THE HIGH COURT
REVENUE
[2003 853 R]
BETWEEN
SEAN NEESON INSPECTOR OF TAXES
APPELLANT
AND
LONGFORD TIMBER CONTRACTORS LIMITED
RESPONDENT 
Judgment of Carroll J. delivered the 21st day of July 2004.
This is a case stated pursuant to section 941 of the Taxes Consolidation Act 1997 against a decision by Judge Kennedy on appeal to the Circuit Court on 31st January 2003 against an assessment of corporation tax issued by the appellant (the Inspector of Taxes) against the respondent (the tax payer) for the years of assessment ended 31/3/96, 31/3/97 and 31/3/98.
The question for determination on appeal was whether the process of timber harvesting carried on by the respondent qualified for the reduced rate of corporation tax (10%) applying to companies carrying out a process of manufacture of goods.
The question of law for determination by the High Court is whether the learned Circuit judge was correct in law in holding that the respondent tax payer qualified for the reduced rate of corporation tax as a consequence of being engaged in a process of manufacture of goods in accordance with s. 443 of the Taxes Consolidation Act 1997.  
An agreed description of the process carried out by the tax payer was annexed to and formed part of the case stated.  However, the process is sufficiently described in the agreed facts and it is not necessary to annex it hereto.
In the case stated:
The following facts were agreed:
(a)	The respondent provides a service to Glennon Brothers Limited (the sawmill) involving the felling and extraction of trees from various forests around the country.  Plots of trees in each forest are bought by Glennon Brothers from Coillte Teo. and the respondent’s felling and extraction activity is carried out in the open air on these plots.  
(b)	The standing trees are cut down to specified lengths by a machine called a “timberjack harvester” and are extracted from the forest floor by a machine called a “forwarder”.  Employees of the respondent operate both machines.  The “timber jack harvester” has an on-board computer system.  The operator inputs details of the desired specifications required by the saw mills.  This machine de-branches the trees and cuts them into predetermined lengths.  The bark remains on the cut tree trunks.  The forwarder machine then collects the cut tree trunks from the forest floor by means of a mechanical arm and places them into a trailer at the rear of the machine.  It is then transported to the roadside and left in piles for collection to the saw mill.
(c)	The company engages sub-contractors to assist when it encounters inaccessible sites and over sized trees.  (It is unable to use the machines in these circumstances).  The sub-contractors use chainsaws to fell the trees.  It is accepted by both parties that the income from this element of the trade does not qualify for the reduced rate of 10% corporation tax (manufacturing rate). 
(d)	The trees remain the property of the sawmill at all times.  
(e)	If the sawmill carried out the above activity as part of their manufacture of products, (i.e. pallets, roofing timber and flooring timber) then they (Glennons) would be entitled to claim manufacturing relief in respect of their total activity. 
 
It was contended on behalf of the respondent that: 
A)	It provides a manufacturing service for the sawmill in accordance with the     provisions of s. 443(21) of the Taxes Consolidation Act, 1997.  It renders a process of manufacturing to the timber owned by the sawmill.
B)	The activity carried out is not precluded from qualification for the reduced rate of corporation tax by virtue of the provisions of s. 443(6)(a)(i) of the Taxes Consolidation Act, 1997.
C)	The activity carried out is not precluded from qualification for the reduced rate of corporation tax by virtue of the provisions of s. 443 (6)(a)(iv) of the Taxes Consolidation Act, 1997.
D)	There is a change in character from the living trees to the finished logs de-branched and cut to precise measurements.  This work is carried out with expensive computer-equipped machinery.
E)	There is substantial “value added” to the product from the standing tree to the cut timber.

It was contended on behalf of the appellant that:
(a)	The activity carried out by the respondent company does not constitute a manufacturing process as defined in legislation and as established by case law.
(b)	The end product is not one capable of being produced by what would ordinarily be described as a process of manufacture.  The company carries out a “tree felling” operation for the sawmill.
(c)	The activity is further (and specifically) excluded from qualification by virtue of the provisions of the s. 443 (6)(a)(i) of the Taxes Consolidation Act, 1997.
(d)	The activity is further (and specifically) excluded from qualification by virtue of the provisions of s. 443 (6)(a)(iv) of the Taxes Consolidation Act, 1997.
(e)	The claim by the company of “value added” to the product relates to the cost of extraction of the trees rather than any added value to the raw material.

The cases cited are set out in the case stated.

The learned Circuit Court judge delivered judgment on the 27th March, 2003 as follows:
“At one time a woodcutter chopped down a tree and next lopped off the branches, all done with an axe.  After that was done the tree trunk was hauled, with or without horse and tackle, to the roadside for collection and transport to the sawmill.  The same procedure continued with the invention of the saw and the chainsaw, and would not by any stretch of the imagination constitute “manufacturing” of the growing tree into a tree trunk.  The procedure in the sawmill of turning by machine the tree trunk into timber – wood prepared for use in carpentry and construction, typically planks, beams, lengths, panels in various dimensions –  would, does, constitute manufacturing.  Time and technology have moved on from the days of the woodcutter’s axe and chainsaw.
At the hearing of the 31st January, 2003, the evidence established that the appellant tax payer cuts down trees for a sawmiller on lands owned by Coillte.  These trees are owned by the sawmiller by purchase from Coillte at auction.  The appellant tax payer uses two kinds of machines, a harvester and a forwarder, operated by one worker on each machine.  The harvester cuts down the standing tree.  The whole cut-down tree is held by the machine and put through, passes through the rollers part of the machine to lop off the branches.  The machine then cuts across the tree into sections.  These sections are of a particular length to fulfil the prior order of the sawmiller.  The lengths are laid on the ground (with the bark still on them).  The forwarder sorts out those lengths, by length and diameter, and hauls them for stacking at the road side ready for collection by the sawmiller’s transport.  (Trees which are inaccessible or too big for the machine are subcontracted to be cut by chainsaw the old way)  One harvester costs between €270,000 - €300,000 and has a working life of about three years.  One forwarder costs between €170,000 - €200,000.  These machines are technically complex and sophisticated.  The sawmiller programmes the computers on the appellant tax payer’s machines for preordained lengths and dimensions.  This is done weekly, by way of orders of what the sawmill wants for itself and its customers.  Before the introduction of such machines, harvesting of particular dimensions was done by eye, tape, rope, chainsaw and left for collection as an assorted lot.  The sawmill and its customers want a sorted, precisely-graded product.  Before the introduction of such machines the cutting of tree trunks to specific lengths would have been done and would have had to be done, in the sawmill after sorting there.  The technology of these machines achieved cuts of an exact length and dimension in the open air, out in the wood instead of in the sawmill.  What happens out in the wood is part of the production line process carried out in a different location and not as heretofore in the mill.  The appellant tax payer must deliver to the sawmill a unique, measured product.  Delivering such a product is not just a matter of convenience for either party but a product of added value by being in that condition when delivered, an economic reality in a competitive market.  The combination of man and machine is on a large scale and is to be compared by way of gradation or degree with the pre-machine method and product.  The appellant tax payer contends that some of this procedure – turning a tree into a tree trunk in the way described, heretofore done only in the sawmill, but now done out in the wood – qualifies for relief.  The respondent inspector concedes that this would be so, relief for the sawmiller, if what is now done in the wood was done in the sawmill as part of the overall procedure of turning a tree into timber.  However, the respondent inspector contends that since the appellant tax payer does only that part of the overall procedure conducted in the wood that the appellant tax payer does not qualify for relief.
The taxation code is to be literally and strictly construed.  The express statutory imposition of liability for taxation – in an excepted or hyphenated way – is that goods shall not be regarded as manufactured if they result from a process which consists primarily of any one of the two provisions which were agreed by the parties to be the only relevant ones for this case under s. 443(6) TCA 1997 sub-ss. (a)(i) and (iv).  As to (a)(i), while the appellant tax payer is involved in dividing (including cutting) and sorting or applying any other similar process to the product it is not acquiring materials in bulk or at all, so as to prepare that product, produce or material for sale or distribution by the appellant tax payer.  The appellant tax payer does not acquire what is produced or sell or distribute it.
An adequately informed onlooker watching the appellant tax payer’s activity in the wood, a harvester machine at work, with knowledge of what it is actually doing, would see not just cutting and stripping in an unplanned, mixed up way but doing so in a precisely measured way, preordained by computer to obtain exact dimensions to order.  Every day experience would teach the ordinary educated man to know the difference between any old log, bole or tree trunk and an article in a more advanced stage from conversion to end use later in the mill, timber.  The trunk is treated by being made into an artefact as distinct from something left in its raw, natural condition which would need treatment to make it into an article at an intermediate level prior to entering the sawmill.  The treated log has an enhanced monetary value from when it was natural growing tree, a value it would heretofore have obtained only after similar treatment in the sawmill.  The treated log has a unique quality of worth beyond a mere random undifferentiated cut log in the traditional historic sense.  Apart from labour saving and efficiency and providing the sawmiller with a better service, the treated log has a different function from an untreated one.  It is a product ready for the next stage of the sawmill without having to await undergoing that process first there.  As to (a)(iv), the nature of the process which the appellant tax payer applies does impose or alter materials and does impose on them such a change in their character.  The appellant tax payer is engaged in a manufacturing process of goods not excluded by either sub-section.  I hold that the appellant tax payer is entitled to relief.”
The appellant (Inspector of Taxes) being dissatisfied with this determination, as being erroneous in law asked for a question of law to be determined whether the learned Circuit Court Judge was correct in law in holding that the respondent qualified for the reduced rate of corporation tax as a consequence of being engaged in a process of manufacture of goods in accordance with s. 443 of the Taxes Consolidations Act, 1997. 
The relevant sub-sections of s. 443 of the Tax Consolidation Act, 1997 are as follows: 
“sub-s. (1)(a) – In this Part, ‘goods’ means, subject to this section, goods manufactured in the State in the course of a trade by the company which, in relation to the relevant accounting period, is the company claiming relief under this Part in relation to the trade.

Sub-s. (6) – Without prejudice to the generality of sub-section (1) and subject to sub-sections (2) to (4) and (8) to (15), goods shall not for the purposes of this section be regarded as manufactured if they are goods which result from a process – 
a)  which consists primarily of any one of the following - 
(iii) dividing (including cutting), purifying, drying, mixing, sorting, packaging, branding, testing or applying any other similar process to a product, produce or material that is acquired in bulk so as to prepare that product, produce or material for sale or distribution, or any combination of such processes.
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(iv) improving or altering any articles or materials without imposing on them a change in their character.
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Sub-s. (21) – For the purpose of relief under this Part, in relation to a company which carries on a trade which consists of or includes the rendering to another person of services by means of subjecting commodities or materials belonging to that person to any process of manufacturing – 
(a) the rendering in the State of such services shall be regarded as the manufacture in the State of goods, and
(b) any amount receivable in payment for services so rendered shall be regarded as an amount receivable from the sale of the goods.”
It was submitted by the appellant that the primary question was whether the logs produced by the respondent could properly be described as having been manufactured.  He submitted that the product in this case is the trunk of a tree and the process of harvesting trees is not substantially different from harvesting grain.  In Brosnan v. Leeside Nurseries Ltd. [1998] 1 I.R. 304 it was held by the Supreme Court that the sophistication of the process has no bearing on whether the goods are manufactured or not.  There are two stages to be applied, one whether the end product was capable of being manufactured and if so, the question of the complexity and sophistication of the process should be looked at.  The end product is wood.  It does not become a manufactured product merely because it was felled by expensive machinery.  
However, if the process could be described as a manufacturing process, then the respondent is disqualified under sub-s. (a)(6)(i)of s. 443 as the process consists of dividing, (including cutting) etc., material that is acquired in bulk so as to prepare that material for sale or distribution.  The sub-section does not require the acquisition in bulk to have been carried out by the respondent itself.  It merely requires acquisition in bulk of a material which is cut, sorted, divided, etc., to prepare it for sale or distribution.  The appellant claims this is what happens when the trees are cut by the respondent’s machinery.
The appellant further submits that if not disqualified under s. 443(6)(a)(i) the respondent  does not qualify under s.s. 6(a)(iv).  The logs are “improved” and “altered” insofar as they are cut to facilitate the subsequent manufacturing process.  The character of the trees is not being changed in the same way as bananas are changed by ripening and milk is changed by pasteurisation.  The learned Circuit Court judge was in error in holding that the process of felling trees imposes on them a change in their character.
The appellant also submits that because the respondent does not manufacture goods in the course of a trade as provided in s. 443 (1) but provides a service for a company which is involved in the manufacture, it cannot avail of s. 443. 
The respondent submits that the findings of primary facts by the learned Circuit Court judge are not open to interference unless there is no evidence to support them (see Mara v. Hummingbird [1982] ILRM 421).  Conclusions or inferences from the primary facts are mixed questions of law and fact.  If they are ones which no reasonable judge could draw they should be set aside on the ground that the judge must be assumed to have misdirected himself as to the law or made a mistake in reasoning.  The respondent submits that unless the appellant can show that the conclusions from the primary facts are based on a mistaken view of the law or are ones which no reasonable judge could draw they should not be set aside. 
The respondent referred to various cases dealing with the manufacturing process.  In Cronin v. Strand Dairy (3 ITR 441) the process of pasteurisation of milk was described as sophisticated with a high degree of skill required and the plant involved as extensive and expensive.  Murphy J. said he had no doubt that an ordinary man viewing the process would be prepared to conclude a manufacturing process was taking place.  The respondent referred also to McCann v O’ Culacháin [1986] 1 I.R. 196 and McCausland v. Minister of Commerce [1956] N.I. 36. 
The respondent submitted that the pre-designed measured lots of manufactured timber are the culmination of a process of manufacture and are not the same as tree stumps or logs formed accidentally.  
Concerning the exclusions from manufacturing contained in s. 443(6)(a)(i) the respondent claims that it does not apply:
(a)	because it did not acquire the product in bulk as they never owned the goods, and 
(b)	the process did not prepare the product for sale or distribution. 
It says the exclusion is directed to the type of situation in O’Laochadha v. Johnson and Johnson (Ireland) Ltd. [1991] 2 I.R. 287 which concerned the cutting, folding and packaging of bales of fabric into nappy liners and J cloths for sale.  Here the product is sent to the sawmill for further processing, therefore the exclusion cannot apply.  
The respondent submits in relation to s. 443(b)(a)(iv) that a significant change in character result from the process.  Growing trees are transformed into prepared timber ready for collection for the next step in the manufacturing process.  It is an agreed fact that if the sawmill did the process it would be part of a manufacturing process. 
Lastly the respondent submits that it does not have to manufacture goods in the course of a trade as provided in s. 443(1) provided it comes within the provisions of s.s. 21 which it does.  It provides services to the sawmill by subjecting materials belonging to the sawmill to a process of manufacturing.  
I am of the opinion that the learned Circuit Court judge was correct in holding that this respondent was engaged in the process of manufacture of goods in accordance with s. 443 of the Taxes Consolidation Act, 1997 and is entitled to a reduced rate of corporation tax. 
There are two elements to the judge’s decision: 
1)	That the process carried out by the respondent was a manufacturing process, and
2)	That it was not specifically excluded by s. 443(6)(a)(i) or (iv).
The finished product as delivered by the respondent consisted of precisely measured lengths of timber cleared of side branches according to instructions received.  If the timber was not cut into predetermined lengths, it would have to be done at the sawmill as part of the manufacturing process.  Therefore what has happened is that part of the manufacturing process has been subsumed into the former crude method of just felling trees for collection and delivery to the sawmill.  The initial part of the manufacturing process has been moved to the forest floor. 	
It was entirely reasonable for the learned Circuit Court judge to hold that the process carried out by the harvester and the forwarder was part of the production line process carried out in a different location and not as heretofore in the mill. 
In my view the finding of the learned Circuit Court judge that the process carried out by the respondent was a manufacturing process is a finding of fact that cannot and should not be interfered with. 
The exclusion contained in s. 443(b)(a)(i) has three elements: 
1)	the process applied to the product 
2)	the product being acquired in bulk 
3)	The requirement to prepare that product for sale or distribution.
The process applied in this case is basically cutting. It is quite clear that the cutting etc. is not so as to prepare the product for sale or distribution.  The process is to prepare the measured lengths of timber for the next step in the production process.  Therefore one of the requirements for the exclusion to apply is not present.  
Further, the respondent did not acquire the product in bulk, given if it is not necessary for the respondent to acquire the product in bulk, the exclusion does not apply as the product was not prepared for sale or distribution. It is an agreed fact that respondent owns no part of the timber.  
In my view the learned Circuit Court judge was correct in holding that 
s. 443 6(a)(i) had no application. 
The exclusion contained in s. 443(6)(a)(iv) excludes goods which result from a process that:
(a)	Improves or alters any article or material. 
(b)	Without imposing a change in their character. 
The learned Circuit Court Judge held that a treated log had a different function to an untreated one.  It is a product ready for the next stage in the sawmill without having to await undergoing that process further.  He said:
	“As to a(iv) the nature of the process which the appellant tax payer applies does impose or alter materials and does impose on them such a change in their character” 
This is a matter of appreciation which the learned Circuit Court judge was entitled to adopt.  It falls into the category of findings of fact that should not be interfered with. 
Lastly the respondent is entitled under s. 443(21) to claim relief because of the services it renders to the sawmill in respect of subjecting the timber belonging to the sawmill to a process of manufacturing. 
The answer to the case stated is that the Learned Circuit Court judge is correct in law in holding that the respondent qualified for the reduced rate of corporation tax as a consequence of being engaged in a process of manufacture of goods in accordance with s. 443 of the Taxes Consolidation Act, 1997.