Hermes Pacific Ltd. v. Comissioner of Customs and Excise

CACV000155/1987

Statutory interpretation - Dutiable commodities Ordinance, Cap. 109 - whether certain highly perfumed and expensive soaps are dutiable under s.76 - whether Commissioner of Customs and Excise has an adjudicative role in resolving that issue.

Coram: Silke, V.-P., Barker & Fuad, JJ.A.

Date of Hearing: 23 February 1988

Date of Judgment: 9 March 1988

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J U D G M E N T

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Fuad, J.A:

1. This is an appeal by Hermes Pacific Limited from the decision of Barnett J. dated 21st October 1987 whereby he held that certain soaps which they import into Hong Kong, and sell here, are dutiable as "Cosmetics" under the Dutiable Commodities Ordinance, Cap. 109, ("the Ordinance").

Cosmetics first became subject to duty in 1985 upon the publication of the Dutiable Commodities (Amendment) Bill which was later given the force of law by the Public Revenue Protection (Dutiable Commodities) Ordinance of the same year.

2. Cosmetics continue to be liable to duty by reading the definition of "dutiable goods" in s.2(1) of the Ordinance together with ss.3(1) and 4(1), and Part VIII of the Ordinance which is in these terms:

"76. In the application of this Ordinance to cosmetics -

'cosmetics' means any preparation designed to improve, beautify and generally increase the attractiveness of the person by external application and includes any preparation which -

(a) is, or purports to be, for the care of skin or hair, including any cream, emulsion, gel, lotion, powder, spray or liquid;

(b) is, or purports to be, a make-up for beautification, including any powder, lipstick, eye make-up, rouge, or preparation for manicure;

(c) promotes, or purports to promote, good grooming, including any talcum powder, deodorant, depilatory, anti-perspiring, suntan product or a salt or foam for the bath;

(d) is, or purports to be, a fragrance, including any cologne, sachet, perfume, scent or toilet water,

but does not include any preparation which is a soap, liquid soap, toothpaste, or shampoo for the cleansing of hair and scalp, unless such preparation purports to be any of the preparations referred to in paragraph (a), (h), (c) or (d)."

3. The facts are to be found in the affidavits sworn by Mr, Fritz Peyer, the Managing Director of Hermes Pacific, and by Mr. Hui Bo Cheung, Assistant Staff Officer of the Customs and Excise Department.

4. Hermes Pacific Ltd. ("the Appellants") is a subsidiary of Holding Hermes S.A., a French company. Among the products they import into, and distribute in, Hong Kong are the six brands of soap with which this appeal is concerned. They are. sold under the names: "Amazone", "Caleche", "Equipage", "Eau de Cologne", "Parfum d'Hermes" and "Belami" ("the six soaps").

5. The Appellants had been importing these soaps before the law made them dutiable. They are in a category of importers who have licenced warehouses. Under the Ordinance, these importers are not required to pay duty immediately upon importation. They have a removal licence which allows them to take dutiable goods, after importation, to their warehouse. They then pay duty on a monthly basis when they submit returns to the Commissioner of Customs and Excise in relation to the goods they have delivered locally.

6. If there is any doubt about whether a particular item is subject to duty, the importer on his own initiative, or at the instance of the Commissioner, submits the item "for classification or determination". Mr. Hui's affidavit explains why it was not until the end of the year 1986 that the Commissioner began to look into the question whether the Appellant's soaps were liable to duty. We are not concerned with that.

7. At the request of the Commissioner, on 12th January 1987, the Appellants sent a descriptive list of the soaps they had imported and distributed during the years 1986/1987 together with a number of samples. On the following day the Commissioner wrote to the Appellants with regard to all the soaps listed "confirming that they are caught within the  net of cosmetics as defined in section 76 of the ... Ordinance ... and are dutiable".

8. The Appellants did not agree with the Commissioner's interpretation of the law and enquired upon what basis the conclusion that the six soaps were dutiable had been reached. On the 6th February the Commissioner replied. The meaning of cosmetics has been clearly defined in section 76 of the ... Ordinance ...

9. It is not necessary to refer to all the correspondence which was exchanged, and there were also a number of telephone conversations during which the matter was discussed. But the first intimation, in writing, of the Commissioner's views was contained in a letter dated 8th May which said: ... As the .... soap in question purports to be perfumed/cologne soap and their corresponding series of perfumes/colognes are on sale, they are caught within the definition of cosmetics as provided in section 76 of` the ... Ordinance."

10. On 12th May the Appellants told the Commissioner that they would be seeking a declaration from the High Court because they did not agree with his classification. The Commissioner responded with a formal acknowledgment.

11. In replying to the solicitors acting for the Appellants, by a letter dated 10th July, the Commissioner wrote: "On the basis of the reasons set out in ... my letter of 8 May I am of the opinion that the soaps in question purport to be fragrances and therefore they are subject to duty as cosmetics under the .... Ordinance.".

12. Mr. Peyer's affidavit explains how and why the Appellants had continued to pay duty, under protest, on the six soaps which are the subject matter of the controversy.

13. The matter was not resolved in the Appellants' favour and so on 11th September 1987, they sought leave to apply for judicial review under R.S.C. 0.53, r.3. Barnett J. granted leave. The principal relief for which leave was given to apply was for a declaration that the "determination or classification" made by the Commissioner that the six soaps in question were liable to duty under the Ordinance was "ultra vires and illegal". Leave was also granted to apply for the following further or alternative relief:

(a) a declaration that the Applicant was not bound to pay duty under the Ordinance in respect of the soaps; and

(b) a declaration that the Applicant was entitled to a refund of the, duty paid since January 1987 on the soaps.

14. Barnett J.'s order refers to another declaration with which we are not now concerned.

15. Mr. Hui's affidavit reveals In further detail the Commissioner's reasoning in reaching his conclusion that the six soaps are dutiable under the Ordinance. Broadly speaking, they were classified as cosmetics on the basis that:

(a) they purported to promote good grooming [s. 76(c)]; and/or

(b) they purported to be a fragrance [s.76(d)].

Mr. Hui explained fully why the six soaps had been classified as cosmetics. I will return later to a detailed review of the Commissioner's reasoning.

16. The judge upheld the Commissioner's contentions and the substance of his decision is contained in the following passage from his judgment:

"    To my mind, the aim and purpose of that section is quite clear. The legislature intended to make dutiable any preparation or substance, the use or application of which contributes more than simple bodily cleanliness. This straight-forward interpretation avoids either the absurdity or the violence to construction which Mr. Merry contended for, particularly in relation to paragraph (c). Good grooming clearly connotes something beyond being simply neat, tidy and clean. It means the lavishing of a little extra care and attention on one's turnout by taking advantage of the many and various preparations which are nowadays available to the person who is concerned to be something more than neat, tidy and simply clean-looking, or smelling. The examples used in paragraph (c) support this meaning, A deodorant or depilatory may be desirable to the user but is 'not necessary for a neat, tidy and clean appearance. A salt or foam for the bath is undoubtedly pleasing to the user, but is also something more than a product or preparation whose primary purpose is cleanliness.

As to paragraph (d), it is correct that a `fragrance' is a sweet smell. It is equally correct, as Mr. Feenstra pointed out, that section 76 is concerned not with a fragrance simpliciter but with a preparation which is or purports to be a fragrance. It is clear, in my view that this is intended to mean a substance whose purpose or attribute is, or is to impart, a sweet smell. To determine whether a soap of other excepted preparation is or purports to be a fragrance it is proper to ascertain whether the preparation's emphasis is on imparting a sweet smell rather than on simple cleanliness."

17. The judge went on to state his view that the Commissioner had not erred in his interpretation of s.76 of the ordinance. As to the question whether or not he had considered irrelevant matters or failed to take into account relevant matters, there was a vast number of cosmetic preparations available in a wide variety of forms. The task of drawing up a schedule of percentages (i.e. of essential oils contained in a soap) and other guides would be virtually impossible, and so he concluded that: "The legislature has therefore, quite sensibly left the matter to the Commissioner to determine."

18. The judge also held that the Commissioner was justified in looking not only at the soaps but also at the way in which they were packaged, advertised and marketed generally, and entitled to distinguish the six soaps, whose smell was provided by essential oils, from other soaps whose smells derived from chemical or synthetic ingredients.

19. The judge said that he had detected no manifest misdirection. The Commissioner's decision was not one to which a reasonable man or tribunal ought not to have come. He had not acted illegally or unreasonably in coming to his decision.

20. I am bound to say, and at once, that in my respectful opinion there was an error of approach in the case put forward on behalf of the Commissioner, partly due, no doubt, to the way in which the first relief sought by the Appellants was formulated. Counsel for the Commissioner had submitted that the legislature had intended that some soaps were of such a nature that they should be regarded not only as soaps hut also as cosmetics and should be classified as cosmetics for the purpose of attracting duty. It had, it was argued, then been left to the Commissioner to distinguish between simple soaps and soaps/cosmetics.

21. Mr. Feenstra put the matter to us in the following way. The Commissioner was correct in taking into account the matters referred to in Mr. Hui's affidavit to make sense of the statutory classification. Although the Ordinance imposed a duty, the wording of s.76 created a difficulty which had to be resolved in a practical manner. Some soaps, said the legislature, were cosmetics. The determination as to which soap was to be regarded as a cosmetic was left by the legislature to the Commissioner in the first instance. The Court, as a matter of common sense as well as law, should not be too astute to interfere with the Commissioner's determination, if it were one which a reasonable person could come to. That was the only reason why he had referred to the C. Maurice & Co. Ltd. v. Minister of Labour [1969] 2 A.C. 346. Even if the Court might consider that it would not itself take into account one or more of the criteria used by the Commissioner, this was not fatal to his case because the test was whether a reasonable person could take these criteria into account having regard to the vague statutory formula.

22. As I read the Ordinance, the legislature has not "left the matter to the Commissioner to determine" in the sense that these words are used in the judgment. Of course, someone must make the initial decision as to whether duty will or will not be levied on a particular item, but the Commissioner is not given a decision-making power or an adjudicative role in determining whether or not an item is subject to duty (compare, for example, his powers and duties in ss.5(1), 7(l), 20, 24(7), 26, 26A, 28A, 31(3), 72 and the Schedule). Therefore, in my view, any reliance placed by the Commissioner upon the decision of the House of Lords in C. Maurice & Co. Ltd. v. Minister of Labour was misconceived. In that case the company contended that they qualified for a refund of selective employment tax under the relevant Act of 1966 and the decision, which involved the interpretation of a particular classification, was entrusted by the statute, in the first instance, to the industrial tribunal. It was in this context that Lord Wilberforce (at p.361B) said: Parliament must be taken to have intended to give [the tribunal's] decisions on classification questions, including, as they must, consideration of the classificatory language, a strength only slightly less than that attracted by decisions of fact properly so called." Lord Wilberforce, at letter C, was careful to distinguish that approach from that of a court construing income fax and customs legislation.

23. In my judgment the Courts must interpret the Ordinance against the background of the admitted or proved facts, employing the ordinary canons of construction. We are not therefore concerned with the question whether or not the Commissioner misdirected himself, nor are we required to defer to, or to take into account, the Commissioner's special knowledge and experience in determining the issue which arises on this appeal.

24. Having said all this, the Commissioner's reasoning is relevant in that it founded the arguments      addressed to us on his behalf as to the true interpretation of s.76 in the context of the whole Ordinance.

25. Section 76 is certainly a difficult one to construe when one comes to the wording which follows the indented paragraphs (a) to (d). My analysis of the section in broad terms is this. It begins with general words which state little more than the dictionary meaning, of cosmetics. It then includes (i) items (for example lipstick and rouge) which would be regarded by everyone as being cosmetics, (ii) others (for example suntan products) about which there might be some doubt, for the removal of any such doubt, and (iii) items such as sachets and bath foam which no one would regard to be cosmetics as ordinarily understood, thus enlarging the ordinary meaning. Then the definition goes on to narrow the meaning of the general words earlier used by expressly excluding soap, toothpaste etc., unless certain conditions are fulfilled.

26. It seems to me clear why the formulae "is, or purports to be" and "promotes, or purports to promote" are used in paragraphs (a) to (d). This must be so that, an importer will have to pay duty on his product whether or not the item, for example, is in fact "for beautification". The use of the expression "purports to be" in the final part of the definition presents more difficulties.

27. One thing is clear - the legislature did not intend to render all soap, toothpaste or shampoo dutiable. On the other hand, it is also clear that the legislature, nevertheless, sought to make these items dutiable in certain circumstances. This is where any one of them purports to be something covered by paragraphs (a) to (d). In my judgment, the expression "purports to be" is used throughout the section in the sense of professes or claims to be or conveys to the mind that it is. In view of the clear indication by the legislature that only certain soaps are dutiable, it seems to me that it is for the person asserting that a particular soap fulfils the necessary conditions to establish that fact.

28. I now return to the Commissioner's reasons for deciding that the six soaps were dutiable, all of which, as I have mentioned, were relied upon before us:

(i) the six soaps clearly conveyed the function of promoting the good/clean appearance of anyone using them;

(ii) further or in the alternative, each of the soaps purported to be a fragrance. The soaps also belonged to the class of articles the function of which was to give a fragrance. In other words the soaps purported to have the attributes of giving a fragrance. This interpretation was supported by the inclusion in s.76, of "sachet" which was not a liquid with a fragrance like perfume or eau de cologne but, according to the dictionary, was a small perfumed bag, or a packet or dry perfumed flowers for laying among clothes. The main attribute of a sachet, like the soaps, was to give a fragrance although it might also have some other function like an ornmental function in the case of a sachet, or cleansing in the case of soap;

(iii) The formulae of the six soaps showed that they contain essential oil (oil in which floral essence contained In their corresponding Eau de Cologne was dissolved). For instance "Amazone" soap contained 3.6% of the essential oil also contained in Amazoe Perfume and Eau de Toilette and other Amazone cosmetics. In contrast to these soaps, ordinary bath and toilet soaps like Lux, Cussons and Zest, although they had a fragrance, did not purport to be a fragrance. They were bought and used primarily for their cleansing function and not for their fragrance. They did not contain essential oils and their fragrance was derived from chemicals. There were no corresponding perfumes or eau de cologne;

(iv) another element which the Commissioner took into account when deciding that the six soaps purported to be a fragrance was the way the soaps were advertised. He drew attention to a glossy magazine where the advertisement had a picture of a bottle of Hermes Eau de Cologne on the lower right hand corner with the following caption:

"After the energetic pleasure of sports, treat yourself to the fresh pleasure of Hermes Eau de Cologne. A pleasure you can enjoy in soap, deodorant, shower gel and shampoo." Clearly the soap was being sold for its pleasure, a pleasure which derived from the Eau de Cologne. The soap purported to be a fragrance rather than a cleanser. It was being sold and marketed for its special and distinctive scent and not primarily as a cleanser;

(v) the packaging of the six soaps also suggested that they were akin to cosmetics rather than bath or toilet soaps. They were contained in chic, brightly coloured, plastic containers with the Hermes label on the top lid with no mention of soap. There was a small label with the words "Savon Perfume" on the outside of the lower lid. Furthermore there was a pamphlet to he found in each paper box carrying, the plastic box with the Parfum d Hermes soap. This was in sharp contrast with Lux and other toilet and bath soaps which were merely wrapped in paper with the words "Bath Soap" and "Beauty Soap" printed clearly on the wrapper;

(vi) furthermore the retail price of the six soaps was between $72-$78. It could be inferred from the price that they were not ordinary cleansing soaps which cost on average $3. a bar. They were distinctive. They were "cosmetics". They contained ingredients of known brands of perfumes. They purported to he a fragrance and were marketed as such, selling at almost 25 times the cost of ordinary soap. Moreover, the six soaps, unlike ordinary bath and toilet soaps, were only available in the Hermes cosmetic outlets in the Landmark, Fanda, Duty Free Shoppers and Watsons. They were not sold in supermarkets such as Park in Shop Wellcome, 7-11 and China Resources which carried a wide range of bath and toilet soaps. In Watsons they were displayed together with Eau de Cologne and After Shaves in a special counter away from ordinary soap, such as Zest, Lux and Cussons which were not sold in the Hermes outlets in Landmark and Duty Free Shoppers. In Watsons, Zest, Lux and Cussons soaps were displayed in the same counter as other bath and toilet soaps.

29. To give some meaning to the expression "purports to he" in the concluding words of the section, I accept that a court is entitled to take into account the way in which the soaps were presented by their packaging and advertising. With all respect to the careful arguments addressed to us on behalf of the Commissioner, I am unable to see how the other factors relied upon can be relevant in deciding whether a soap (or, indeed, a toothpaste) purports to be one of the preparations referred to in paragraphs (a), (b), (c) or (d) of the section.

30. In my judgment, an item cannot "purport to be" something by reason of any of the following factors taken singly or together:

(i) the price at which it is old;

(ii) its presence in a range of products which clearly are "cosmetics" as defined;

(iii) the places, the number of outlets and the particular counters where it is sold;

(iv) whether its pleasant smell derives from synthetic or natural oils.

31. There is no warrant in the wording of the section to have regard to these matters. If the legislature had intended that factors of this kind could be taken into account, it would have said so. And, I would add the legislature could have said if that is what was intended, that any preparation or substance, the use or application of which contributes more than simple bodily cleanliness" is to be dutiable, but it did not. Nor did the legislature indicate, in my view, that it intended Luxury soaps to be dutiaible and others not.

32. As regards packaging, the Commissioner does not levy duty on, for example, Cussons, 4711, and Lux soap Of course the mere fact that he does not do so, does not mean that the six soaps are not caught by s.76. In other words any inconsistency in the Commissioner's approach there might he, cannot help the Appellants. However, I think it is necessary to point to what one finds on the packaging of those other soaps:

(i) Cussons: "Cussons Cold Cream' soap is a pure mild soap specially formulated to care for your skin. Its smooth gentle lather contains moisterising ingredients to cleanse your skin while helping it to stay soft and young looking";

(ii) Lux: "Beauty soap. For softer smoother skin";

(iii) 4711: "Eau de Cologne Cream Soap".

33. It is to be noted that the Commissioner does not regard soaps (i) and (ii) as purporting to be. preparations under even paragraph (a) which contains the words "for the care of the skin", or soap (iii) as being dutiable because its wrapping mentions Eau de Cologne and 4711 makes Eau de Cologne too. Apart from their price and their rich perfume (which escapes even the packing) I do not see how the Hermes soaps can be distinguished.

34. As to the advertisement the Commissioner refers to all it does is to say that the pleasure one gets from Hermes Eau de Cologne can also be enjoyed by using their soap, deodorant, shower gel and shampoo. I am unable to read this advertisement as helping the soap to purport to be one of the preparations referred to in paragration (a) to (d).

35. Doing the best that I can with this difficult definition; I conclude that it has not been shown that any of the six soaps purports to be "a fragrance". Nor do I think that it has been shown that they "promote or purport to promote good grooming" any more than any other toilet soap does. And the legislature has made it plain, as we have seen, that it did not intend that all toilet soaps are dutiable.

36. In my judgment, once it was maintained both before the judge and before us that the legislature had left the Commissioner to decide whether a particular soap was dutiable or not (and not just initially as an administrative act) the contentions made on his behalf are seen to be faulty. If one has to resort to the Commissioner's opinion upon the question whether a particular soap is dutiable or not, it shows that the definition has failed, in relation to soap, to do what it set out to do. I reach the conclusion that the Commissioner has not established that any of the six soaps is a soap which is not excluded by the words "but does not include any preparation which is a soap" but is included by what follows the word "unless".

37. For these reasons, I would allow the appeal and grant the principal and ancillary declarations sought.

Silke, V.-P.:

38. I have had the benefit of reading in draft the judgment of my Lord Fuad J.A. and I am in respectful agreement with his conclusions.

39. Ideally, definitions of the kind here should, in a Customs Statute, to be of sufficient clarity that the one whose duty it is to administer the statute can do so with reasonable ease and those to whom the statute is intended to apply can know with reasonable certainty where they stand. I have considerable sympathy with the Commissioner in his attempt to carry into effect whatever it is that s.76 may be thought to mean when the substance he is considering is soap.

40. It is clear from the concluding portion of the ''section that the Legislature did not wish all soaps to be dutiable as "cosmetics". It then attempted to de-soap, if I may use that expression, some soaps and turn them into cosmetics". It is impossible in my judgment to discover where the fine line is. All soaps smell, for good or ill; all soaps, by as sisting in the cleansing of the person, are or purport to be, aids to "good grooming". Merely because some soaps smell more sweetly than others does not turn them into "a fragrance" though their sweet smell may be fragrant. They are not of themselves any cologne, sachet, perfume, scent or toilet water" or purporting to be such. They remain soaps.

41. I agree with my Lord Fuad J.A. that the Commissioner's task was to apply the definition as it stood. It was not for him to decide what, if any, soap was subject to duty: that was the task of the Legislature. He could certainly decide what is a soap, or for example, what is a preparation which is or purports to be for the care of skin, provided it is not a soap, for such a preparation which is a soap must, in the light of the wording of the section, be a separate thing even if it, as it clearly does, assist in care of skin.

I too would allow the appeal.

Barker, J.A.:

42. I have had the opportunity of reading the judgment of Fuad J.A., I spree with it and do not wish to add anything of my own.

Representation:

Mr. Malcolm Merry (Denton Hall Burgin and Warrens) for the Appellants.

Mr. Peter Feenstra and Miss M. Datwani (Crown Solicitor) for the Respondent.