(1989)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. ν MATERO LIMITED, Respondents-Apphcanis (Revisions!Jurisdiction Appeal No. 666) Companies — Veilof incorporation,piercingof— Clearintentionemerging from letter of ManagingDirectorof Company to avoidpayment of tax — Respondent entitled, m the circumstances, to lift the veil of incorporation Customs andexcise— Importation ofgoods m a disassembledcondition — Interpretative Rule 2(a) of the Rulesfor theInterpretationof theBrussels nomenclature set out m the SecondSchedule to the Customs and Excise Duties Law (Law IS/78) and the explanatory Notes to the Brussels nomenclature — Rightlvappliedm thecircumstancesof thepresentcase By letter dated 12/4/84the Managing Director of the respondents in this appeal placed an order to suppliers in Italy for the supply of 1700 motor fans Inthe said letter the Managing Director asked the suppliers to ship the goods in different consignments, that is one consisting of motors onl\.in the nameof therespondents in theappeal andtheother, consisting of theblades of thefuns of themotors (impellers), in thename of another compam limited by shares, described in the letter as a "sister company" In fact the Managing Director of the respondents m the said letter spelled outquite clearly that"according to thelocal Customs and Excise Law, all motors when imported complete with impellers, the importer 3 C.L.R. 5 Republic & Another Λ.Matero Ltd has to pay import duty 156% on the whole consignment If, however, they areshipped inafferent consignments,thenwe pay importduty 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 thenameof oursister company" The Managing Director is the main shareholder and the Managing Director of therespondents Heis also a shareholder and a Directorin the said sister company 10 15 20 25 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 ontheground thattherehadbeen abreachof therule against the lifting of the veil of incorporation Hencethis appeal TheCourt mallowingtheappeal,heldthattherespondents intention was crystal clear, namely to import the goods ma 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 thegoods hadarrived assembled The order as made was notagenuineonefor theimportationof unassembled motors It was reasonably open totheappellants,inthelight of theaforesaid provisions of theinterpretative rule 2(a)andthe Brussels nomenclaturetoreachthe sub judice decision Appeal allowed with no order as to costs 30 Appeal. 35 40 Appeal against thejudgmentof aJudgeof theSupreme Court of Cyprus (Sawides, J.) given on the 18th September, 1986 (Re\risional Jurisdiction case No. 673/84) reported in 1986 3 C.LR 1574. whereby the decision of the Director of Customs to classify electricmotorsimponedby respondentunder Tariff Heading 84 1120 andthus impose duty of 15.6%was annulled A Evangelou, Senior Counsel of the Republic, for the Appellant. 257 Republic &Another v. Matero Ltd
(1989)St.Triantafyllides. fortheRespondents. Cur. adv.wit. A.LOIZOU.P.:TheJudgmentoftheCourtwillbedelivered 5 by Mr.JusticeDemetriades. DEMETRIADES. 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 10 supplyto themof 1700motorfans andbytheirsaidletterthey askedthesuppliersto shipthegoodsindifferent consignments. that isoneconsignment consistingofmotors only,inthename oftherespondents,andtheother,consistingofthebladesofthe fans of the motors (the impellers), in the name of Glamourgo 15 TradingCo.Ltd. Itisoftheutmost importancefortheappealbefore ustoset out the exact words of the Managing Director of the respondents with regard to the shipment of the goods.These 20 read: "With these observations in mind,weare submitting atrial order covering 1.700 pieces of motor fans, for whichplease giveusyourrock bottomprices F.O.B.Italian Port. 25 According to the local customs and excise law. all motors whenimponed completewithimpellers,theimporterhasto pay import duty 15.6% on the whole consignment. If. however,theyareshippedindifferent consignments,thenwe 30 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 35 address." Theperson whosignedtheorderisthemainshareholderand the Managing Director of the respondents. He is also a shareholder andaDirector intheGlamourgoTradingCo.Ltd. 40 Thegoodswereshippedinthesamecontainerandwhenthey 258 3 C.L.R. Republic &Another v. Matero Ltd Demetriades, J. 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 5 ought to be regarded as constituting motor fans in an unssembled condition and thus they were liable to import duty at therate of 15.6%. As a result of protests made by the respondents, the 10 appellants sought the advice oftheAttorney-General who.asit appears from the letter of the appellants to the respondents. dated the 18th October. 1984, opined that "the provisions of Interpretative Rule2(a)oftheNomenclature shouldapplyinthe present case and. therefore, both motors and fan blades should 15 be regarded as constituting fans in an unassembled condition. thus properly classified underTariff 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 S4.11.20 at 15.6% respectively as declared". 20 AccordingtothesecondScheduletotheCustomsand Excise Duties Law of 197S(Law 1S/7S).fan blades are classified under Tariff Heading 84.11.20 and are subject to the payment of import dutyattherateof 15.6%.Themotorsareclassified under 25 Tariff Heading 85.01.90andthey are free from the payment of import duty. If the motors, however, are imponed 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%. 30 The Director in reaching his decision relied on the Interpretative Rule2(a)oftheRulesfor theinterpretation ofthe BrusselsNomenclature whichareset out inthesecond schedule to the Customs and Excise Duties Law (Law 18/78) and the 35 explanatory Notes tothe Brussels Nomenclature. Rule2(a)provides:40 "2-(a) Any reference inaheading toan article shallbe taken ro include a reference to that article incomplete or unfinished, provided that, as imponed, the incomplete or unfinished anicle hasthe essential character of the complete 259 Demetriades, J. Republic & Another v.Matero Ltd
(1989)orfinishedanicle. Itshallalsobetakentoincludeareference ! tothataniclecompleteorfinished (orfallingtobeclassified as complete or finished by virtue of this Rule), imponed unassembledordisassembled." 5 TheNotestotheNomenclatureread> "Thefirst pan ofRule2(a)extendsthescopeofanyheading which refers to a panicular anicle to cover not only the complete anicle but also that anicle incomplete or 10 unfinished, provided that, as imponed, it has the essential character ofthecompleteorfinishedanicle.... The second pan of Rule 2(a) provides that complete or finished anicles imponed unassembled or disassembled are tobeclassified inthesameheadingastheassembledarticle. Whengoodsaresoimponed,itisusuallyforreasonssuchas requirements or convenience of packing, handling or transpon. 20 The classification Rule also applies to incomplete or unfinished anicles imponed unassembled or disassembled providedthat they aretobetreated ascomplete or finished aniclesbyvinueofthefirst pan ofthisRule." Asaresult ofthedecision oftheappellantstherespondents filed Recourse No. 673/84. by which they prayed for its annulment. The main issue that was raised and argued before the trial 30 Counbytherespondentsinthisappealwasthatsincetheorder 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 impon duty on the motors that were imponed and that the 35 Coun couldnot look behindthe corporate entity and "impute the actions of the company on its merits, that is to lift the corporateveil". Thecasefor theappellantsbefore thetrial Coun,whichwas 40 forcefully arguedbefore it,wasthat,in view of thecontentsof theordermadebytheManagingDirectoroftherespondentsin 260 3C.L.R. Republic &Another v.Matero Ltd Demetriades, J. hisletterofthe 12thApril,1984,thegoodswereorderedbyand despatchedto thesameperson andthat the import dutyought to be calculated at the rate provided under tariff heading 84.11.20.Counsel for the appellants further arguedbefore the 5 trial Court that the"intervention ofthetwocompanieswasin themaner purelycolourable andtheyhadbeenusedasacloak toavoidthepaymentofimportduty". ThetrialCouninrejectingthiscontention ofcounselforthe 10 appellantsandafter extensivelydealingwiththeissueof "lifting the corporate veil",had this to say (see Matero Ltd. v. The Republic
(1986)3 C.L.R.1574,atp.1595): 15 20 "TheLawitself affords theopportunity not onlyin thecase oftwodifferent importers,theoneimportingthemotorsand theotherthefans,butalsoto oneandthesameimporterto take advantageoftheCustomslegislation onthematterand orderthemotorsandthefansunassembledtobedespatched to him in two separate consignments. Once such an advantage isprovidedbythelaw,Icannot considerit asan attemptofevasionofastatutoryregulationwhichbyexpress provisionsaffords suchanopportunitytoimporters". ThetrialCourtthenconcludeditsjudgmentbysaying,atpp. 25 1596-1597,that: 30 35 "InthelightoftheaboveIhavecometotheconclusionthat theactoftherespondent DirectorofCustomsandExciseto treatthetwocompaniesasoneandthesamelegalentitywas 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 84.11.20subject topayment of impon dutywaswrongand was taken under a misconception of law and has to be annulled." AsaresultofthefindingsofthetrialCourt,bywhichthesub judice decision was annulled, the respondents in the recourse filedthisappealonthefollowinggrounds: 40 "1. TheHonourable Courtmisinterpreted theprovisionsof theInterpretativeRule2(a)oftheSecondScheduletothe 261 Demetriades, J. Republic &Another v.Matero Ltd
(1989)CustomsandExciseDutiesLaws1978-1984andwrongly decidedthattheRespondentDirectorofCustomswasnot entitled to classify the electric motors as complete or finishedandimposedutyattherateof 15.6%undertarriff heading84.11.20 5 2. The Honourable Court failed to take into account materialfactsin determiningwhetherthegoodscouldbe classified as complete or finished by virtue of the aforesaid InterpretativeRule,andinparticular 10 (
- a)He failed to takeinto account that the orderplaced bytheimporter covered 1700piecesofcompleteor finished electricmotors. 15 (b)hefailedtotakeintoaccountandtogivedueweight to the fact that the importer gave express written instructionstothesupplierstoshipthesaidcomplete or finished goods in different consignments and in unassembled pans for the sole purpose of avoiding 20 thepayment ofimport 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 25 colourable and that it has been used as a cloak to avoid payment of import duty and that the said companyisnottherealimporteroftheunassembled parts. 30 3. The Honourable Counmisdirecteditself andwaswrong inreachingtheconclusionthatinthecircumstancesofthe present case the veil of incorporation should not be lifted" 35 Havinginmindtheargumentsofcounselfortheparties,itis clearthattheonlyissuebeforeusfordetermination iswhatwas the purpose for which the letter of the 12th April, 1984,was written andwhattheintentionsofitswriterwere. 40 As it appears to us from the extract of the letter of the ManagingDirectoroftherespondents,towhichwehaveearlier 262 3 C.L.R. Republic &Another v. Matero Ltd Demetriades. J. referred, it iscrystal clear that their intention was to order and impon the goods in a complete state and that the instructions given that they hadto be despatched to the w o companies and not to the respondents alone,were made in order to avoid the payment of impon duty to which the respondents would have been liable if the goods arrived assembled. We have no hesitation whatsoever to saythat it wasfor thisreason that the Managing Director suggested to their suppliers the shipmentof 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 subjudice decision. The appeal, therefore, succeeds. There will be however, no order astocosts. Appeal allowed No order as to costs. 263