Country Road Clothing NZ Ltd paid its Australian parent company, Country Road Clothing Pty Ltd, separtely for products and licensing of intangibles, mainly techniques for shop layout, design, trademarks, and shop marketing. In the period between January 2014 and June 2018, more
than $20 million was paid in royalty and the company did not believe it was required to pay customs duties on that amount.
New Zealand Customs Service disagreed and found that the royalty payment should have been included in the price of the products for duty purposes and issued a duty reassessment.
This reassessment was then appealed by Country Road Clothing to the Customs Appeal Authority. Country Road Clothing maintained that the payments were an “arm’s-length” royalty paid to the Australian parent for the complete and comprehensive bundle of intangibles governing every aspect of the retail operations. Accordingly, the royalties were not for the goods it imports, nor were they sufficiently related to the proceeds of sale returned to the parent company. Customs duty was therefore not payable on these royalties. The Customs Appeal Authority later ruled in favour of the company.
Not satisfied with the decision, the Customs Service filed an appeal with the High Court.
Judgment
The High Court allowed the appeal and ruled in favour of the Customs Service.
Excerpt
“The Customs Appeal Authority seems to have adopted the wrong test
[81] First, counsel accept that the Authority misunderstood the analysis it was required to undertake to determine the value of the goods. The Authority focused on whether the price paid for the goods was at market value (or arm’s-length). The Authority viewed the objective of this exercise as being “to establish a price that removes any element affecting the transactional price due to the relationship between the parent company and [CRNZ]”. The Authority viewed cl 2(2) of sch 2 as supporting that analysis because where the sale is between related persons, the importer must produce evidence that the transaction value of the goods was not influenced by the relationship.
[82] However, the purpose of cl 2(2) is to determine whether the “transaction value” method should be used to determine the true value of the goods in a given case. Where the price paid or payable for the goods is influenced by the relationship between the 28 At [22].
parties, the transaction value method is not appropriate, and one of the alternative valuation methods should be used.”
“[86] I have come to the conclusion that the “royalty payments” are properly caught by cl 3(1)(a)(iv) so that the price paid by CRNZ for the goods should be adjusted to include these payments.”
“[104] Given the strategy is solely focused on the sale of those goods, it would be artificial to say that the retail strategy was not in respect of the imported goods. The goods cannot be separated from the way they are sold. The services involved in the licensing/royalty payment are just too interconnected with the goods themselves, to reach any other conclusion. For instance, it is difficult to read the evidence of the Head of Merchandise when he talks of the importance of the colour of the products, as not referring to the goods themselves. “
“[133] The proposition for Customs is that the New Zealand Court of Appeal has taken a position that deliberately distances itself from the Canadian and Australian law on the issues to be determined on this appeal. I am told that New Zealand law, as it currently stands, is consistent with the approach taken by Europe and South Africa.
[134] Customs again observes, and I understand this not to be disputed by Mr Geldenhuys, that the New Zealand Court of Appeal approach is settled and globally recognised. It is said by Customs that it is important that there be consistency of interpretation and harmonised application of a materially identical provision in an international treaty. In my view, if I were to uphold the approach advocated by CRNZ, I would be upsetting that consistency and introducing a discordant application.”