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ΠΑΓΚΥΠΡΙΟΣ ΔΙΚΗΓΟΡΙΚΟΣ ΣΥΛΛΟΓΟΣ
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(1989) 3A CLR 256
1989 February 24
[A. LOIZOU P., MALACHTOS, DEMETRIADES, PAPADOPOULOS, HADJITSANGARIS, CHRYSOSTOMIS, JJ.]
THE REPUBLIC OF CYPRUS, THROUGH THE MINISTER OF
FINANCE AND ANOTHER,
Appellants - Respondents.
v.
MATERO LIMITED,
Respondents-Applicants.
(Revisionai Jurisdiction Appeal No. 666)
Companies - Veil of incorporation, piercing of- Clear intention emerging from letter of Managing Director of Company to avoid payment of tax - Respondent entitled, in the circumstances, to lift the veil of incorporation.
Customs and excise - Importation of goods in a disassembled condition - Interpretative Rule 2(a) of the Rules for the Interpretation of the Brussels nomenclature set out in the Second Schedule to the Customs and Excise Duties Law (Law 18/78) and the explanatory Notes to the Brussels nomenclature - Rightly applied in the circumstances of the present case.
By letter dated 12/4/84 the Managing Director of the respondents in this appeal placed an order to suppliers in Italy for the supply of 1700 motor fans. In the said letter the Managing Director asked the suppliers to ship the goods in different consignments, that is one consisting of motors only, in the name of the respondents in the appeal, and the other, consisting of the blades of the funs of the motors (impellers), in the name of another company limited by shares, described in the letter as a "sister company".
In fact the Managing Director of the respondents in the said letter spelled out quite clearly that "according to the local Customs and Excise Law, all motors when imported complete with impellers, the importer has to pay import duty 15.6% on the whole consignment. If, however, they are shipped in different consignments, then we pay import duty only on impellers not on the motors. It follows therefore that the motors should be shipped... in the name of our company...., whereas the impellers in the name of our sister company".
The Managing Director is the main shareholder and the Managing Director of the respondents. He is also a shareholder and a Director in the said sister company.
The Director of Customs applied the hereinabove in Headnote 2 referred to legal provisions and imposed duty on the goods, as if they were in an assembled condition. The Judge of this Court annulled the decision on the ground that there had been a breach of the rule against the lifting of the veil of incorporation. Hence this appeal.
The Court in allowing the appeal, held that the respondents' intention was crystal clear, namely to import the goods in a complete state. The instructions, that the goods be despatched in two consignments to two companies and not to the respondents alone, were given for the sole purpose of avoiding the payment of import duty to which they would have been liable, if the goods had arrived assembled. The order as made was not a genuine one for the importation of unassembled motors. It was reasonably open to the appellants, in the light of the aforesaid provisions of the interpretative rule 2(a) and the Brussels nomenclature to reach the sub judice decision.
Appeal allowed with no order as to
Costs.
Appeal.
Appeal against the judgment of a Judge of the Supreme Court of Cyprus (Savvides, J.) given on the 18th September, 1986 (Revisional Jurisdiction case No. 673/84) reported in 1986 3 C.L.R. 1574, whereby the decision of the Director of Customs to classify electric motors imported by respondent under Tariff Heading 84.11.20 and thus impose duty of 15.6% was annulled.
A. Evangelou, Senior Counsel of the Republic, for the Appellant.
St. Triantafyllides, for the Respondents.
Cur. adv. vult.
A. LOIZOU. P.: The Judgment of the Court will be delivered by Mr. Justice Demetriades.
DEMETRJADES, J.: By their letter dated the 12th April, 1984, the respondents in this appeal, through their managing Director, placed an order to their suppliers in Italy for the supply to them of 1700 motor fans and by their said letter they asked the suppliers to ship the goods in different consignments, that is one consignment consisting of motors only, in the name of the respondents, and the other, consisting of the blades of the fans of the motors (the impellers), in the. name of Glamourgo Trading Co. Ltd.
It is of the utmost importance for the appeal before us to set out the exact words of the Managing Director of the respondents with regard to the shipment of the goods. These read:
"With these observations in mind, we are submitting a trial order covering 1,700 pieces of motor fans, for which please give us your rock bottom prices F.O.B. Italian Port.
According to the local customs and excise law, all motors when imported complete with impellers, the importer has to pay import duty 15.6% on the whole consignment. If, however, they are shipped in different consignments, then we pay import duty only on impellers not on the motors. It follows, therefore, that the motors should be shipped on a C.A.D. basis in the name of our company Matero Ltd., whereas the impellers in the name of our sister company Glamourgo trading Co. Ltd., both housed at the same address."
The person who signed the order is the main shareholder and the Managing Director of the respondents. He is also a. shareholder and a Director in the Glamourgo Trading Co. Ltd.
The goods were shipped in the same container and when they arrived in Cyprus and the respondents sought to clear them from Customs, the Customs authorities refused to allow the clearance of the motors free of import duty, as claimed by the respondents., on the ground that the motors and the fan blades ought to be regarded as constituting motor fans in an unssembled condition and thus they were liable to import duty at the rate of 15.6%.
As a result of protests made by the respondents, the appellants sought the advice of the Attorney-General who, as it appears from the letter of the appellants to the respondents, dated the 18th October, 1984, opined that "the provisions of Interpretative Rule 2(a) of the Nomenclature should apply in the present case and, therefore, both motors and fan blades should be regarded as constituting fans in an unassembled condition, thus properly classified under Tariff Heading 84.11.20 at 15.6% E.E.C. rate of duty and not separately as electric motors and fans under Tariff Heading 85.01.90 free .and 84.11.20 at 15.6% respectively as declared".
According to the second Schedule to the Customs and Excise Duties Law of 1978 (Law 18/78).fan blades are classified under Tariff Heading 84.11.20 and are subject to the payment of import duty at the rate of 15.6%. The motors are classified under Tariff Heading 85.01.90 and they are free from the payment of import duty. If the motors, however, are imported assembled with the fan blades, they are classified under Tariff Heading 84.11.20 and thus they are liable to import duty at the rate of 15.6%.
The Director in reaching his decision relied on the Interpretative Rule 2(a) of the Rules for the interpretation of the Brussels Nomenclature which are set out in the second schedule to the Customs and Excise Duties Law (Law 18/78) and the explanatory Notes to the Brussels Nomenclature.
Rule 2(a) provides:-
"2-(a) Any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as imported, the incomplete or unfinished article has the essential character of the complete or finished article. It shall also be taken to include a reference to that article complete or finished (or falling to be classified as complete or finished by virtue of this Rule), imported unassembled or disassembled."
The Notes to the Nomenclature read:-
"The first part of Rule 2(a) extends the scope of any heading which refers to a particular article to cover not only the complete article but also that article incomplete or unfinished, provided that, as imported, it has the essential character of the complete or finished article...
The second part of Rule 2(a) provides that complete or finished articles imported unassembled or disassembled are to be classified in the same heading as the assembled article. When goods are so imported, it is usually for reasons such as requirements or convenience of packing, handling or transport.
The classification Rule also applies to incomplete or unfinished articles imported unassembled or disassembled provided that they are to be treated as complete or finished articles by virtue of the first part of this Rule."
As a result of the decision of the appellants the respondents filed Recourse No. 673/84, by which they prayed for its annulment.
The main issue that was raised and argued before the trial Court by the respondents in this appeal was that since the order placed to their Italian suppliers was made by two completely independent entities, namely the respondents and Glamourgo Trading Co. Ltd., the appellants were not entitled to impose import duty on the motors that were imported and that the Court could not look behind the corporate entity and "impute the actions of the company on its merits, that is to lift the corporate veil".
The case for the appellants before the trial Court, which was forcefully argued before it, was that, in view of the contents of the order made by the Managing Director of the respondents in his letter of the 12th April, 1984, the goods were ordered by and despatched to the same person and that the import duty ought to be calculated at the rate provided under tariff heading 84.11.20. Counsel for the appellants further argued before the trial Court that the "intervention of the two companies was in the matter purely colourable and they had been used as a cloak to avoid the payment of import duty".
The trial Court in rejecting this contention of counsel for the appellants and after extensively dealing with the issue of "lifting the corporate veil", had this to say (see Matero Ltd. v. The Republic (1986) 3 C.L.R. 1574, at p. 1595):
"The Law itself affords the opportunity not only in the case of two different importers, the one importing the motors and the other the fans, but also to one and the same importer to take advantage of the Customs legislation on the matter and order the motors and the fans unassembled to be despatched to him in two separate consignments. Once such an advantage is provided by the law, I cannot consider it as an attempt of evasion of a statutory regulation which by express provisions affords such an opportunity to importers".
The trial Court then concluded its judgment by saying, at pp. 1596- 1597, that:
"In the light of the above I have come to the conclusion that the act of the respondent Director of Customs and Excise to treat the two companies as one and the same legal entity was wrong and also that his decision communicated to the applicant by letter dated 18.10.84 to classify the electric motors imported by the applicant under Tariff Heading 84.11.20 subject to payment of import duty was wrong and was taken under a misconception of law and has to be annulled."
As a result of the findings of the trial Court, by which the sub judice decision was annulled, the respondents in the recourse filed this appeal on the following grounds:
"1. The Honourable Court misinterpreted the provisions of the Interpretative Rule 2(a) of the Second Schedule to the Customs and Excise Duties Laws 1978-1984 and wrongly decided that the Respondent Director of Customs was not entitled to classify the electric motors as complete or finished and impose duty at the rate of 15.6% under tarriff heading 84.11.20.
2. The Honourable Court failed to take into account material facts in determining whether the goods could be classified as complete or finished by virtue of the aforesaid Interpretative Rule, and in particular -
(a) He failed to take into account that the order placed by the importer covered 1700 pieces of complete or finished electric motors,
(b) he failed to take into account and to give due weight to the fact that the importer gave express written instructions to the suppliers to ship the said complete or finished goods in different consignments and in unassembled parts for the sole purpose of avoiding the payment of import duty, and
(c) he failed to take into account and/or attach due weight to. the fact that the intervention of the sister company Glamourgo Trading Co. Ltd. was colourable and that it has been used as a cloak to avoid payment of import duty and that the said company is not the real importer of the unassembled parts.
3. The Honourable Court misdirected itself and was wrong in reaching the conclusion that in the circumstances of the present case the veil of incorporation should not be lifted."
Having in mind the arguments of counsel for the parties, it is clear that the only issue before us for determination is what was the purpose for which the letter of the 12th April, 1984, was written and what the intentions of its writer were.
As it appears to us from the extract of the letter of the Managing Director of the respondents, to which we have earlier referred, it is crystal clear that their intention was to order and import the goods in a complete state and that the instructions given that they had to be despatched to the two companies and not to the respondents alone, were made in order to avoid the payment of import duty to which the respondents would have been liable if the goods arrived assembled. We have no hesitation whatsoever to say that it was for this reason that the Managing Director suggested to their suppliers the shipment of the goods in an unassembled condition.
In the result, we find that the order of the goods in the form it was made by the respondents was not a genuine one for the importation of unassembled motors and that it was reasonably open to the appellants, in the light of the provisions of the Interpretative Rule 2(a) and the Brussels Nomenclature, to reach the sub judice decision.
The appeal, therefore, succeeds. There will be however, no order as to costs.
Appeal allowed No order as to
costs.