that, because of APAO's powers of negotiation, its supervision of the performance of the contracts with the manufacturers, which required adherence to a Code of Conduct and standards set by Nike Inc, and APAO's role in arranging for NIAC to participate in the financial aspects of the contract in its role in transportation, there was greater and more detailed involvement than might ordinarily be expected on the part of an agent acting for a principal, those factors were explicable by such matters as the bulk of the amalgamated orders, APAO's expertise and Nike Inc's strong wish to preserve the value in the intellectual property of its trade marks and goodwill and the difficulties of doing business in countries which did not adhere to factory and labour laws of the United States and European nations. But, that said, what Nike Inc/APAO did was only what its contractual obligations to Nike NZ required it to do. It was acting only as an agent should to discharge its obligations to its principal. Even if questions of control by Nike Inc over the manufacturers were relevant to the issues, it was Williams J's view that the Code of Conduct was one of the aspects of a continuing business relationship and did not connote such control. Nor could it be credibly asserted that Nike Inc controlled NIAC given the latter's size and the breadth of its operations. The documentation disclosed a "conventional agent/principal relationship where the overseas agent arranges contracts with independent manufacturers in accordance with its principal's instructions." It followed that thepurchase commission payable by Nike NZ to Nike Inc/APAO was to be excluded in determining the transaction value of the goods. [41] In this Court, pressed to distil from his argument the error of law he said Williams J had made, as distinct from any error in the application of the law to the particular facts, Mr Hancock was constrained to accept that his contention must be that a subsidiary company whose board of directors was appointed by its shareholding parent was actually or potentially under such control by the parent that it could never act as a principal in transactions which involved the parent. Mr Hancock suggested that this must be so in the context of the tariff scheme but could point to no authorities supporting his proposition other than a dictum of Salmon J delivering the judgment of the High Court in Elitunnel Merchanting Ltd v Regional Collector of Customs (1999) 1 NZCC 61,056 at 61,062 where, having said that the primary issue was that of control, the judgment posed the question – "does the evidence prove that the buyer is the party in control and that the purported agent is working for the buyer and not himself?" Mr Hancock accepted immediately, however, that this related to control of the particular transaction, not of the buyer's affairs in general. [42] We consider that it cannot be said that a subsidiary, which naturally is under the general control of its parent company both through shareholding and the ability of the parent to appoint the members of the board, can never in relation to a particular transaction have its parent act as its agent. As a matter of common commercial experience, that happens frequently and we see nothing in the context of the Tariff Act leading to a different conclusion of law. [43] We would go further and say that, even if it were permissible for Customs to relitigate in this Court the factual conclusion of the High Court, we would be in agreement with Williams J that Nike Inc was acting as an agent of Nike NZ notwithstanding that it had its own financial interest, as parent company, in the purchasing transactions and was also acting on behalf of some of its other subsidiaries in its dealings with the manufacturers and with NIAC. As it happens, we would not regard it as having control of the independently owned manufacturers merely because of its market power in relation to them and its desire to supervisetheir activities in its own interests. But, even if there were control of that sort, Nike Inc/APAO would still be acting as Nike NZ's agent in the matter. The basic functions which it performed were those of a buyer's agent. The principals and contracting parties were the manufacturer and Nike NZ. Nike Inc seems to have taken no responsibility for payment of the purchase price or made any financial commitment in relation to the goods ordered by Nike NZ. The commission was paid for services associated with the purchase.(b) NIAC'S commission[44] The Customs Appeal Authority concluded that the commission paid to NIAC could not be excluded under the exceptions relating to a buyer's agent because it was not incurred by Nike NZ in actually purchasing the goods; that NIAC did not represent Nike NZ in any purchase transactions but only assisted implementation of the settlement of such purchases. [45] In the High Court Williams J said that the fees paid to NIAC were fees payable by Nike NZ to its agent for the service of representing it overseas. It was not the "buying agent" of Nike NZ in the conventional sense of being involved in the receipt of orders and the arranging of contracts and their performance. But the phrase "representing the buyer overseas in respect of the goods" was not to be read as "representing the buyer overseas in the purchase of the goods". He said that the phrase "in respect of" is a wide one. Nike NZ's orders could not be filled and its stock obtained without a satisfactory assurance of payment to the manufacturer. Financing of the transaction was an integral part of the process. The fees paid to NIAC as an agent were for representation overseas in respect of the purchase of goods. [46] Mr Hancock submitted to us that the Judge had erred in law "in finding NIAC a buying agent for Nike NZ". NIAC was merely providing financing services. The role of an agent in arranging Letters of Credit was a separate and distinct task from that of actually buying the goods for the New Zealand principal, which would involve direct contact with the manufacturer over the detail of the purchase, including design, quality, quantity, delivery dates and ongoing inspection.[47] We are in no doubt that Williams J did not fall into error in his conclusion. The fallacy in the argument for Customs is shown in the interchangeable use by counsel of the phrases "buyer's agent", which appears in cl. 3(1)(a)(i), and "buying agent" which does not. A buying agent would obviously have to be someone whose function as an agent included the buying of the goods. Arguably that was done by Nike Inc, not NIAC, although it is to be noted that NIAC does confirm APAO's orders. But the exception is concerned with commissions and brokerage in the form of fees paid to a buyer's agent who represents the principal in respect of the purchase of goods. Williams J was right to say that "in respect of" is a wide phrase:Phonographic Performances (NZ) Ltd v Lion Breweries Ltd [1979] 2 NZLR 252, 258 and 259. On an ordinary use of language, what NIAC did was to act as the agent of the buyer in respect of its purchases. NIAC's establishment of Letters of Credit on behalf of Nike NZ and its confirmation of the purchase orders were essential steps in the purchases. Without them, the manufacture and sale of the goods to Nike NZ would not have occurred. The commissions were therefore fees paid to NIAC as a buyer's agent in respect of the purchase of the goods in terms of cl. 3(1)(a)(i).Nike NZ's cross-appeal - royalties to NIL[48] NIL, a subsidiary of Nike Inc, is the proprietor of the group's intellectual property. During the period of the importations it had licensed Nike NZ to use in New Zealand and certain Pacific Islands its trademarks, copyrights, designs and other intellectual property rights. Nike NZ agreed to use its reasonable efforts to sell and promote the licensed goods in the licensed territory: cl. 4. The licence was granted expressly in relation to two activities. First, it was a non-exclusive licence to manufacture or "subcontract" (a term which, it is accepted, should in a New Zealand context be read as "contract") for the manufacture of licensed goods provided that they were sold in the licensed territory in accordance with the agreement: cl. 2.1. Secondly, it was an exclusive licence to sell the licensed goods in the licensed territory, in respect of which Nike NZ was appointed the exclusive distributor of licensed goods: cl. 2.2.[49] A royalty of 2.5% of net annual sales revenues of sales in the licensed territory was required to be paid by Nike NZ to NIL: cl.10.4. [50] The agreement required Nike NZ to obtain written approval from NIL of samples and specimens of the licensed goods: cl. 7. But it was free to choose its suppliers and there was express agreement that NIL should not impose restrictions on its choice and that, in the event of non-payment of royalty, NIL would not prevent or impede the supply to Nike NZ of goods manufactured pursuant to binding orders accepted by the supplier prior to the supplier's receipt of notice of termination of the agreement: cl. 13.1. NIL reserved the right to exercise other rights, such as termination, in that event. [51] The Customs Appeal Authority said that it was clear from the documentation and "the true nature of the purchase transactions" that there was a strong link between the royalty payments and the sale of goods for export to New Zealand. Through the various agreements Nike Inc or NIL could enforce all royalty obligations. It followed that it controlled the supply of goods for Nike NZ and that supply could be terminated for non-payment of royalties. Payment of royalties was a condition of sale of the goods by way of export into New Zealand. It was commercial commonsense that there would be no supply of Nike product to Nike NZ if royalties were not paid. [52] In affirming the Authority's decision, Williams J, after an extensive review of prior cases, said that when the agent employed to place Nike NZ's orders was itself a branch of the company which, through another subsidiary, owned the intellectual property utilised in the goods' manufacture for which the royalty was payable, it must be taken to be the case that the agent would not have accepted and acted on the order without being assured that the royalty would be met by its principal, Nike NZ, when the goods were sold. Nike Inc plainly had the capacity to ensure "all" (i.e. the Nike companies) acted so that its subsidiary met its royalty obligations. Although the evidence showed that Nike NZ had been able to purchase stock even though, at times, its financial circumstances had meant it had been in arrears of royalty payments, Nike Inc's ownership and ultimate control of Nike NZ and its directors meant that Nike NZ must comply with Nike Inc's requirements if so directed. NikeInc could not import the stock it later sold without incurring a liability for royalty. The Judge preferred to view the word "condition" in the way described in the decisions of this Court in Adidas New Zealand Ltd v Collector of Customs (Northern Region) [1999] 1 NZLR 558 and Avon Cosmetics Ltd v Collector of Customs [1999] NZAR 345, rather than viewing it in the way the Supreme Court of Canada had done in Deputy Minister of National Revenue v Mattel Canada Inc [2001] 2 SCR 100; (2001) 199 DLR (4th ) 598. The decision in Mattel might well be explicable, Williams J said, in terms of its particular contractual arrangements, but the case nonetheless merited the observation that insistence on a contractual condition for royalties being included for the transaction to come under cl. 3(1)(a)(iv) "simplifies avoidance". Adidas and Avon remained the law binding on the High Court and the Judge saw nothing compelling arising out of the different approach in Mattel to endeavour to distinguish them. [53] Mr Fardell, for Nike NZ, submitted that the Court should not follow its earlier decisions in Adidas and Avon, but instead should say that a condition of sale meant a condition of the contract of sale, in a strict legal sense, as the Supreme Court of Canada had done in Mattel. Counsel said that the items required by cl. 3(1)(a) to be added by way of adjustment to the "price paid or payable" for goods all related to costs involved in necessary steps in the export transaction. The price paid or payable was different from the transaction value. Counsel accepted, however, that the matters to be added did not have to fall within the definition of "price paid or payable" in cl. 1. It was argued that the obligation to pay royalties arose on the resale in New Zealand and was therefore not in respect of the export transaction. It was said to be significant that express provision had been made in paragraph (v) of cl. 3(1)(a) requiring an addition for the value of any part of the proceeds of resale or disposal, but only where it was to accrue directly or indirectly to the seller. The royalty in this case was not payable to the seller. [54] It was also submitted that, even if the Court preferred not to adopt the Canadian approach, a correct application of Adidas would have led to a different result in this case. Facing up to the difficulty of such an argument in an appeal confined to a point of law, Mr Fardell said that the evidence simply did not support the findings made below which were unreasonable. The facts of Adidas were said tobe clearly distinguishable because, unlike the appellant in that case which had to have its manufacturers approved by its parent company, Nike NZ did have complete freedom in the selection of manufacturers and was therefore in control of its buying processes, rather than being controlled in that respect by its parent. [55] Mr Hancock supported the position taken by the Court in Adidas and Avon on the basis that it best ensured the attainment of the object of the legislation. He observed that in Integrity Cars (Wholesale) Ltd v Chief Executive of the New Zealand Customs Service (2001) 1 NZCC 61,198, Keith J, delivering the judgment of the Court, had said that it would be "singularly inappropriate to import into the construction of the 1994 Agreement technical rules of the common law": para [19]. (The Second Schedule gives effect to the Agreement on the implementation of Article VII of the General Agreement on Tariffs and Trade 1994.) The approach of the Supreme Court in Mattel had been inappropriately technical for an instrument of this character. It had effectively introduced the words "of the contract of" before "the sale of the goods" in cl. 3(1)(a)(iv). The correct approach had been that stated in Avon by Richardson P at para [28], namely that the expression "as a condition of the sale of the goods" was necessarily wider than "as a condition of the contract of sale of the goods". Mattel was also readily distinguishable on its facts. The contract for export and the contract for payment of royalty were separate contracts between separate parties. The licensor was an independent party, unlike NIL. [56] We begin by looking at the Mattel decision of the Canadian Supreme Court which has been delivered since the latest of the New Zealand cases but makes no reference to any of the New Zealand authorities. It involved an importation of goods into Canada by a three stage transaction in which an independent manufacturer invoiced the goods to a Mattel owned intermediary which invoiced them to the United States parent which in turn invoiced them to Mattel Canada, the importer, at prices increasing at each stage. The portion of the case of present interest concerned Mattel Canada's obligation to pay royalties to a trademark licensor whose identity was protected by a confidentiality order and can therefore reasonably be assumed not to have been a Mattel company. Mattel Canada was obliged to pay royalties based on a percentage of its invoiced billings for goods sold to Canadian customers.Section 48(5)(a) of the Customs Act 1985 was in the same terms as cl. 3(1)(a) of our Schedule. [57] The judgment of the Court, delivered by Major J, said (at para [58]) that a condition of sale has a settled legal meaning, citing P S Atiyah, The Sale of Goods,8ed (1990) at p60; and that, rather than create a "complex series of tests" not strictly based on the settled legal meaning of words, it was preferable to rely on the common law and sale of goods law to determine whether royalties and licence fees were paid as a condition of the sale of the goods for export to Canada. The word "condition" was used as a term of art. The Federal Court of Canada had erred in applying a control test which would capture virtually all royalties and licence fees by the mere existence of remedies afforded to trademark owners under the Canadian trademark legislation (para 59). If Mattel Canada refused to pay royalties to "Licensor X", Mattel US could not refuse to sell the licensed goods to Mattel Canada or repudiate the contract of sale. "The sale contract and the royalties contract were separate agreements between different parties". [58] Although there is a unanimous single judgment of a court whose views are held in high regard, we have to say that we find the approach taken inappropriately narrow in the context of the interpretation of an international agreement. That is not to say that we would disagree with the result on the particular facts of the case which are readily distinguishable from the present case and from Adidas and Avon. [59] It seems to us that the proper approach to the construction of the Second Schedule is that stated in Integrity Cars to which Mr Hancock referred. The Court said that it did not consider that the New Zealand common law should have a decisive role. The transactions were of an international character. Keith J, for the Court, went on:Much more significant are the facts that the Court is faced with interpreting legislation – and not, directly at least, with applying the common law – and that that legislation is designed to give effect to an international agreement. The Agreement is to be given a uniform interpretation and application, so far as that can be achieved, both because of its character as a world wide agreement and because of its particular subject matter, as emphasised by its preamble. To adapt words used about International Chamber of Commerce arbitration rules (a text which does not have treaty force), it would be singularly inappropriate to import into the construction of the 1994Agreement technical rules of the common law. Rather, given its international currency, the language of the Agreement – and the schedule – should be construed on broad principles of general acceptation; Richardson J in CBI NZ Ltd v Badger Chiyoda [1989] 2 NZLR 669, 682, quoting Lord Macmillan in Stag Line Ltd v Foscolo Mango & Co Ltd [1932] AC 328, 350; see also Lord Wilberforce in James Buchanan and Co Ltd v Babco Forwarding and Shipping (UK) Ltd [1978] AC 141, 152-153.[60] In Adidas the Court addressed three questions:(a) Whether it could be said that royalties calculated by reference to the resales of product manufactured for adidas NZ and imported by it into this country, could be said to be payable "in respect of the imported goods"; (b) Whether to fall within para (iv) the royalty must be payable directly or indirectly to the seller; and (c) Whether the royalty was payable "as a condition of the sale of the goods for export to New Zealand".[61] The members of the Court were entirely of the one view concerning the first two questions. No challenge is made to their conclusions, with which we agree. In the leading judgment, delivered by Henry J with Thomas J concurring, it was said that even if the payment was dependent upon distribution, it was unreal to suggest that the payment was not in respect of the product. It was the product which was impressed with the royalty obligation: p564. Blanchard J said that it was unrealistic to contend that royalties were not payable "in respect of the imported goods" merely because they were fixed in relation to the price at which the importer sold them and because nothing was payable until and unless they were resold. In practice, royalty payments were almost invariably calculated on sales by the licensee. Clause 3(1)(a)(iv) must be taken to be directed to the ordinary run of royalty arrangements. [62] On the second question, the Court said that there was nothing in the clause requiring that the royalties must be payable to the party who sells the goods to the importer. [63] Where Nike NZ says in the present case that the Court in Adidas erred was in relation to the third question, concerning which the members of the Court in Adidasdid not speak with one voice. Henry J said that whether the royalty was payable as a condition of the sale for export seemed to be the critical question. As in the present case, the contractual terms between the New Zealand company and the overseas manufacturer did not contain any provision express or implied relating to royalty payments. Neither did that obligation appear to have featured in any formal way in the business dealings between adidas NZ and its buying agent, adidas Asia-Pacific, which undertook the negotiations with the manufacturer. But that was not determinative. For the purposes of cl. 3(1)(a)(iv) the sale must be the transaction or process under which the importer obtained the product. It was therefore the true nature of that transaction as evidenced by the relevant documentation which fell for consideration. Under the licence agreement adidas NZ was granted the right to use the protected property (trademarks, patents, etc) for manufacture of goods outside New Zealand but only by manufacturers approved by adidas AG. Accordingly adidas NZ was contractually restricted in its ability to import manufactured product. The effect of the licence provisions therefore was that adidas NZ could not through its approved manufacturers import product without incurring a liability to pay royalty on that product when it was sold. If adidas NZ could not import the product which it later sold without incurring the liability to pay royalty, then payment of the royalty was a condition of the sale to it of the product: p563. [64] The licence agreement obliging adidas NZ to pay royalty was closely related to the importation, i.e. the sale for export. Adidas NZ's right to contract with the manufacturer was governed by the licence agreement. In Henry J's view the obligation to pay royalty was undoubtedly closely related to the right of adidas NZ to contract with the Asian supplier, through another adidas related company, for the manufacture and its associated purchase or sale for export. [65] Blanchard J placed emphasis not on the ability of the parent company to control the choice of manufacturer but upon the particular buying practice adopted by adidas NZ. The New Zealand company had in practice left all the buying arrangements, including the placing of orders with the manufacturer/seller, in the hands of another member of the adidas group. He said that it was inconceivable that if the New Zealand company had been under separate ownership and had placed its orders in this way, the agent would have undertaken such a function unless satisfiedthat royalty payments to its parent were being fulfilled by the purchaser. He thought, therefore, that with this control voluntarily accepted by adidas NZ the situation could properly be seen as one involving as part of that purchasing arrangement an obligation on adidas NZ to pay the agreed royalties to the parent company. On that basis, of course, the present case is indistinguishable. [66] In its judgment in the Mattel case, subsequently reversed by the Supreme Court, the Canadian Federal Court of Appeal was of the opinion that the payment of royalties was a condition of the sale of goods for export first if it appeared as such in the contract of sale between the vendor and the importer and second, "if either the licensor because it owns or controls the vendor, or the vendor when it holds the trademarks rights or copyrights, can prevent the importation of the goods by the purchaser or seriously compromise the ability of the purchaser to buy the goods for export in cases where he has failed to pay the royalties". The Court pointed out that the wording of para (iv) does not refer to a "condition of the contract for sale" and therefore, it was, in the opinion of the Federal Court, not a requirement that the payment of royalties be expressly stipulated in the sale contract. The word "condition" was not considered to have been used in the Act as a term of art carrying the meaning generally ascribed to it in the law of sales. Rather, the word was used in its ordinary and common sense way to mean that the payment of royalties had to be made as a pre-requisite or requirement for the export of the goods: para [26]. [67] That view was not accepted by the Supreme Court, as we have seen, but, with respect, we find it convincing. It seems to us that for a royalty to come within para (iv) there must be a combination of two features. First, the royalty must be payable to the manufacturer or to another person as a consequence of the export of the goods to New Zealand and, secondly, the party to whom the royalty is payable must have a control of the situation going beyond the ordinary rights of a licensor of intellectual property and giving it the ability to determine whether the export to New Zealand can or cannot occur. An ordinary licensor, unrelated to the licensee, may be able to take steps to prevent future importations if royalties are not paid in respect of a particular importation of licensed product, but it has no control over an importation prior to any default. In contrast, where royalties are payable to a licensor which is a member of the same corporate group as the licensee – and particularly where thebuying is in practice conducted through another member of the corporate group – the situation is throughout under the parent company's control exercisable on behalf of the licensor. [68] In the present case, the goods bearing the licensor's trademarks and utilising its other intellectual property were able to be exported to New Zealand only because of the existence of the licence agreement which required a payment of royalty. Although that agreement, like the one in Adidas, was not expressly related to the export to New Zealand, it was stated to be for the events which preceded and followed that event, respectively the manufacture of the goods and their resale in the licenced territory by Nike NZ. Importantly, there was an obligation on Nike NZ under the terms of the licence agreement to use reasonable efforts to sell the licensed goods. But the manufacturing licence was conditional upon sales occurring only in the licenced territory. Implicitly, then, the agreement required the export of the goods to New Zealand. If Nike NZ simply left the goods in the country of manufacture it would not be making reasonable efforts to sell them in accordance with the agreement. Implicitly the licence covers, and the royalties are payable for, the right to export the goods to New Zealand. The royalties may be calculated on sales in the licenced territory but they are payable, in part, for the right to bring the goods to New Zealand. Hence they can be said to be payable as a condition of that act which is itself a step in fulfilment of an obligation to the licensor. [69] Coupled with this was the overall control which Nike Inc was able to exercise. It was involved in the purchasing as the agent of Nike NZ and it had the ability to ensure that royalty payments were made pursuant to the licensing agreement with its subsidiary, NIL, through its control of the board of directors of Nike NZ. There was also a further measure of control in that NIAC did not take steps to arrange letters of credit on behalf of Nike NZ without first receiving a copy of an order placed by Nike Inc. The manufacture of the goods did not occur until a confirming order was received from NIAC. [70] The factual situation in Mattel was quite different. There the royalty was payable as a consequence of the export of goods to Canada but Licensor X had no ability to exercise control through Mattel US, the exporter. All it could do ifroyalties were not paid was to invoke the provisions of the licensing agreement and seek to assert such rights as it had under the Canadian trademark legislation in respect of future importations. [71] We are therefore satisfied that the Customs Appeal Authority and the High Court were correct when they concluded that payment of royalty by Nike NZ to NIL was a condition of the sale of the goods for export to New Zealand in terms of cl. 3(1)(a)(iv) of the Second Schedule.Result[72] The appeal is dismissed and, by majority, the cross-appeal is also dismissed. Each party must bear its own costs and expenses of the appeal.ANDERSON J[73] I have had the advantage of reading in draft the judgment to be delivered by Blanchard J and the judgment of Gault P. [74] For the reasons given by Blanchard J, I agree that the appeal should be dismissed. I agree with Gault P, for the reasons he gives, that the cross-appeal should be allowed.Solicitors Russell McVeagh, Auckland, for Respondent Crown Law Office