Canada (Customs and Revenue Agency) v. Agri Pack, 2005 FCA 414

Date: 20051212

Docket: A-34-05

Citation: 2005 FCA 414

CORAM:        LINDENJ.A.

                        NOËL J.A.                 

                        SEXTON J.A.

BETWEEN:

THE COMMISSIONER OF THE CANADACUSTOMS

AND REVENUE AGENCY

Appellant

and

AGRI PACK

Respondent

Heard at Toronto, Ontario, on December 1, 2005.

Judgment delivered at Ottawa, Ontario, on December 12, 2005.

REASONS FOR JUDGMENT BY:                                                                                  NOËL J.A.

CONCURRED IN BY:                                                                                                 LINDEN J.A.

                                                                                                                                    SEXTON J.A.

Date: 20051212

Docket: A-34-05

Citation: 2005 FCA 414

CORAM:        LINDENJ.A.

                        NOËL J.A.

                        SEXTON J.A.

BETWEEN:

THE COMMISSIONER OF THE CANADACUSTOMS

AND REVENUE AGENCY

Appellant

and

AGRI PACK

Respondent

REASONS FOR JUDGMENT

NOËL J.A.

[1]                This is an appeal and cross-appeal from a decision of the Canadian International Trade Tribunal ("Tribunal" or "CITT") dated November 2, 2004, ([2004] C.I.T.T. No. 129 (QL)) concerning the customs tariff classification of eight kinds of onion bags imported by Agri Pack ("respondent"), on August 26, 2002.



Background

[2]                Classification of the onion bags under the Customs Tariff, S.C. 1997, c. 36, (the "Tariff") is a two-step process. First, the Tribunal was required to classify the onion bags under a tariff item in Chapters 1 to 97 of the Schedule to the Tariff (Customs Tariff, S.C. 1997, c. 36, Sch.) (the "Schedule"). Second, the Tribunal had to consider whether the onion bags were also described under duty relief tariff item 9903.00.00.

[3]                The Tribunal first classified the onion bags under tariff item 6305.33.00 "as sacks and bags, of a kind used for the packing of goods, of man-made textile materials, of polyethylene or polypropylene strip". The Tribunal then determined that all of the onion bags, except for the "master" bags, also qualified for duty relief under tariff item 9903.00.00, which applies to "articles for use in" machinery for bagging, filling or packing fresh vegetables.

[4]                The Commissioner of the Canada Customs and Revenue Agency ("appellant"), claims that none of the onion bags in issue were for use in machinery for bagging, filling or packing onions under tariff item 9903.00.00.

[5]                The respondent cross-appeals, claiming that the onion bags should have first been classified under tariff item 5608.19.90 as made up nets of man-made textile materials, rather than under tariff

item 6305.33.00. The respondent also claims that the "master" onion bags should have been classified under tariff item 9903.00.00, like all the other bags.

The Facts

[6]                There are eight kinds of onion bags in issue. The evidence establishes that although these bags can be put to different uses, they were all used in this instance to pack fresh onions using onion bagging machinery.

[7]                The onion bags are made of open mesh leno weave fabric which is woven from strips of synthetic polypropylene textile material of a width not exceeding 5 mm. The fabric is folded onto itself and then stitched along two sides, leaving the third side open to form a bag of various industry-standard sizes for specific weights. There is a pull closure that can be used to draw the bags closed and tie them. The polypropylene weave provides water resistance and aeration to industry standards.

[8]                Seven of the eight onion bags are 10-lb., 25-lb. or 50-lb. bags used to pack loose onions. The eighth onion bag (the "master" onion bag) has the same physical characteristics as the first seven except that it is used to pack smaller 3-lb. and 5-lb. bags.

[9]                The onion bags were imported by the respondent and sold to three customers who provided end-use certificates attesting that they used the bags to pack onions. The plant manager of one of these customers (Hillside Gardens) described the packing process in great detail. It is sufficient for present purposes to provide the following brief summary.

[10]            The onions are placed into a large dumper and then go up a conveyor to a brusher, which removes loose skin and dirt. After being graded by hand, the onions move along the conveyor to a seizer, following which the onions move further along conveyors to feeding tables, which feed the onions to the bagging machines.

[11]            Three types of bagging machines were used: the Octo-Pak, the edp® and the master. The Octo-Pak and edp® bagging machines essentially operate in the same way. The bags are clamped into rotating arms, which adjust depending on the bag size and which are timed to rotate into place under a bucket containing onions amassed to achieve the pre-selected weight (i.e., 10 lbs., 25 lbs. or 50 lbs.). Through a photo eye a signal is sent, and the onions drop from the bucket to fill the bags. Once filled, the bag rotates so as to allow another bag to move into the fill position. The filled bag is then removed from the clamp, tied closed by an operator and placed on a skid.

[12]            In contrast, the master bagging machine does not have an automated filling function. The bags are filled manually, while the clamps hold the bags open. The common feature among the three types is the inability to function without a bag being attached to them.

Legislative Framework

[13]            The Tariff requires that tariff classification proceed as follows:

[14]            The General Rules are structured in cascading form: if and only if General Rule 1 does not resolve the classification, then regard must be had to General Rule 2, and so on as necessary. According to the General Rules,

[15]            The relevant basic tariff nomenclature at issue in this case reads as follows:

[16]            The relevant duty relief tariff item, number 9903.00.00, describes:

Decisions of the CITT

[17]            Dealing with what it identified as the first issue, the CITT reviewed tariff headings 56.08 and 63.05 and considered the Explanatory Notes (World Customs Organization, Explanatory Notes, 3^rd ed. (Brussels, 2002) vol. 2, s. VI-XI, c. 30-63) to these headings. The CITT agreed with the appellant's submission that heading 56.08 cannot cover the goods in issue due to the Explanatory Notes to that heading, which state that goods cannot fall under heading 56.08 if they are more specifically covered under another heading. In this case, the CITT concluded that heading 63.05 provided for the proper classification as it more specifically covered the goods in issue.

[18]            The CITT went on to hold that the goods in issue (except for the master bags) qualified for tariff relief under tariff 9903.00.00 as articles for use in machinery for bagging, filling or packing fresh vegetables. In so holding, the CITT rejected the appellant's contention that the bags, by reason of being briefly attached to the machines, had an insufficient connection with the machines to come within tariff 9903.00.00.

[19]            With respect to the master bags, the CITT held that since the function of the master bags is to serve as containers for the manual phase of the operation, they cannot be said to be integrally connected with "machinery for filling" or "machinery for bagging" (Reasons, paragraph 30) within the meaning of tariff item 9903.00.00.

Alleged Errors in the Decision of the CITT

[20]            The appellant submits that the CITT erred when it held that the goods in issue (except for the master bags) qualified for relief under tariff 9903.00.00. At the hearing of the appeal, Counsel rested his case on a simple issue of statutory construction. According to him, the bags in issue were for use "with" the machinery rather than "in" the machinery as required under the tariff and the CITT failed to appreciate this distinction. All other arguments that the appellant advanced before the CITT and reiterated in its memorandum of fact and law were abandoned.

[21]            The respondent maintains in support of its cross-appeal that the CITT committed a reviewable error in excluding the master bags from the relief provided by tariff item 9903.00.00. According to the respondent, the CITT would have come to the opposite conclusion if it had considered the broader "packing" machinery category of eligible machinery in tariff item 9903.00.00.

[22]            With respect to the first issue identified by the CITT, the respondent contends that the Tribunal erred in law when it held that the goods in issue were to be classified under tariff heading 63.05 on the ground that they are more specifically described by this heading, rather than by heading 56.08. The respondent contends that, in doing so, the CITT failed to consider Note 2(a) to Chapter 63 ("Chapter Note 2(a)") which excludes the application of tariff 63.05 in the circumstances of this case.

[23]            In its decision, the CITT made no mention of this argument although the record reveals that it was specifically advanced (Appeal Book, Volume 1, page 45). According to the respondent, the CITT simply misunderstood its argument.

Standard of Review

[24]            According to the wording of section 68(1) of the Act, appeals are authorized from CITT decisions on questions of law only. Matters of construction or interpretation of the Tariff and its Schedule are questions of law which, due to the CITT's extensive expertise in tariff classification, can only be reviewed on a standard of reasonableness simpliciter (Minister of National Revenue (Customs and Excise) v. Schrader Automotive Inc. (1999), 240 N.R. 381 (F.C.A.) at para. 4; Sandvik

Tammock Canada Ltd. et. al. v. Minister of Revenue (Customs and Excise), [2001] F.C.J. No. 1692 (C.A.) at para. 13).

[25]            A Court reviewing an interpretation of the Tariff on a reasonableness standard must defer when confronted with any reasoning that rationally supports the CITT's interpretation (Star Choice Television Network Inc. v. Canada(Customs and Revenue Agency), [2004] F.C.J. No. 674 (C.A.) at para. 7). A decision is unreasonable if a tribunal adopts an interpretation that the words of the Tariff cannot reasonably bear.

Analysis and Decision

The Appeal

[26]            The appellant argues that the CITT erred in law when it concluded that the goods in issue can also be classified under tariff item 9903.00.00 as articles "for use in" machinery mentioned in that tariff item and qualify for tariff relief.

[27]            In order for the goods in issue to qualify for the benefits of tariff item 9903.00.00, the goods must be "articles" and they must be "for use in" bagging machinery. Subsection 2(1) of the Tariff defines, in turn, the expression "for use in" as follows:

[28]            The appellant concedes that the goods in issue are "articles" and that the machinery contemplated by the CITT fell within tariff item 9903.00.00, but takes issue with the CITT's conclusion that these articles are "for use in" such machinery within the meaning of the definition.

[29]            According to the appellant, the words "attached to" on which the CITT relied must be read with the preceding words which require that the articles be "wrought or incorporated into" qualified machinery. The requirement for the existence of a form of incorporation is reinforced by the French text which indicates that, in order to qualify, the article must become part of the machinery. The appellant submits that the CITT failed to read the words in context when it held that the bags were "attached to" the machinery merely by virtue of being clamped onto the machinery during the bagging process.

[30]            There is no merit to this argument. The CITT understood that the words "attached to" were to be read in context and that mere physical attachment was not enough. It said at paragraph 31 of its Reasons:

Given the above-quoted definition of "for use in", the Tribunal must determine whether the goods are "wrought or incorporated into" (which they are not) or "attached to" the other goods mentioned in the above tariff item. In past cases, the Tribunal has effectively narrowed the meaning of "attached to" to mean that the goods must be physically connected and functionally joined to the goods listed in the tariff item. The "functionally joined" condition is derived from a long line of Tribunal cases where the Tribunal noted that the expression "attached to" does not merely bear its ordinary grammatical meaning. Indeed, given the legislative context in which the expression appears, it also connotes a functional relationship. [Emphasis added.]

[31]            Applying this legal test, the CITT concluded that the onion bags (other than the master bags) were both physically and functionally attached to the bagging machine (Reasons, paragraph 32). In my view, it cannot be said that the CITT failed to read the expression "attached to" in light of the preceding words and in harmony with the provision as a whole.

[32]            Beyond this, there was evidence to support the CITT's conclusion that there was both a physical and a functional connection between the bags and the machines. The machines cannot function without the bags being attached to them, and there is clear interaction between the bags and the machines during the bagging process.

[33]            It has not been shown that the CITT committed any reviewable error in concluding that the onion bags (other than the master bag) fell within tariff item 9903.00.00. I would therefore dismiss the appeal with costs.

The Cross-Appeal
Master Bags

[34]            The CITT declined to extend the tariff relief to the master bags because the machine's only function with respect to these bags was to hold them open while they were filled manually. As such, the master bags were not integrally connected with machinery for "filling" or "bagging" (Reasons, paragraph 30).

[35]            The respondent, as part of its cross-appeal, submits that in reaching this conclusion, the CITT failed to consider that aspect of the tariff item covering machinery for "packing" (i.e. "machinery for packing fresh fruits or vegetables from the dumper, feed table, bin or hopper stage to the box or bag closing stage"). According to the respondent, this definition covers a broader range of machinery than machinery for "filling" or "bagging".

[36]            Whether one focuses on machinery that "packs", "fills" or "bags" onions, the CITT was of the view that the manual filling of the master bags resulted in there being an insufficient connection between the master bags and the machinery. In so holding, the CITT was addressing the extent of the connection that is required to bring an article within the tariff item. This is a question of mixed fact and law, and as no legal error has been identified, it is beyond this Court's purview.

[37]            Beyond this, it is not clear that the master bagging machine even qualifies as machinery for "packing" as this function is performed manually.

[38]            I would therefore dismiss this part of the cross-appeal.

Heading 63.05 versus Heading 56.08

[39]            The CITT chose heading 63.05 over heading 56.08 because heading 63.05 "more specifically describes the goods in issue" (Reasons, paragraph 11). The CITT relied on the Explanatory Notes to heading 56.08 which state that this heading has no application if the goods are "more specifically covered" by another heading (Reasons, paragraph 12). It also noted that the goods in issue are more like those described in the Explanatory Notes to heading 63.05 (Reasons, paragraph 12 in fine).

[40]            At the beginning of its reasons, the CITT noted that in appeals under the Act on tariff classification, it is guided by two sets of general interpretive rules entitled "General Rules for the Interpretation of the Harmonized System" ("General Rules"), being the Schedule to the Tariff, and the "Canadian Rules", being a Part of the General Rules. The General Rules are structured in a cascading form. If the classification of an article cannot be determined in accordance with Rule 1, then regard must be had to Rule 2, etc. The Canadian Rules reiterate that the classification of goods under the tariff item of a heading (or sub-heading) shall be determined in accordance with the General Rules (Reasons, paragraph 10).

[41]            As noted by the CITT, the General Rules are structured in a cascading form. General Rule 1 is the primary Rule, and regard can be had to Rule 2 if Rule 1 does not resolve the classification and so on. Therefore, General Rule 1 requires first that goods be classified according to the terms of the headings and any relevant Section and Chapter Notes within the Schedule. Chapter Notes, like headings and sections, have the status of law.

[42]            In this case, Chapter Note 2(a) is relevant. It provides:

Sub-Chapter I [i.e. Sub-Chapter I of Chapter 63, which includes heading 63.05] does not cover:

(a)      Goods of Chapters 56 to 62 [which includes heading 56.08].

...

[Emphasis added.]

According to the respondent, it follows that where goods are covered by both heading 56.08 and heading 63.05 (as was found by the CITT in this case (Reasons, paragraph 13)), heading 63.05 must be excluded.

[43]            The CITT made no mention of Chapter Note 2(a). It proceeded to apply General Rule 3(a) which provides that a heading which more specifically describes goods is to be preferred and concluded that heading 56.08 was the applicable heading on this basis. However, General Rule 3 is subject to General Rule 1 which provides that classification is to be determined according to the terms of the headings and relevant Sections or Chapter Notes and that General Rules 2 to 6 only apply "provided such headings or Notes do not otherwise require".

[44]            The respondent points out that in this case, Chapter Note 2(a) "otherwise requires" since as we have seen, it expressly excludes the application of heading 63.05 on the facts, as found by the CITT. It follows that, according to the respondent, it was not open to the CITT to resort to the "more specific description" test found in General Rule 3(a).

[45]            The respondent adds that it was also wrong for the Tribunal to construe the Explanatory Notes to heading 56.08 -- which states that goods do not fall under heading 56.08 if they are more specifically covered by another heading -- without regard to Chapter Note 2(a). It is not appropriate to resort to the "more specifically covered" test to support a classification that is excluded under the Schedule. Properly understood, the Explanatory Note to heading 56.08 must be read as excluding the application of this heading to goods which are "covered more specifically" by other [permissible] headings". This conclusion is reinforced by the Explanatory Notes to Chapter Note 2(a), which specify that "[i]n particular, this sub-Chapter [sub-Chapter I of Chapter 63] does not include: [ . . .] (c) made up nets of heading 56.08".

[46]            On the one hand, the respondent points out that this approach was followed by the European Commission ("EC") in a ruling (Binding Tariff Information ("BTI") Reference No. UK105214817 dated May 24, 2000) on garlic bags, which like onion bags, are covered by heading 56.08. The EC ruling states that the bags are classified under heading 56.08 and refers to Chapter Note 2(a) for authority.

[47]            On the other hand, in 1991, the U.S. Customs Service ruled that onion bags similar to the ones in issue should be classified under heading 63.05 (Ruling HQ 950360 dated November 13, 1991). However, no mention is made of Chapter Note 2(a).

[48]            As noted earlier, the CITT did not refer to Chapter Note 2(a) and did not address the respondent's argument in this regard. The appellant explained that this is because the CITT ruled out the application of heading 56.08 at the first stage and that accordingly Chapter Note 2(a) had no application. This is most unlikely given the whole tenor of the CITT's reasons and the statement at paragraph 13 of its reasons that: "...the language of heading No. 56.08 was not clear with regard to its application to the goods in issue, since heading No. 63.05 also covered the goods and, as explained above ... more precisely." [Emphasis added.]

[49]            The respondent's explanation for the CITT's failure to address Chapter Note 2(a) is more plausible. According to the respondent, the CITT simply misunderstood its position. It did not argue that "where the language of a heading is clear, it should 'trump' the application of the Explanatory Notes" as the CITT said (Reasons, paragraph 13). Rather, it argued that Note 2(a) to Chapter 63 is clear in stating that heading 63.05 can have no application and that, accordingly, the CITT was bound to classify the goods under heading 56.08.

[50]            Whatever the explanation, the end result is that this Court does not have the benefit of the reasons of the CITT on this issue. The CITT is a highly specialized tribunal which is entitled to deference, even on questions of law. In my view, it would be imprudent for this Court to dispose of this issue without the CITT reviewing it and disposing of it in the first instance.

[51]            In the circumstances, I believe that it would be appropriate to allow this aspect of the cross-appeal in light of the CITT's failure to address the respondent's argument and refer the matter back to the CITT so that it may determine whether Chapter Note 2(a) has the effect of excluding the application of heading 63.05 or explain why Chapter Note 2(a) has no application. Given the divided result, there should be no award of costs on the cross-appeal.

"Marc Noël"

"I agree.

            A.M. Linden J.A."

"I agree.

            J. Edgar Sexton J.A."

FEDERAL COURT OF APPEAL

NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET:                                                                               A-34-05

STYLE OF CAUSE:                                                               THE COMMISSIONER OF THE CANADACUSTOMS AND REVENUE AGENCY

                                                                                                and

AGRI PACK

PLACE OF HEARING:                                                         Toronto, Ontario

DATE OF HEARING:                                                           December 1, 2005

REASONS FOR JUDGMENT BY:                                      NOËL J.A.

CONCURRED IN BY:                                                          LINDENJ.A.

                                                                                                SEXTON J.A.

DATED:                                                                                  December 12, 2005

APPEARANCES:

Alexander Gay	FOR THE APPELLANT / APPLICANT
Dennis A. Wyslobicky	FOR THE RESPONDENT

SOLICITORS OF RECORD:

John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Ontario	FOR THE APPELLANT / APPLICANT
Barrister & Solicitor Oakville, Ontario	FOR THE RESPONDENT