Overground processing of mined ores constitutes a mining operation for tax relief purposes under the Corporation Tax Act 1976.

THE SUPREME COURT

REVENUE

Record No. 147/01

DENHAM J

MURPHY J

MURRAY J

BETWEEN:

PATRICK O’ CONNELL (INSPECTOR OF TAXES)

APPELLANT

AND

TARA MINES LIMITED

RESPONDENT

Judgment of Mr. Justice Francis D Murphy delivered the 10th Day of October , 2002

This is an appeal by Tara Mines Limited (Tara) from the judgment and order of the High Court (Mr. Justice R. Murphy) on the 4th

April, 2001, whereby, for the reasons set out in that judgment, the learned judge allowed the appeal brought by the Inspector

of Taxes (the Inspector) from the determination by the Appeal Commissioners of certain assessments to corporation tax for the

years ended 31st December, 1978 to 31st December, 1988.

The issue in these proceedings can be stated simply as follows:-

“Did any part of the monies received by Tara during the relevant years aforesaid constitute ‘income from any mining

operations’ within the meaning of subsection 9 of section 58 of the Corporation Tax Act 1976?”

The facts and the legal framework within which that question arises are complex: they are set out fully in the case stated by

the Appeal Commissioners dated the 16th February, 2000, but may be summarised as follows: Tara extracts lead and zinc ores

from the earth at its property situate near Navan, County Meath. These ores are then processed to produce finished products

of zinc and lead concentrates. The major constituents (approximately 90%) of the concentrates are sphalerite and galena.

Sphalerite is a naturally occurring substance containing zinc in the form of zinc sulphide. Galena is a naturally occurring

substance containing lead in the form of lead sulphite. The company’s ore body is set between 50 and 600 metres below the

surface. It dips gently towards the south west at 15 degrees and varies in thickness from 10 to 80 metres. The current known

area extent of the ore body is 1,300 metres in length and 900 metres in width. On average the ore contains 8% zinc and 2.5%

lead.

The commercial activities of Tara are carried out in two divisions which are known as the mining division and the processing

division respectively. The managers of these divisions, Mr. Pitkanen and Mr. Pocock gave evidence before the Appeal

Commissioners. They explained that the work of the mining division includes a geology department which determines the location

of the ore body: a research department which investigates new mining methods and a mine operations department which carries

out the underground operations and a mobile equipment department which has charge of the maintenance of all mobile

equipment both under and over ground. The process by which ores are extracted from the mine body were summarised in the

findings of the Appeal Commissioners in the following terms:-

“(i) Mining commences with prospecting for valuable materials. Diamond drilling is carried out above ground to establish

the commercial viability of the ore body or an area of the ore body. Underground diamond drilling is also carried out and

the results of this drilling are provided to the Mining Engineering Department to enable them to plan the mining

operation.

(ii) Once the extent of the ore body has been determined, plans are drawn up setting out how access will be gained to

each pocket of ore in the ore body. Underground access tunnels are then blasted with explosives in order to reach the

pockets of ore.

(iii) Following exploration and location of the ore body, the mine is laid out in blocks for planning purposes. The blocks are

divided into stopes and pillars. Stopes are areas from which ore is excavated leaving pillars.

(iv) Ore is dislodged from the earth’s crust by blasting. Blasting produces “broken ore” which consists of large boulders

as well as finer material. The boulders can be as large as 2 metres across.

(v) The broken ore resulting from the blasting is transferred to the underground crushing station where it is subjected to

primary crushing. After the ore is extracted, the cavities formed are filled by piping in back-fill. This allows the adjoining

pillars to be worked.

(vi) Following this primary crushing, the crushed ore is transferred by conveyor belt to the coarse ore bin situated 320

metres below the surface.

(vii) The ore from the underground coarse ore bin is transported to the surface by way of skips operated by a hoist.

Each skip transports up to 16 tonnes of ore to the surface by conveyor belt. At the surface the ore is again transported

by conveyor belt to the surface storage bin or tepee. At this point the responsibility of the mining division ends.”

The Appeal Commissioners in their case stated then go on to deal with the work carried out by the processing division in the

following terms:-

“(i) The coarse ore is then subjected to a highly sophisticated process which is carried out at the Company’s on site

milling plant. The object of this process is to produce precisely calibrated lead and zinc concentrates suitable for sale to

smelters in other European countries.

(ii) The operations beyond the tepee can be divided into sections; comminution, processing, back-fill preparation and

product disposal. Comminution and processing essentially involve the extraction of galena and sphalerite in concentrate

form from the crushed ore. The comminution and processing are carried out in the mill which had a capital cost on

construction of approximately US$75m.

(iii) Comminution more particularly involves further dry crushing and wet grinding. The ore is transported by conveyor to

the first overground crusher which reduces the size of the ore from 200mm to 16mm. From there it is conveyed to the

grinding circuit which reduces it from 16mm rock to a fine size (0.1mm) rock. Water is added in the grinding process

producing a slurry. The whole process is very energy intensive and is controlled by computers to ensure maximum

efficiency.

(iv) At this size as slurry and water it is suitable for the flotation process which separates out galena (for lead) and

sphalerite (for zinc). For reasons of commercial and technical efficiency and efficacy, galena is floated before sphalerite.

As the name implies, the flotation process involves “floating off” of the lead and zinc bearing materials in the ore.

(v) The basis of the flotation process is the modification of the mineral surfaces using organic and inorganic chemicals.

Firstly a small precisely measured amount of organic and inorganic chemicals is introduced to the slurry. These

chemicals react with and change the surface characteristics of the lead mineral (galena) and it becomes hydrophobic

(water repellent). Air is then passed through the slurry. As an air bubble progresses upwards through the slurry the

water repellent particles become attached to it and the bubble becomes coated with galena particles. A floating agent is

added so that when the bubbles reach the surface a stable froth is produced at the surface. The accumulated bubbles

with their minerals flow off the surface onto a concentrate launder.

(vi) After the process described above is carried out the rougher concentrate is pumped to the cleaning circuit where

the flotation process is repeated three further times to increase the lead content of the final lead concentrate to a level

acceptable for smelting.

(vii) The tailings from the lead rougher circuit now contain very little lead mineral but most of the original zinc minerals

and waste rock. This slurry is then conditioned with further organic and inorganic chemicals to make the zinc minerals

hydrophobic. After conditioning, the zinc mineral (sphalerite) is floated as described for galena to produce rough zinc

concentrate which is reground into a small ball mill prior to three stages of cleaning to produce a zinc flotation

concentrate.

(viii) The zinc concentrate is further processed by acid leaching to reduce the magnesium oxide content of the zinc

concentrate to a level acceptable to the smelters. The concentrate is leached in four rubber lined vessels with sulphuric

acid. Magnesium goes into a solution as magnesium sulphate and calcium carbonate is dissolved and re-precipitates as

calcium sulphate. After leaching the concentrate is processed in a reflotation plant which removes the calcium sulphate

precipitates and upgrades the zinc concentrate to its final value typically containing 56% zinc.

(ix) Both concentrates are now in the form of dilute slurry and must be de-watered sufficiently to facilitate handling and

transport. The flotation concentrate is pumped to a thickener, the clear water overflow of which returns to the grinding

circuit. The thickened under-flow is pumped to a surge tank and then to a ceramic filter which reduces the moisture

content to an acceptable level. Dried lead concentrate which contains approximately 6% moisture is conveyed to a

7,000 DMT capacity storage building on site from where it is transferred to rail wagons for transport to Dublin Port.

(x) Leached zinc concentrate is de-watered in similar but larger equipment. The thickened under-flow flows by gravity to

a surge tank, to which filter aid is added and from there it is pumped to two or three disc filters. Again the filter cake

drops onto a conveyor that transports it to a concurrent, oil fired rotary drum drier. Dried zinc concentrate containing

approximately 8% moisture is conveyed to a 20,000 DMT capacity storage building on site from where it is transferred

to rail wagons for transport to Dublin Port.

(xi) Throughout the flotation process a high degree of control and monitoring is exercised to ensure maximum efficiency

in the production of lead and zinc concentrates, maximising the recovery of the appropriate minerals from the ore while

using the minimum quantity of chemical reagents. The principal control mechanism is a Courier 200 on-stream analyser

which is an on-line X-ray fluorescent spectrometer which analyses a sample of each of eighteen processed streams for

percentage zinc, percentage lead, percentage iron and percentage solids once every fifteen minutes on a continuous

basis. This data together with grinding feed tonnage rates are processed by a computer which controls reagent dosage

rates and other control variables.

(xii) Most of the material taken from the ground remains as waste material following the extraction of galena and

sphalerite. Much of this waste material is returned underground by the Processing Division either as sand back-fill or

cemented back-fill. The cemented back-fill is prepared by mixing the waste with water and cement. Although the back-

fill is produced by the Processing Division, the back-filling operation is carried out by the Mining Division.”

The Appeal Commissioners found that the distinction or specialisation between the mining division and the processing division

exists throughout the industry internationally and was also recognised in the organisation of university departments. The Appeal

Commissioners expressly found that:-

“The concentrates produced as the end product of the company are quite distinct from the ore. A chemical change

occurs in the processing stages in that the chemical compound on the surface of the mineral changes during the

flotation process and in the leaching process carbonates are converted into sulphates which are subsequently removed.”

The Appeal Commissioners, having heard the evidence and having inspected the site, concluded that the mining division or the

process carried out by it was on a similar scale to the activity carried out by the processing division but neither one was

subsidiary or ancillary to the other.

It was explained by Tara and accepted by the Commissioners that the cost of transporting the ore from the tepee for further

processing off site would make further processing uneconomic. The ore when processed as aforesaid was transported to Dublin

Port and all of the concentrates produced by Tara during the relevant accounting periods were exported out of the State. None

of the lead or zinc ore was sold as such.

Having regard to the desperate need for industrialisation which might create wealth and give employment on the one hand and

the highly speculative nature of exploring for and finding commercial quantities of metallic ores in this country it is not surprising

that legislation was enacted granting valuable tax concessions to those who did succeed in engaging in the trade of working a

mine. The Finance (Profits of Certain Mines) (Temporary Relief from Taxation) Act, 1956, provided that profits derived from the

working of a qualifying mine (as therein defined) in relation to a trade which commenced after the 6th April, 1956, should be

exempt from tax for each of its first four years of trading and liable to tax on one half of its profits for the following four years.

Those provisions were effectively re-enacted in the consolidating Income Tax Act, 1967 and significantly extended by the

Finance Act, 1967, section 9, which provided for a twenty year tax exemption on the profits of the trade of operating a

qualifying mine. Similar exemptions were granted in respect of corporation profits tax.

Lengthening the exemption period was clearly attractive to the tax payer. It had the advantage, in addition, of ensuring that

any mine discovered would be developed in an orderly fashion and fully exploited. A restricted exemption period might have

resulted in high grade ores being extracted in the first instance to take advantage of the exemption and leaving ores of a lower

grade which it might not be economic to extract under a less favourable tax regime.

Relief in the form of exemption from income tax and corporation profits tax was discontinued as from the year 1974/75 by the

Finance (Taxation of Profits of Certain Mines) Act, 1974. That Act provided in place of that relief a generous system of

allowances in respect of development, exploration and mine development expenditure.

At the same time as the mining industry was being encouraged by the tax reliefs aforesaid valuable concessions were made by

the Finance (Miscellaneous Provisions) Act, 1956, to encourage the export of goods by corporate tax payers who manufactured

them. The general scheme of the legislation was to deem the profits of the company to be such sum as bore the same

relationship to the amount of the company’s actual profits as the sums received from exports during a prescribed standard year

bore to the sums received from such exports in the basis year.

After corporation profits tax and income tax on companies was replaced as and from the financial year 1974 by corporation tax,

the exports sales relief was governed by Part IV of the Corporation Tax Act, 1976, and in particular s.58 thereof. It may be

helpful to set out in some detail the provisions of that section as follows:-

“58 (1) Where a company claims and proves as respects a relevant accounting period:-

(a) that, during the standard period in relation to the trade, goods were, in the course of the trade, exported out

of the State,

(b) that, during the relevant accounting period, goods were, in the course of the trade, exported out of the State,

and

(c) that the total amount receivable from the sale of the last-mentioned goods was in excess of the total amount

(in this section referred to as the standard amount) receivable from the sale of the goods exported during the

standard period,

corporation tax payable by the company for the relevant accounting period, so far as it is referable to the income

attributable to the said excess, shall be reduced to nil; and the corporation tax referable to the income attributable to

the said excess shall be such an amount as bears to the relevant corporation tax, as defined in subsection (10), the

same proportion as the income attributable to the said excess bears to the total income brought intocharge to

corporation tax.

(2) For the purposes of subsection (1) ‘the income attributable to the said excess’ shall be taken to be such sum as

bears to the amount of the company’s income for the relevant accounting period, which is attributable to the sale of

goods (whether exported or not), the same proportion as the amount of the said excess bears to the total amount

receivable by the company from such sale in the relevant accounting period.

(3) Where a company claims and proves as respects a relevant accounting period:-

(a) that, during the standard period in relation to the trade, no goods were, in the course of the trade, exported

out of the State or that the standard period is not applicable, and

(b) that, during the relevant accounting period, goods were, in the course of the trade, exported out of the State,

corporation tax payable by the company for the relevant accounting period, so far as it is referable to the income from

the sale of the goods so exported, shall be reduced to nil; and the corporation tax referable to the income from the sale

of goods so exported shall be such an amount as bears to the relevant corporation tax the same proportion as the

income from the sale of goods so exported bears to the total income brought into charge to corporation tax.

(4) For the purposes of subsection (3) ‘the income from the sale of the goods so exported’ shall be taken to be such

sum as bears to the amount of the company’s income for the relevant accounting period, which is attributable to the

sale of goods (whether exported or not), the same proportion as the amount receivable in the relevant accounting

period from the sale of goods exported bears to the total amount receivable by the company from the sale of goods

(whether exported or not) in the relevant accounting period.

(5) In a case in which the preceding provisions of this section apply, and the export out of the State in the relevant

accounting period consisted of or included goods with respect to which section 54(3) provides for the inclusion thereof in

the definition of ‘goods’ this Part shall have effect subject to the insertion, in subsections (2) and (4), of ‘and of

merchandise (whether exported or not) other than such goods’ after ‘goods (whether exported or not)’ wherever the

latter words occur.

(6) Not relevant

(7) Not relevant

(8) Not relevant

(9) A reduction shall not be made under this section in respect of corporation tax payable on income from any mining

operations.”

A crucial feature of Part IV of the 1976 Act is the definition of “goods” which are defined by s.54 (1) as meaning:-

“...goods manufactured within the State by the person who exports them or some of them and who in relation to the

relevant accounting period is the company claiming relief under this part.”

Section 54 goes on to deem certain products to be goods manufactured in the State which would not in their ordinary meaning

be understood to be goods subjected to any manufacturing process.

It was under Part IV of the 1976 Act that Tara sought export sales relief in respect of the years relevant to these proceedings

by reference to the income received by it in respect of the concentrates exported by it during those years. In those

circumstances a question to be considered was whether the concentrates had been “manufactured” by Tara so as to

constitute goods within the meaning of the 1976 Act, s.53 aforesaid. Having regard to the decisions in McCausland v. The

Minister for Commerce [1956] N.I. 36; Cronin v. Strand Dairy Ltd (1985) 3 I.T.R 441; McCann v. O’Culachain [1986] I.R. 196

and Irish Agricultural Machinery Ltd .v. O’Culachain [1990] 1 I.R. 535 and the nature of the process to which the ores were

subjected to produce the concentrates there could be no doubt but that the product constituted “goods” within the meaning of

the section and this, in fact, was rightly conceded by the Inspector. The issue on which the parties disagreed - and disagreed

vigorously - was whether the processing (or manufacturing) stage constituted a “mining operation”. Certainly it was a stage

which produced an income for Tara and accordingly if it could be described correctly as a mining operation subsection 9 of s.58

aforesaid would have applied so as to disentitle Tara to the relief.

The Finance (Profits of Certain Mines) (Temporary Relief from Taxation) Act, 1956, had defined “mining operations” in a limited

sense as meaning:-

“...mining operations (by underground or open cast excavation) within the State, whether before or after the passing of

this Act, but only insofar as scheduled minerals have been or are obtained thereby.”

That basic definition enabled the legislature to provide a definition of “new mining operations” and limited the application of the

Act and the exemptions thereby granted to the working of a “qualifying mine” which is defined as, or limited to, a mine insofar

only as new mining operations were carried on therein. That definition was maintained in the Finance (Taxation of Profits of

Certain Mines) Act, 1974. Tara have contended that the statutory definition and the ordinary meaning of the words “mining

operations” as used in the 1976 Act mean - in relation to lead and zinc mining at any rate - the process which culminates with

the extraction and raising of the ores to the surface. That is to say the process which in the present case concludes with the

delivery of the ores to the storage bins or tepee. Tara argue that the very facts which require or permit the subsequent

process to be described as a manufacturing process exclude the possibility of describing that process as a mining operation.

Counsel for Tara argued that the manufacturing process might equally well be carried on as an entirely separate trade by an

independent company, and perhaps in a different location, when, it was submitted, nobody would suggest that the

manufacturing aspect carried on by the independent company was a mining operation. The Inspector contended that all of the

activities carried on by Tara up to and including the production of the concentrates constituted mining operations. The purpose,

it was said, of the activity was the production of the concentrates. The ore itself was not marketable and could not be

transported off site for treatment as the transport costs would be uneconomic. In addition the Inspector argued that the

structure of the legislation granting exemptions in respect of the trade of working a qualifying mine; the various allowances

provided in respect of tax when payable and the provisions of the 1976 Act dealing with export sales relief, required that “the

manufacturing process” should be treated or recognised as being a mining operation.

The Commissioners recognised, correctly, that the net issue before them was whether Tara had “income from any mining

operations”. They had regard to evidence given by distinguished experts as to what constitutes mining operations. They

considered a number of cases, particularly those decided in Australia, as to the meaning of the term “mining operations” in not

dissimilar legislation and they reached the conclusion following:-

“We decided that the Company operates a mine and that it also carries out a separate activity subsequent to its mining

activity; namely, the processing of ore, the result of its mining operations, to manufacture concentrates of lead and

zinc. We also decided that the mining activity and the manufacturing activity were of similar scale and that neither was

subsidiary or incidental to the other. In our opinion the manufacturing activity was, in the words of the judges in the

Broken Hill case on page 4030, ‘...distinct from although connected with the taxpayer’s mining operations...’ and clearly

did not come within the meaning of the phrase ‘mining operations’. While we did not have any difficulty in so deciding, we

found support for our conclusion in the evidence of the expert witnesses that different branches of science are involved

in the mining activity and the manufacturing process, each branch of which requires separate training and education of

its specialists.

We concluded that the company does not sell its mining output. It subjects that output to a separate manufacturing

process to produce concentrates of lead and zinc which it sells in the course of its trade. Therefore the company’s

income is derived from the sale of the said concentrates. It follows that the company cannot be said to have ‘...income

from any mining operations...’ within the meaning of section 58(9) of the Corporation Tax Act 1976 and that it is

consequently entitled to Export Sales Relief in respect of its trading income for the periods with which this appeal is

concerned.”

It was from that decision that the Inspector appealed to the High Court.

Mr. Justice Roderick Murphy allowed the appeal. In essence the learned judge concluded that there was no basis for the finding

by the Appeal Commissioners that the manufacturing process was not a “mining operation” when they had held that this

expression could encompass all of the activities carried out by the company. At p. 29 of the transcript he said:-

“The conclusion that not all of the company’s activities could be said to come within the meaning of ‘mining operations’

can, however, have no basis given the finding that the term ‘mining’ depending on the context on which it and cognate

terms are used, could encompass the type of activities carried out by the company. The conclusion is not a finding of

paragraph (v) as the Commissioners did not deem it necessary to make a finding of fact specifically in regard to

whether the term ‘mining operations’ as used within the mining industry would include all of the activities carried on by

the company or just the underground activities.”

At the conclusion of his judgment (at p. 33 of the transcript) Murphy J. said:-

“The finding that the manager of the mining divisions responsibilities end at that point and that the manager of the

processing division is responsible for all activities after the ore arrives in the tepee including the manufacture of lead and

zinc concentrates does not, in my view, determine the beginning and end of mining operations, as experts would appear

to be uncertain as to the extent of ‘mining operations’ and such term could encompass all the activities of the company.

The decisions of the Commissioners do not accordingly sit firmly on the findings. It may be that, within the decision,

there are further latent findings. These further findings seem in turn to be somewhat at variance with the extensive

findings found by the Commissioners as such.”

It would seem to me that in essence that the learned judge concluded that the Commissioners, having decided that all of the

activities of the company could constitute “mining operations”, did not reach any conclusion or make any finding which would

justify excluding any of those activities from the ambit of that classification. Certainly the Appeal Commissioners had been

unable to find any definition of the term “mining operations” or to provide any description of the activities which those words

embraced and thus to delineate the boundaries or ambit of this phrase. In the absence of any such prior determination it is, I

believe, impossible to make a conclusive finding of fact as to what does or does not fall within that description. The proposition

that a finding of primary fact by the Appeal Commissioners should not be set aside by the Court unless there was no evidence

whatever to support it is well established. (See Mara v. Hummingbird [1982] I.L.R.M. 421 and Brosnan v. Mutual Enterprises

Ltd [1997] 3 I.R. 257). However, what constitutes “mining operations” is a mixed question of law and fact. Depending upon the

proper definition of that term a finding of fact may establish whether such activities are involved but a finding of fact without

such prior definition could not be conclusive of any legal proposition. In the present case the exposition by the Appeal

Commissioners as to the nature, extent and purpose of the activities carried on by the company over ground is clear and, as a

matter of fact, conclusive. But without guidance as to what “mining operations” entail, these findings do not advance the

matter significantly.

Frequently findings of fact relate to the basic proposition as to the credibility of witnesses. In taxation matters findings often

concern issues which can be clearly distinguished in principle but may require a delicate judgment in practice. For example the

question whether a person who sells property at a profit is trading or achieves a windfall capital gain is essentially a fact or

conclusion which a court of first instance is entitled to draw, as was held in Mara v. Hummingbird (supra). Again, the weighing

of factors which determine whether a loss is of a revenue or a capital nature is a conclusion of fact on which the decision of

the Appeal Commissioners is conclusive: Brosnan v. Mutual Enterprises Ltd (supra). However, these cases clearly illustrate the

fact that the tribunal determining an issue must know the factors to be taken into account and assessed so as to reach a

conclusion which involves issues of law as well as fact.

In the present case the Appeal Commissioners were unable to provide any definition or description of the term “mining

operations”. Let it be said this is a task which has eluded courts in several jurisdictions. It was argued in the present case that

any operations or activities which occurred after the ore had been brought to the surface were incapable of falling within the

description of “mining operations”. That argument was supported by the decision of the Exchequer Court of Canada in

Marbridge Mines Ltd .v. The Minister for National Revenue 71 D.T.C. 5231 in which Gibson J. stated (at p. 5234) that “mining

ends with the bringing of the mineral ore to the ground surface”. Clearly the Appeal Commissioners did not accept that

proposition. If they had done so their conclusions would have been expressed differently and briefly. It would have been wholly

unnecessary to consider the value, nature or purpose of the works carried out after that primary objective had been achieved.

I am satisfied that the Appeal Commissioners did not make any finding of fact or draw any conclusion which precluded the

learned High Court judge from determining whether the processing activity constituted a “mining operation” or absolve him from

the duty of so doing.

The main issue in this case is how much of the work carried on by a mining company can be said to constitute “mining

operations” within the meaning of the Act. Is it the case that only that which occurs below ground constitutes “mining

operations” or does the definition extend to include the process undertaken in relation to the raw materials extracted from the

mine? At what point can it be said that the “mining operations” cease?

Two propositions can be advanced without dispute. First, the extraction of minerals from the earth and the bringing of such

materials to the surface (including all such works necessary to facilitate this process, such as the sinking of shafts or the

building of tunnels) forms part of what may be termed “mining operations”. Secondly, processes which subject the raw material

to change in their physical or chemical properties, commercial characteristics or other characteristics such that the end product

has a utility, marketability and quality different from that of the original raw product constitute manufacturing.

It is inconceivable that any definition of “mining operations” could be given which would not include the underground mining

activities in which Tara have engaged. As those activities form a substantial part of the business of the tax payer the first

question which arises is whether Tara derives any income from those operations. At first sight it may seem surprising that this

would not be so. Ordinarily one would expect a substantial expenditure by a tax payer to result in an income to him. However,

as Tara argued in the present case, it is the final link in an integrated business, and not the original or intermediate steps,

which provides the income. To suggest that any earlier activity produces an income would in fact involve some concept of

apportionment being deemed to have taken place. This proposition is well illustrated by s.50 of the Finance Act 1980, which is

later in date but in pari materia with the legislation under consideration here. Subsection 2 of s.50 aforesaid provides as

follows:-

“Where a company carries on a trade which consists of or includes the manufacture of goods and, in the course of the

trade, carries on any mining operations within the meaning of subsection (1)(a) from which it obtains any scheduled

mineral, mineral compound or mineral substance of the kind referred to in that subsection and any such mineral

compound or substance is not sold by the company in the course of the trade but forms the whole or part of the

materials used in the manufacture of such goods or is to any extent incorporated in the goods in the course of their

manufacture, then, part of the income which, apart from this subsection, would be income from the sale of goods for

the purposes of section 41 shall be deemed, for the purposes of subsection (1), to be income from such mining

operations and that part shall, for the purposes of that subsection, be such amount as appears to the inspector or, on

appeal to the Appeal Commissioners to be just and reasonable.”

In my opinion, no part of the income of Tara is, on the findings of the Appeal Commissioners, derived from the mining operations

of Tara insofar as those operations consist of the underground activities.

How does one determine whether the over ground activities constitute mining operations?

Attention was drawn to the decision of the Exchequer Court of Canada in Marbridge Mines Ltd v. MNR Ltd. (supra). The

judgment of Gibson J. contains a passage on which Tara understandably place some reliance, namely:-

“As I understand it, mining ends with the bringing of the mineral ore to the ground surface and that before that terminal

point, three stages of physical operation have been gone through, namely:

(1) Exploration, (2) development, and (3) (extraction) mining

Then following the bringing of the minerals to the surface the physical operations that takes place is “treatment” of the

ore. And again treatment consists of three stages of physical operation, namely:

(1) milling which includes the rough primary grinding; (2) smelting; and (3) refining.”

Superficially this extract would appear to be helpful. However it was made in the context that the appellant tax payer was

contending that he had discovered an ore body on a claim adjacent to one on which he was already operating a mine so that

the working of the new claim was a separate, independent mine in respect of which he was entitled to tax exemption. The issue

was whether there was a “mine” not whether there were “mining operations”. What the Court decided was that the treatment

of the ore after it had been brought to the surface was irrelevant in determining whether or not the operation of the claim

constituted a mine. Neither the Appeal Commissioners nor the learned High Court judge accepted or concluded that mining

operations necessarily terminated when the mineral ore was brought to the surface. In my view they would have been

incorrect to have reached any other conclusion.

Several Australian authorities were cited in support of the proposition that activities carried out above ground are not per se,

and without more, excluded from the description “mining operations”: Federal Commission of Taxation v. Henderson [1943] 68

C.L.R. 29; North Australian Cement Ltd. v. Federal Commission of Taxation 89 A.T.C. 4765; and Federal Commission of

Taxation v. ICI Australia Ltd. [1971-1972] 127 C.L.R. 529.

In Federal Commission of Taxation v. Henderson [1943] 68 C.L.R. 29 the taxpayer was an assayer and metallurgist who had

discovered an improved process for recovering gold from “slum dumps” (material excavated from mines and lying on the surface

of the ground, from which the residual gold could be extracted only by chemical processes). The taxpayer sampled and assayed

certain dumps, and a syndicate of which he was a member acquired the right “to enter upon and treat” the slum for the

recovery of gold.

The Court of first instance held that the company in treating the dumps, was “a mining company...carrying on mining

operations...for gold” within the meaning of s. 78(1)(d) of the Income Tax Assessment Act, 1936-1938 and that Henderson was

therefore entitled to a deduction in respect of the calls paid by him on his contributing shares in the company.

The High Court of Australia dismissed the appeal and, having regard to expert evidence, Latham C.J. stated at p. 44 that:

“It may be conceded that soil or minerals severed from the freehold are chattels and that the primary meaning of the

word ‘mine’ is a subterranean excavation for the purpose of getting minerals. But, as this case shows, ‘mine’ is not a

definite term and it is used in other than its primary sense. The Mines Act 1928 of Victoria, to which appellant’s counsel

referred, may be used to show that the word ‘mine’ and the word ‘mining’ used adjectivally, are not limited either to

excavation or to subterranean excavation.”

The words “mining operations” - and that in the context of relief from taxation - were considered in a number of Australian

decisions to which the Court was referred and which included, Federal Commissioner of Taxation v. Broken Hill Proprietary Co.

[1967-1969] 120 C.L.R. 241 and, more particularly, Federal Commission of Taxation v. Northwest Iron Co. Ltd. (Unreported,

Federal Court of Australia, 27th March, 1986) and Reynolds Australia Alumina Ltd. v. Federal Commissioner of Taxation

(Unreported, Federal Court of Australia, 31st March, 1987). The facts of these cases are technical and complicated. The law

was, as Lockhart J said in the North West Iron case, “labyrinthine”. Moreover there are dangers in every case in extracting

authorities from jurisdictions without a comprehensive knowledge of the legal system and jurisprudence from which they are

derived. It is understandable that the Appeal Commissioners were reluctant to place great reliance on those authorities. On the

other hand it would be unwise to ignore them.

In Reynolds Australia Alumina Ltd. v. Federal Commissioner of Taxation (Unreported, Federal Court of Australia, 31st March,

1987) the Court upheld the taxpayer’s claim to exemption from sales tax on an overland conveyor - connecting the mine site

and the refinery - which the taxpayer asserted was used “in the mining industry in carrying out mining operations or the

treatment of the products of those operations” under Item 14(1) of the First Schedule to the Sales Tax (Exemptions and

Classifications) Act, 1935. The bauxite was not subjected to any process while travelling on the conveyor: it was used solely

for transportation. However, the Court held that the transportation formed part of the treatment of the bauxite in the mining

industry and thus Item 14 applied to exempt the applicants from liability to sales tax on the relevant machinery and apparatus.

The trial judge, Beaumont J., in Federal Commissioner of Taxation v. Reynolds Australia Alumina Ltd. (1987) 77 A.L.R. 543 had

deduced a number of general propositions from the authorities, at p. 549:

“(i) Because the object of a provision such as Item 14(1) is to encourage the production of minerals in Australia, the

exemption should be construed and applied liberally...

(ii) the notion of ‘mining’ is a flexible rather than fixed one so that, conceptually, it is capable of accommodating

technological change...

(iii) ‘Mining operations’ means operations pertaining to mining and ‘operations’ is a very wide expression. For instance,

‘mining operations’ is wider than ‘the working of a mining property’...

(iv) The present question is one of fact and degree...

(v) In determining whether the exemption is applicable, it is appropriate to have regard to practical and businesslike

considerations and, for this purpose, to look at the matter in the context of the taxpayer’s activities as a whole....”

The decision of the Federal Court of Australia in Federal Commission of Taxation v. North West Iron Co. Ltd. (Unreported,

Federal Court of Australia, 27th March, 1986) is important not so much for the conclusion which it reached as for the reasoning

by which it reached its conclusion on the interpretation of the words “mining operation” and that in a statutory context similar

to the one under consideration in the present case.

Under the Australian Income Tax Assessment Act 1936 s.112 it was provided that:-

“Where a person, in connection with the carrying on by him of mining operations upon a mining property in Australia ...

has incurred expenditure of a capital nature on necessary plant, ... and the amount ascertained in accordance with a

section shall be an allowable deduction in respect of that expenditure.”

The facts of the case were interesting. A mining venture known as Savage River Mines extracted crude ore from a site on the

Savage River in north western Tasmania near the town of Waratah. On site they crushed and ground the ore: separated the

magnetic iron particles from undesirable matter by a wet process and then transported the ensuing concentrate in slurry

solution by a pipe line to Port Latta in northern Tasmania - some 85 kilometres away - where the slurry was dewatered and the

ore converted into pellets. The issue in the case was whether the transportation of the slurry by pipeline from Waratah to Port

Latta was a “mining operation” within the meaning of s.112 aforesaid so as to enable the cost of the construction of the

pipeline to be claimed as an allowable deduction. It was held that it was. Alterations to and amendments of the Act of 1936

expressly restricted deductions in respect of transportation facilities to those operating “wholly within the site of prescribed

mining operations”. Notwithstanding the wide area involved in the extraction, transportation and treatment of the ore it was

held that the pipeline operated within such a site.

Clearly the pelletisation - as described in the judgment - was a complex manufacturing process. The finely ground iron ore which

was included in the slurry was dewatered; coalesced with a binding agent and rolled into marble sized balls (the pellets) which

were then transported by conveyor from the plant along a jetty for nearly 1.6 kilometres to ore carries moored nearby.

In Federal Commissioner of Taxation v. Broken Hill Proprietary Co. [1967-1969] 120 C.L.R. 241 the High Court of Australia had

expressly found that pelletisation was not a manufacturing operation and in Federal Commissioner of Taxation v. Utah

Development Co. [1976] 76 A.T.C. 4119 the Supreme Court of Victoria concluded that operations carried on in a plant by which

coal which had been mined was processed or treated so as to transform it into metallurgic coking coal did not constitute a

mining operation. It may be asked how those conclusions could be reconciled with the decision in the North West Iron Co. case

. The answer is, of course, that the nature and effect of the process is a matter of fact in each case. In the course of his

judgment in the North West Iron case Lockhart J. expressed his conclusions and implicitly gave guidance as follows:-

“What is plain from the cases is that it is a question of fact in each case whether the particular operations or processes

are “mining operations” for the purposes of s.122”.

At paragraph 41 of his judgment he said:-

“The slurry is not a saleable commodity and it is not dewatered until it reaches Port Latta as part of the pelletisation

process. The only saleable commodity available from the Savage River development as a modern blast furnace fee was,

as it is today, pellets. Until pelletisation takes place the concentrates are of no use to anybody and the slurry in which

they are contained is similarly of no use. Only the pellets are useful ....”

Again, in paragraph 43 the learned judge explained:-

“... The object of the taxpayers’ activities is the production of pellets after the treatment of the ore, essentially by work

processes and the eventual removal of the water content from the slurry. It is not the object of the taxpayers

operations to produce “fines” .... The process of pelletisation is integral to the whole operations of the mining venture

and essential to the development of the potential of the low grade ore of the Savage River site by means of tax payers

technology. The pipeline is essential to the end product. It is not different in essence from a necessary conveyor line

conveying material from one section to another within the mining complex. The end product of the tax payers mining

activities is the production of pellets.”

In paragraph 44 he expresses his conclusions in the following terms:-

“... Practical and businesslike considerations clearly lead to the conclusion that the whole of the relevant operations of

the tax payer to the final stage where the pellets emerge are part of its mining operation. Although at first sight it may

seem somewhat incongruous that a pipeline, extending for some 85 kilometres from the Savage River to Port Latta, is

part of the tax payers mining operations, the apparent incongruity disappears when the role of pipeline is considered in

the context of the tax payers activities as a whole.”

The term “mining operation” does not admit of a precise definition. Unquestionably it is an activity related to mining. The

expression is, as the Australian authorities have pointed out, of wide import. It is not confined to underground activities or the

mere extraction of mineral ores. It may extend to overground operations and to the processing, to some extent at any rate, of

the extracted ores. The fact that the processing may be properly categorised as manufacturing does not preclude it being at

the same time a “mining operation”. In determining whether a particular activity is a mining operation consideration must be

given to the nature of the activity and above all its relationship with the extraction process. However these factors must be

considered in the context of the object for which the mining activity and the business venture was commenced. A fact which is

important in every case and, perhaps, crucial in the present case, is consideration of the object for which Tara was promoted.

What the findings of the Commissioners clearly demonstrate is that the activities of that mining company were not undertaken

for the purpose of extracting mineral ores. For that product there was no economic market. The object and purpose of the

company was to produce on the site of the mine, concentrates for which there was a market, albeit an overseas market. In

those circumstances and on the findings of fact made by the Appeal Commissioners a conclusion that the overground

processing operations constituted “mining operations” was inescapable and a decision to the contrary on the findings of fact

made would be unsustainable.

I am satisfied that the above ground activity of Tara is a mining operation and at the same time a process by which “goods are

manufactured” within the meaning of s.54 of the Act of 1976. This overlap was anticipated by the Corporation Tax Act 1976,

s.58(9) (quoted above) which provides:-

“A reduction [in taxable income] shall not be made under this section in respect of corporation tax payable on income

from any mining operation”

In cases where an activity is exclusively a mining operation no question of export tax relief would arise. On the other hand if the

process under consideration was exclusively a manufacturing - and not a mining operation - the exception would have no

application. Clearly the subsection recognises that a process of manufacturing, subsequent to the extraction of the

underground minerals, may at the same time constitute a “mining operation” for the purposes of the relevant legislation and

that the legislation intended to exclude income derived from that activity so as to avoid a tax payer enjoying both export tax

relief and capital allowances on his mining investment.

In my opinion the learned High Court judge was correct in the answer which he gave to the question posed by the Appeal

Commissioners even though I am not in full agreement with the reasoning by which he reached that conclusion. Accordingly I

would dismiss the appeal and affirm the order of the learned High Court judge.