Sherritt Gordon Mines Limited v. Federal Commissioner of Taxation.Judges:
Supreme Court of Victoria
McInerney J.: This is the hearing of an appeal dated 10 May 1973, by Sherritt Gordon Mines Ltd., hereinafter called the taxpayer, against the disallowance in part of its objection dated 24 October 1972 to an assessment of income tax issued on 28 August 1972 relating to income derived by the taxpayer during the year ended 30 June 1971. On 20 March, 1973 the Commissioner of Taxation issued a notice to Western Mining Corporation Limited, as agent for the taxpayer, of partial allowance of the objection to the extent indicated in the notice of amended assessment bearing date 20 March, 1973 and attached thereto - see Folios 25 and 26 of the documents forwarded by the Commissioner to this Court. On 10 May 1973, the taxpayer requested the Commissioner to treat its objection as an appeal and forward it to the High Court. On 24 August 1973 the taxpayer and the Commissioner agreed that the relevant objection should be forwarded to the Supreme Court of Victoria and treated as an appeal against the disallowance (in part) of the taxpayer's objection dated 24 October 1972. In fact, by a further amended assessment dated 4 February 1975 the Commissioner allowed certain tax deductions previously claimed by the taxpayer, and amended the assessment further so that in the result, on the further amended assessment dated 4 February 1975, there is an amount of $14,697.45 standing to the credit of the taxpayer. No explanatory letter or memorandum accompanying that further amended assessment has been included in the documents forwarded to the Court.
When the case came on before me, the Commissioner's file, forwarded to the Court was, by consent, tendered in evidence and marked Exhibit `A'. The statement of agreed facts was also tendered in evidence and marked Exhibit `B'. From the documents and from the statement of agreed facts, the following facts appear.
Sherritt Gordon Mines Ltd., the taxpayer, is and at all material times was a company duly incorporated in Canada, and a Canadian resident for the purpose of Canadian tax within the meaning of the Third Schedule to the Income Tax (International Agreements) Act 1953, as amended, and for the purpose of the Income Tax Assessment Act 1936-1971. The taxpayer is not and was not at any material time a resident of Australia within the meaning of the Act or of the Third Schedule or at all. The taxpayer has at all material times carried on a Canadian enterprise within the meaning of the Third Schedule to the Income Tax (International Agreements) Act 1953. The taxpayer has not at any material time engaged in trade or business in Australia through a permanent establishment in Australia within the meaning of the Third Schedule to that Act.
On 24 November, 1967 the taxpayer entered into an agreement in writing with Western Mining Corporation Limited, a company incorporated and resident in Victoria and having no residence outside Australia. A copy of the agreement is included as Folios 2 to 15 of the documents forwarded by the Commissioner to the Court.
During the year of income ended 30 June 1971, a sum of $232,079 became due and payable by Western Mining Corporation Limited, to the taxpayer pursuant to Article 3 of the agreement hereinbefore referred to. By letter dated 9 September, 1970 Western Mining Corporation notified the Commissioner that the first royalty payment under the agreement was then due and requested a ruling as to the amount of tax that was required to be deducted from the amount that was to be remitted to Canada. In answer to the request contained in that letter the Commissioner directed Western Mining Corporation to retain a specified amount in accordance with sec. 256 of the Income Tax Assessment Act.
Between 9 November, 1970 and 19 February, 1971, Western Mining Corporation Limited, in accordance with Article III of its agreement with the taxpayer, remitted to the taxpayer an amount of Canadian Dollars equivalent to Australian $122,341.54, (being part of the sum of $232,079 Australian previously referred to) in respect of the quarters ending 30 June 1970, 30 September 1970, and 1 January 1971, and in pursuance of sec. 255 of the Act withheld from the taxpayer an amount of $109,737.55 (being the balance of the said sum of $232,079). In July 1972 Western Mining Corporation Limited paid the said sum of $109,737.55 to the Commissioner of Taxation.
On 21 July 1972 the taxpayer lodged a return of income in respect of the year ended 30 June 1971. This return showed the sum of $232,079 income arising from a know-how agreement with Western Mining Corporation Limited. A deduction of 30% estimated expenditure was claimed, namely $69,623 - estimated because of the difficulty in segregating or apportioning expenditure incurred in Australia and Canada in relation to the continuous furnishing of know-how to Australia. Net income derived was therefore shown as $162,450.06. The return stated that Western Mining Corporation Limited had withheld tax to the amount of $109,737.55 as hereinbefore stated and claimed that exploration and development expenditure amounting to $24,502 had been incurred during the year in connection with Western Mining Corporation Limited - Sherritt Laterite Joint Venture and that the sum was recorded for carrying forward as a deemed allowable capital expenditure pursuant to sec. 122J of the Act.
On 28 August 1972, the Commissioner issued an assessment assessing the taxpayer to tax on the whole of the income of $232,079 shown in the taxpayer's return and disallowing the deductions claimed.
On 24 October 1972 the taxpayer lodged a notice of objection against the assessment in which it claimed (inter alia)
``Para. 3. If the taxpayer derived any assessable income in or in respect of the said year of income (which however is denied), he ought to have been allowed and ought to be allowed, in respect of the said year of income an allowable deduction of $69,623 or (alternatively), of some amount less than $69,623 being losses and outgoings incurred in gaining or producing the assessable income, or alternatively, necessarily incurred in carrying on a business for the purpose of gaining or producing such income, and not being losses or outgoings of a capital, private or domestic nature.''
Partial effect was given to this objection by the Commissioner in that he allowed a deduction to the extent of $11,603 and issued an amended assessment dated 20 March, 1973, whereby the net tax payable was reduced from $110,237.52 to $104,726.10 and the taxpayer became entitled, according to the amended assessment, to a refund of $5,011.45. Save to the extent indicated the Commissioner disallowed the objection contained in paragraph 3 of the notice of objection and wholly disallowed the objections contained in paragraphs 1, 2 and 4 of the notice of objection.
Subsequently the Commissioner allowed an amended claim of the taxpayer for deductions, in respect of the cost of technical assistance provided under the agreement with Western Mining Corporation Limited, of the amount of $42,546 and on 4 February, 1975, the Commissioner issued an amended assessment whereby the amended net tax was reduced to $90,028.65 so that the taxpayer became entitled to a credit or refund of $14,697.45.
The agreement under which the sums of money in question became payable to Sherritt Gordon Mines Limited was made on 24 November 1967.
Under Article II cl. 2 of that agreement Sherritt agreed that
``subject to all the terms and conditions therein contained it would within the limits of available personnel, furnish technical assistance and information in connection with the SHERRITT system to Western commencing three months after the date of commencement of the Corporation as and when requested by WESTERN, and that subject to Article 4.03, that assistance was to include `making available to Western services of qualified personnel of Sherritt in Australia and research work at the laboratories of SHERRITT at Fort Saskatchewan, Alberta'.''
Sherritt further agreed (Article II cl. 2.02) that
``subject to all the terms and conditions therein contained WESTERN should have the right to practise the SHERRITT system within the Commonwealth of Australia and to use or sell throughout the world the
ATC 4133products produced as a result of such practice.''
``Sherritt system'' was defined by clause 1.01 as meaning ``all Sherritt technology excepting Sherritt technology as it pertains to treatment to lateritic and garnieritic ores.'' ``Sherritt technology'' was defined (by clause 1.02) as meaning ``all processes, techniques, apparatus, know-how and trade secrets which are useful primarily in the treatment of nickel-bearing material to recover nickel and valuable by-products and which SHERRITT now is, or during the period referred to in Article 3.02 shall become, free to grant the rights hereinafter provided for''. ``Know-how'' was defined as meaning ``all technical information, whether or not reduced to writing (including but not limited to research reports, data and conclusions relative thereto) concerning the Sherritt system, including any information which is or could be useful in the design, engineering, construction and co-operation of the facility employing the Sherritt system.''
``Date of commencement of operations'' was defined (by cl.1.07) as meaning the date when 150 tonnes of nickel metal have been produced by WESTERN using the Sherritt system.
Furthermore Sherritt agreed (by Article IV cl.4.01) to bear the costs of technical assistance provided under Article 2.01 (other than payments referred to in Article 4.03) in any calendar year up to an amount equal to five per cent (5%) of the amount payable for such year under Article III. Clause 4.03 provided that WESTERN should pay directly the salary costs and expenses of SHERRITT personnel in Australia (including travelling to and from Australia).
Article III cl.3.01 provided that for the rights granted in the agreement WESTERN should pay to SHERRITT an aggregate sum expressed as a percentage of the aggregate sales value of the nickel and by-products produced in whole or in part by the practice of the SHERRITT system, computed at the rates which are specified in the succeeding portions of that clause. It is unnecessary to say more about those rates than that they are related to production and that the rate declines with the quantity produced. An upper limit to the amount payable for any year is, however, set by the formula set out in paragraph (e) of Article 3.01(2).
Clause 3.03 provided that the sums payable to SHERRITT pursuant to Article III should be paid in Canadian currency to the Canadian Imperial Bank of Commerce, 25 King Street, West Toronto in Toronto, funds for the account of SHERRITT, and that the sums payable to Sherritt should be paid within forty-five (45) days after the end of each calendar quarter and should cover sums payable to SHERRITT on WESTERN'S production of nickel and by-products during such calendar quarter. Under Article IV costs and expenses were likewise to be paid by WESTERN promptly on receipt of invoices rendered in Canadian currency to the same bank in Toronto to the account of SHERRITT.
Clause 3.02 provided that the rights granted by the agreement to WESTERN should become fully paid up and irrevocable when WESTERN should have made the payments therein provided on production operations for a period of fifteen (15) years after the date of commencement of operations, it being understood that any time during which such operations should be suspended, whether voluntarily or involuntarily, longer than for six consecutive months should not be considered in completing the period of production operation for the purposes of the Article.
Article XI of the Agreement provided that the agreement should be subject to and interpreted in accordance with the laws of the Province of Ontario, Canada. The agreement was executed by SHERRITT in Toronto, Canada and by WESTERN in London, England.
The agreement of 24 November 1967, was varied by an agreement recorded in a letter from Sherritt (the taxpayer) to Western Mining Corporation Limited dated 25 February 1972. By that letter it was recorded that the parties had agreed to vary the existing agreement so that Articles 4.01 and 4.03 of the agreement be rescinded and that instead Sherritt bear the cost of technical assistance provided under Article 2.01 in any calendar year up to a maximum of $35,000 Canadian currency from 1971 to 1973 inclusive, and thereafter up to a maximum of $50,000 Canadian currency, but that no amount be payable by Western under Article III in respect of calendar years 1971, 1972 and 1973. Article 3.02 was also varied in a manner not here material. Western Mining Corporation Ltd. recorded its agreement to that variation on 29 February, 1972.
At the hearing before me there was tendered in evidence and marked as Exhibit `C' an agreement made 1 January, 1968. That agreement recites that SHERRITT owns letters patent and applications for letters patent in Australia pertaining to inventions useful in the recovery of nickel and by-products from nickel-bearing material (thereinafter called ``Sherritt Patents''). The recital further sets out that WESTERN is desirous of securing a non-exclusive and non-revocable licence under the Sherritt patents and on future improvements and all modifications thereof. Under the operative parts of the agreement SHERRITT granted to WESTERN a non-exclusive and non-revocable licence and rights to practise in Australia, in the treatment of nickel-bearing material (other than lateritic and garnieritic ores) in which nickel is the primary constituent of value to recover nickel and by-products, the inventions covered by the Sherritt patents and such other improvements and/or modifications thereof in respect of which SHERRITT should, during the eighteen (18) years following the date of the agreement, obtain the right to grant licences. Clause 2, headed ``royalties'', provides that for the rights and privileges granted under the agreement WESTERN shall pay to SHERRITT a single lump sum of $10,000 Canadian currency. Clause 6 provides that the agreement should be read and construed and take effect according to the laws of the province of Ontario, Canada.
From the oral evidence adduced before me the following additional facts appeared. The taxpayer Sherritt Gordon Mines Limited has at all material times operated a nickel refinery at Fort Saskatchewan, Alberta, Canada where by means of the ``Sherritt Process'' or ``Sherritt Technology'' it recovers nickel from nickel-bearing ores or concentrates. Over the years it has developed very sophisticated equipment and techniques and accumulated a considerable body of experience in the process of pressure hydro-metallurgy. Some of its processes and some of its equipment are the subject of letters patent in Canada and it was, by 1966, recognized as being a company which possessed a considerable body of ``Know-how'' in regard to the recovery of nickel from nickel-bearing ores or concentrates.
As a result of discussions between Western Mining and the taxpayer in 1966 and 1967, Western Mining Corporation Limited decided to adopt the ``Sherritt Process'' as the basis of its refining operations at a refinery which it proposed to construct at Kwinana, Western Australia, and the agreements already referred to were executed between the taxpayer and Western Mining Corporation Limited on 24 November 1967 and 1 January 1968 respectively. A number of Western Mining technical men visited Fort Saskatchewan for the purposes of instruction. There they saw the refinery in operation, had access to the numerous operating manuals and other technical literature kept on the taxpayer's files at Fort Saskatchewan and were able to take part in discussions with the taxpayer's technical men at Fort Saskatchewan. The Kwinana project was then set up by the taxpayer, Western Mining Corporation Limited and Bechstel Corporation Limited which had been selected as the contractor for the construction of the proposed refinery. Detailed planning commenced at Fort Saskatchewan where the taxpayer's personnel imparted knowledge of the technical requirements and processes to chemical engineers and design engineers from Bechstel and to at least one representative of Western Mining Corporation (see transpt. 42-43-68, 69 and 77). At about the beginning of 1968 the Bechstel team moved back to Montreal where a taxpayer's group of about six to eight engineers and chemists worked with the Bechstel team together with representatives of the Western Mining Corporation Limited. The main task at this stage was to determine the plant lay-out, to write the specifications for the plant and equipment necessary, to prepare working drawings and to call for tenders for the construction of individual items of equipment, some of which were to be constructed or fabricated in Canada and some in Australia. During this period information, in documentary form, was being supplied by the taxpayer to Bechstel and also to Western Mining Corporation Limited. At about the end of 1968 a number of the Bechstel personnel transferred from Montreal to Australia, principally to Melbourne.
During 1969 the prime concern of the taxpayer and of Western Mining Corporation Limited as well as of Bechstel, was the construction of the commercial refinery plant at Kwinana. During this period the taxpayer was engaged in review of design drawings, mainly at the Fort Saskatchewan (transpt. 79), and in inspection of plant and equipment under construction, especially at the premises
ATC 4135of sub-contractors engaged in that construction. Much of this work took place in Australia (transpt. 78): some of it in Kwinana and some in Melbourne (77). At the same time personnel from Western Mining Corporation Limited were visiting the premises of the taxpayer at Fort Saskatchewan. For instance, Dr. Blanks, who in October 1968 was appointed Technical Superintendent at Kwinana Refinery (transpt. 36) left, within three weeks of his appointment, for Fort Saskatchewan where he remained for some six weeks thereafter (42). Senior Western Mining personnel had already visited Fort Saskatchewan prior to Blanks' visit, namely the resident Manager, the Chief Engineer and the Administration Superintendent at Kwinana (41). Blanks paid a further visit to Fort Saskatchewan in May-June 1969, together with two of his senior staff, namely, the chief chemist and the senior development engineer (45). At this stage, the basic design work had been done for the Kwinana Refinery, but construction had advanced only to about the ten per cent stage, the foundations having been poured (46). The principal details required at this stage were for the laboratory (46). In the light of the taxpayer's experience, certain modifications had been adopted in the design of the refinery at Kwinana so that the layout and also certain equipment differed materially (p. 47). Prior to Dr. Blanks going to Fort Saskatchewan in May 1969, the taxpayer had already undertaken at Fort Saskatchewan a plant trial of seven days, with its refinery operating exclusively on the Western Mining concentrates (44). Indeed, a report thereon was in course of completion when Blanks arrived there.
Towards the end of 1969, this second phase of the combined operation drew to a close and phase 3 began, namely, the ``pre-start up'' and ``start up'' operations (112). The witness Colvan was seconded from the taxpayer to take charge of the pre-start operations at Kwinana and he was appointed the senior operations engineer at Kwinana to supervise the ``start up stage'' (106). He reported directly to Western Mining for duties and direction (108) and was paid by that company, though at the Sherritt Gordon rate of pay. It is to be noted, however, that on his arrival at Kwinana, Colvan reported first of all to the Sherritt Gordon superior. Some twelve to thirteen personnel from the taxpayer were made available during this period. The pre-start up period was intended to be completed during the months of January to March 1970. Late in February or early in March 1970 nickel-bearing concentrates were brought in to the refinery and in April processing of the concentrate began (108). The first sale of nickel refined in the refinery took place in June 1970 (108). By August, 1970 the refinery was working sufficiently satisfactorily to permit Colvan's return to Canada to undertake other work for his employer, the taxpayer. From this date onward, Western Mining Corporation Limited was given full responsibility for the Kwinana operation. Soon afterwards most of the taxpayer's employees at Kwinana were recalled to Canada. Thereafter the taxpayer kept only about four or five personnel in Kwinana to work with Western Mining Corporation Limited (92).
In 1971 some detailed work was done at Fort Saskatchewan by the taxpayer in connection with faults showing up in the plant at Kwinana (54). Visits of personnel from Western Mining Corporation Limited to the taxpayer's plant and laboratories at Fort Saskatchewan continued for some time thereafter but over the years there were fewer personal visits and more reliance on correspondence.
It is clear that a refinery could have been set up and got into operation at Kwinana without the assistance of the taxpayer, merely by Western Mining Corporation Limited drawing on the available literature. The witnesses, however, put forward the view, which I accept as reasonable, that such a process would have been more expensive and that it would have taken longer to get the refinery into production without the personal contact with and assistance from employees of the taxpayer and the on-site discussions between technical staff of Western Mining Corporation Limited and their opposite numbers, principally at the taxpayer's premises at Fort Saskatchewan. Clearly, some of the ``know-how'' was communicated by the taxpayer to Western Mining Corporation Limited in Australia both in relation to the preparation and design drawings, the inspection of plant and equipment for the refinery, the giving of advice as to layout of the refinery, and, ultimately in relation as to the conduct of the operations during the ``pre-start up'' and ``start up'' period of the refinery and for some time thereafter. But I am satisfied that the bulk of the assistance rendered by the taxpayer in the operation was rendered in Canada at its place of business, at the refinery and laboratories at Fort Saskatchewan.
It is common ground that at all material times there has been in force an agreement entered into on 1 October 1957 between the Government of the Commonwealth of Australia and the Government of Canada for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, and that by virtue of sec. 6A of the Income Tax (International Agreements) Act 1953-1968 the provisions of that agreement, so far as these provisions affect Australian tax, have the force of law in relation to tax in respect of the income of all years of income since 1 July 1957. It is common ground also that the appellant is and has at all material times been a Canadian resident within the meaning of that agreement and that it has never engaged in trade or business in Australia through a permanent establishment in Australia. It is further common ground that at all material times it carried on an industrial or commercial enterprise or undertaking which constituted a ``Canadian enterprise'' within the meaning of those words as used in the Canadian - Australian Double Tax Agreements.
It is likewise common ground that the amount of $232.079 disclosed in the appellant's return of income in respect of the year of income ended 30 June 1971 constitutes ``industrial or commercial profits of a Canadian enterprise'' unless that amount falls within the exclusion of ``royalties'' from the definition of ``industrial or commercial profits'' contained in Article II Clause 1 of that agreement.
It is contended by the Commissioner (and denied by the appellant) that the amount in question was a royalty within the ordinary acceptation of that term. In the alternative, the Commissioner contends (and the appellant denies) that the sums totalling $232,079 constituted a royalty within the meaning of that term as defined in sec. 6(1) of the Income Tax Assessment Act 1936-1971 and as used in sec. 6C of that Act.
The Commissioner contends (and the appellant does not deny) that the amounts received by the appellant constitute income. The appellant does not contend that those amounts have the character of capital receipts.
The Commissioner contends that by virtue of the definition of royalty in sec. 6(1) and the combined operation of sec. 6C and sec. 25(1)(b) the amounts constitute gross income derived directly or indirectly by the appellant from a source in Australia so that it is ``assessable income'' within the meaning of sec. 25(1)(b) and of sec. 26(f) of the Act.
In relation to the last mentioned section, the appellant contends that the amounts are not assessable income in that they are not ``royalties'' within the ordinary acceptation of the term, and are not amounts which fall within the definition of ``royalty'' contained in sec. 6(1), that they are therefore not made liable to tax under sec. 6C, and are excluded from the operation of sec. 26(f) in that, but for the definition of royalty in sec. 6(1), they would not be an amount received as or by way of royalty.
It is, of course, not in dispute that the amounts totalling the $232,079 here in question were paid (after 1 July 1968) to the appellant (a non-resident) by Western Mining Corporation Limited (a resident of Australia) and that these payments did not constitute an outgoing wholly incurred by Western Mining Corporation Limited in carrying on business in a country outside Australia at or through a permanent establishment of Western Mining Corporation Limited in that country - see sec. 6C(1)(a). If therefore, those amounts constituted income derived by the appellant consisted of royalties, then sec. 6C applied to that income, and such income was, by force of sec. 6C(2), deemed to have been derived from a source in Australia, and therefore to be included, by sec. 25(1)(b), in the assessable income of the appellant.
The Commissioner does not, before me, contend that the income is derived directly or indirectly from an Australian source except through the definition of ``royalty'' in sec. 6(1) and the combined operation of sec. 6C and sec. 25(1)(b). He concedes that but for those sections the reasons for judgment of the majority Judges in
F.C. of T. v. United Aircraft Corporation (1943) 68 C.L.R. 525 would preclude me from so holding. He reserves, however, the right to argue before the High Court, if there should hereafter be an appeal to that court, that the decision in the United Aircraft Corporation case (supra) does not compel the High Court to find that the amounts here in question constituted income derived, directly or indirectly, from a source in Australia, according to ordinary conceptions and without the application of sec. 6C.
It may here be observed that the agreement was made outside Australia, that the payments which under the agreement were to be made
ATC 4137and were in fact made by Western Mining Corporation Limited to the appellant out of Australia and in Canada. The bulk of the information and ``know-how'' produced was provided in Canada - at Fort Saskatchewan and at Montreal - or by dispatch of drawings, instruction manuals and the like from Canada to Australia. Some of the information was provided to or dispatched to personnel of Western Mining Corporation Limited while other information was provided to or dispatched to personnel of Bechstel Corporation. The services of certain personnel of the appellant were made available by the appellant to Western Mining Corporation Limited.
Mr. Aickin, for the appellant, argued that those services were made available in Canada by the appellant releasing or seconding those personnel from its employment in Canada, and that the making available of those personnel was completed when the personnel started on their journey to Australia. But Article II Clause 2.01 specifies that the assistance to be rendered by Sherritt to Western Mining Company Limited ``shall include making available to Western the services of qualified personnel of Sherritt in Australia,'' and this provision, I think, accords more with the reality of the matter. The ``making of those personnel available'' was I think, a continuous process, operating from the time when the personnel concerning was seconded for duty with Western until he was recalled by Sherritt for duty with Sherritt.
Even on that analysis, however, it can be said that the action of ``seconding'' and the action of recalling each person concerned was done by the appellant in Canada, and it may also be said that the process of making the services of qualified personnel available to Western in Australia was done by secondment of such personnel and later by refraining from recalling the personnel in question for some time thereafter.
I conclude therefore that insofar as the appellant received the sums totalling $232,079 in respect of - in consideration of - promises made by it to Western and from the performance of those promises, it executed that consideration wholly or to an overwhelming extent in Canada, and that it certainly received payment of those amounts wholly in Canada.
I would, therefore, hold that apart from the definition of ``royalty'' in sec. 6(1) and the provisions of sec. 6C and sec. 25(1)(b), the receipt by the appellant of the sums totalling $232,079 constituted income derived from a source outside Australia.
I turn now to the question whether those payments constituted ``royalties'' either according to the ordinary acceptation of that term or within the meaning of the definition of ``royalty'' in sec. 6(1).
That definition is in these terms: -
```Royalty' includes any payment to the extent that the payment falls within the definition of `royalties' in paragraph (5) of Article 10 of the Agreement between the Government of the Commonwealth and the Government of the United Kingdom a copy of which is set out in the First Schedule to the Income Tax (International Agreements) Act 1953-1968.''
The definition in Article 10(5) of the United Kingdom agreement is in these terms: -
``In this Article the term `royalties' means payments of any kind to the extent to which they are paid as consideration for the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trademark, or other like property or right, or industrial, commercial or scientific equipment, or for the supply of scientific, technical, industrial or commercial knowledge, information or assistance, and includes any payments of any kind to the extent to which they are paid as consideration for the use of, or the right to use, motion picture films, films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but does not include royalties or other amounts paid in respect of the operation of mines or quarries or of the extraction or removal of natural resources.''
I have emphasised what appear to me the (arguably) relevant portions of this definition. Mr. Aickin conceded (pp. 169-170) (in my opinion rightly) that the payments made by Western Mining Corporation Limited were paid to the appellant as consideration for the supply by the appellant of scientific, technical, industrial or commercial knowledge, information or assistance. Consequently if the statutory definition of royalty contained in sec. 6(1) is applicable to these payments (and is not excluded by the words within the commas in sec. 26(f), or if they are ``royalties'' within the ordinary acceptation of the term ``royalties''
ATC 4138(see sec. 26(f)), they would, by virtue of sec. 6C(2) be deemed to have been derived from a source in Australia and therefore by force of sec. 25(1)(b) to form part of the assessable income of the appellant. Nowhere in the agreement between the appellant and Western Mining Corporation Limited are these payments described or referred to as ``royalties'', but this circumstance is not conclusive, cf. F.C. of T. v. United Aircraft Corporation (1943) 68 C.L.R. 525 at p. 540 per Rich J. The payments are made for the rights granted by that agreement - see clause 3.01, and are made as part of the payment for an aggregate sum ``expressed as a percentage of the Aggregate Sales Value of the nickel and by-products produced in whole or in part by the practice of the `Sherritt system'.'' Those payments are to be spread over a period of fifteen years after the date of commencement of operations (clause 3.02), that date being the date when 150 tonnes of nickel metal had been produced by Western using the Sherritt system (cl. 1.07).
The consideration for those payments will be found, on analysis, to consist of five things: -
- (1) the agreement by the appellant to furnish technical assistance and information in connection with the Sherritt system (cl. 2.01);
- (2) the agreement by the appellant to make available to Western the services of qualified personnel of the appellant in Australia (cl. 2.01);
- (3) the agreement by the appellant to make available to Western research work at the laboratories of the appellant at Fort Saskatchewan (cl. 2.01);
- (4) the agreement by the appellant that Western shall have the right to practise the Sherritt system within the Commonwealth of Australia (cl. 2.02);
- (5) the agreement by the appellant that Western may use and/or sell throughout the world the products produced as a result of such practice.
It is to be observed that the appellant has at no time been the owner of the nickel ores or nickel matte referred to in Article III of the agreement. There is thus no question of a payment to the owner of land or soil in respect of the taking of some part of that soil or land or of any product growing or issuing out of that soil or land. Nor does the present agreement cover payments for any patents or copyrights, there being a separate agreement for the grant of a licence to use the Sherritt patents (see Exhibit `C'). The agreement by the appellant to furnish technical assistance and information in connection with the Sherritt system extends (by virtue of the definitions in clauses 1.01 and 1.02 respectively) to processes, techniques, apparatus know-how and trade secrets (see cl. 1.02) and in substance part of the consideration relates to the communication of ``know-how'' - as to which see the observations of Lord Radcliffe in
I.R. Commrs. v. Rolls-Royce Ltd. (1962) 1 W.L.R. 425 at pp. 430-1. See also at p. 437-8 per Lord Guest.
It is to be observed that Lord Radcliffe, at p. 432, seems to have been of the view that the use, in the agreement there in question, of the term ``royalties'' was a misnomer. See also the remarks of Lord Radcliffe in
Musker v. I.R. Commrs. (1964) 41 T.C. 556 at 585.
It is apparent that in imparting its ``know-how'' the appellant has not diminished its assets; what it did was to communicate its know-how through the supply of drawings, technical journals, the making available of research facilities at its laboratories in Canada, and the making available of its personnel both in Canada and in Australia. True it also granted to Western the right to practise the Sherritt system and the Sherritt technology, and it granted, or purported to grant, the right to use and sell products produced as a result of such practice. It is true also that the payments for the consideration furnished by the appellant are to be computed in terms of a variable percentage of the aggregate sales value of the nickel and by-products produced in whole or in part by the practice of the Sherritt system and that this is commonly a feature of a royalty paid in consideration of a grant of a licence to produce or sell articles manufactured with the aid of some secret process which is the subject of some monopoly right as e.g. letters, patent or copyright.
Notwithstanding these matters, I am of opinion that the payments received by the appellant cannot be regarded as having been received by way of royalties within the ordinary acceptation of that term - see
Stanton v. F.C. of T. (1955) 92 C.L.R. 630 at pp. 641-2 and see also the definition of royalty contained in Webster's Dictionary (2nd Edn.) 1959; Oxford New English Dictionary (1914) Vol. 8 p. 852; Shorter Oxford English Dictionary (1933) Vol. II pp. 1761-2.
It is, I think, as the appellant contends, properly to be characterised as a fee for the provision of information and technical assistance. Counsel for the Commissioner contended that the payment was in respect of a species of industrial property or something akin to that, and pointed out (correctly enough) that the amounts payable under Article III are commensurate with and are computed by reference to the sales value of products produced by the application of the system. In support of this submission, counsel for the Commissioner relied on the remarks of Lord Radcliffe in I.R. Commrs. v. RollsRoyce (1962) 1 W.L.R. 425 at p. 432 to which I have already made reference. It will, I think, be clear from my previous reference to those remarks that I do not understand Lord Radcliffe to be assenting to the proposition that the payments to which he made reference were properly to be described as royalties. It oversimplifies matters, however, to regard the payments as payments for each tonne of nickel metal produced in pursuance of the information communicated, for the truth is that much of the technical, industrial and scientific knowledge, much of the know-how was directed to matters of plant lay-out and design at a time much earlier than the time when production at Kwinana commenced. To my mind, to hold that these payments are ``royalties'' would constitute a considerable extension of the accepted meaning of ``royalties'' and I am not disposed so to extend the term. Accordingly I hold that the payments were not royalties within the accepted meaning of the term.
It becomes then necessary to determine whether the statutory definition contained in sec. 6(1) is applicable to these payments.
The definitions contained in sec. 6(1) are in some instances specific as, e.g.:
```Allowable deduction' means a deduction allowable under this Act -''
in which case the definition is conclusive and exhaustive. In other cases the definitions are ``inclusive'', e.g.:
```Business includes any profession, trade, employments, vacation or calling, but does not include occupation as an employee.''
In such case, the definition adds the meanings given in the definition clause to the natural meaning of the word. The added meaning is often one not otherwise within the natural meaning, so that the natural meaning of the word is to that extent amplified.
A new definition of the word ``royalty'' was inserted in the principal Act by sec. 3(b) of Act No.4 of 1968 (operative from 1 July 1968 - see sec. 2(2) of that Act). That new definition is an ``inclusive'' definition, including payments which might not otherwise fall within the ordinary acceptation of the term ``royalties''. It is a curious definition, in that it merely takes in any payment to the extent that the payment falls within the definition of royalties in the United Kingdom double tax agreement: it does not expressly re-enact the words of that definition.
If the effect of the insertion into sec. 6(1) of the new definition of ``royalties'' is to adopt as part of the Income Tax Assessment Act, for all purposes, the words of the definition of royalties contained in paragraph (5) of Article 10 of the United Kingdom, the payments to the appellant would - so the Commissioner argues - be income derived from a source in Australia, notwithstanding that the Canadian double tax agreement - operative as law in Australia by virtue of sec. 6A of the Income Tax (International Agreements) Act 1953-1959 - provides (by Article III clause 1) that they shall not be subject to Australian tax. And this notwithstanding that sec. 2(2) of the last mentioned Act provides that its provisions shall have effect notwithstanding anything inconsistent with those provisions contained in the Income Tax Assessment Act (other than sec. 160AO of that Act). The reference to sec. 160AO is doubly significant. First it exemplifies the proposition that it is, as a matter of constitutional power, open to the Commonwealth Parliament to overrule the provisions of sec. 2(2) of the Income Tax (International Agreements) Act and any Double Tax Agreement given the force of law by that Act - cf.
Collis Dealings Ltd. v. I.R. Commrs. (1962) A.C. 1 and
Wooden (K.V. Ceylon) Rubber and Tea Co. Ltd. (1971) A.C. 321. Secondly, it illustrates that a Parliament may on occasion, by express words make it clear that it is overriding an International Agreement.
No such reference appears in sec. 6C. The words of that section are perfectly general and are not in terms confined to royalties paid to a United Kingdom resident by an Australian resident. But the very same Act (No. 4 of 1968) which introduced into sec. 6(1) the new
ATC 4140definition of ``Royalty'' and enacted sec. 6C, enacted the amendment to sec. 26(f), which, as it then stood, enacted that the assessable income of a taxpayer should include -
``Any amount received as or by way of royalty.''
The amendment enacted was to add to sec. 26(f) the words:
``Other than an amount that but for the definition of `royalty' in sub-section (1) of section 6 of this Act would not be such an amount.''
The effect of that amendment is that so far as sec. 26(f) is concerned, whatever is a ``royalty'' according to the ordinary meaning of the word is part of the assessable income of a taxpayer, but that any amount which not being a royalty within the ordinary meaning of that term is, by force only of sec. 6(1) included in the term ``royalty'' is not-so far as sec.26(f) is concerned - part of the assessable income of the taxpayer.
Section 6C (omitting irrelevant parts) in its terms applies to ``income'' which is derived by a non-resident and which consists of royalty paid to the non-resident. It makes that income, for the purpose of sec. 25, income derived from a source in Australia and therefore (by sec. 25(1)(b)) part of the assessable income of the non-resident. When it is remembered that the definition in sec. 6(1), the amendment to sec. 26(f) and the enactment of sec. 6C all come about through the same Act of Parliament, the difficulty of reconciling those provisions with each other and with the provisions of the Canadian Double Tax Agreement and with sec. 4 and 6A of the Income Tax (International Agreements) Act 1953 to 1968 becomes very great.
It is tempting to resolve these difficulties by saying that the definition in sec. 6(1) applies only to royalties paid to a United Kingdom resident by an Australian resident or vice versa. The difficulty about `that is that the United Kingdom Double Tax Agreement does not - and indeed cannot - impose Australian Tax on those royalties. Indeed it does not even purport to impose that tax. What it does - at all events, in relation to royalties - is to prescribe a limit to the amount of tax otherwise exigible - and this, in the case of Australia, requires some reference back to the Income Tax Assessment Act. Under that Act, as it stood prior to the 1968 United Kingdom Double Tax Agreement and the consequential amendments made by Act No. 4 of 1968, royalties were part of the assessable income of a non-resident if received in Australia (sec. 25(1)(b) and sec. 26(f)) but were exempt from income tax if derived from sources wholly outside Australia (sec. 23(r)). Under the previous United Kingdom Double Tax Agreement, ``royalties'' did not form part of the industrial or commercial profits of a United Kingdom enterprise (which were, by Article III, exempted from Australian tax - see Article II Clause (1)(c)). Royalties were dealt with by Article VII of that agreement, the effect of which Article was to exempt from Australian tax any royalty (as defined in Clause (2) of Article VII) derived in Australia by a resident of the United Kingdom who was subject to United Kingdom tax in respect thereof and who was not engaged in trade or business in Australia through a permanent establishment, subject to the qualification that no exemption was allowed in respect to so much of the royalty as exceeded an amount which represented a fair and reasonable consideration for the rights for which the royalty was paid. The definition of ``royalty'' in Article VII(2) was a very restricted one confining it, virtually, to royalties paid in respect of licences in respect of industrial property such as copyrights, patents etc. - the first category of royalties to which reference is made in the judgment in Stanton v. F.C. of T. (1955) 92 C.L.R. 630 at p. 641.
When under the new United Kingdom Double Tax Agreement a new and wider definition of royalties was announced and an upper limit set to the amount of tax exigible in the case of a royalty, it was no doubt considered desirable to define what were the circumstances in which a royalty beneficially owned by a United Kingdom resident could be said to be ``derived'' from a source in Australia so as to become part of the assessable income under sec. 25(1)(b). And this, I consider, is the purpose of sec. 6C. It was enacted, primarily, to deal with the new situation created by the 1968 United Kingdom Double Tax Agreement, in order to make royalties as defined in that agreement liable to tax in Australia subject, however, to the limit fixed by Article 10 of the new agreement.
So also, in the case of the amendment to sec. 26(f): royalties, within the ordinary acceptation of the term, form part of the assessable income of the United Kingdom
ATC 4141resident if derived from the source in Victoria, and are taxable at the ordinary rate without restriction unless they fall within the definition of royalties in Article 10 Clause 5, in which case the limit applies. But payments which but for that definition would not be ``royalties'' are outside the scope of sec. 26(f), and if received outside Australia will attract tax only because of the combined operation of sec. 6C and sec. 25(1)(b). Section 6C operates to bring them within sec. 25(1)(b), in which case, however, they will, by force of sec. 4 and 5 of the Income Tax (International Agreements) Act 1953-1968, bear Australian tax only within the limits prescribed by Article 10 Clause 2A.
Such a view explains why the definition of ``royalties'' in sec. 6(1) is expressed as it is, so that it relates only to royalties as defined in Article 10 Clause 5 paid by an Australian resident to a United Kingdom resident or vice versa, but not to payments such as those received in the present case by the appellant - a Canadian resident, not being either an Australian resident nor a United Kingdom resident.
It follows that the said payments do not constitute a royalty within the meaning of sec. 6C so as to become taxable income of the appellant under sec. 25(1)(b). The payments were not in short, liable to Australian income tax and the assessment objected to must be discharged and the case remitted to the Commissioner to deal with in accordance with these reasons for judgment.
I am conscious of the fact that the generality of the terms of sec. 6C is such as to make it difficult to suppose that it was intended to be confined in its operation to royalties within the ordinary meaning of that word and to royalties as defined in Article 10 of the United Kingdom agreement paid by an Australian resident to a United Kingdom resident or vice versa. Possibly it was considered that there would be scope for the operation of sec. 6C if new Double Tax Agreements modelled on the new (1968) United Kingdom agreement were negotiated. If that were the view on which sec. 6C was drafted, there would appear to be need to amend the definition of ``royalty'' in sec. 6(1).
In the result, the order I make is to allow the appeal, discharge the assessment (as from time to time amended) and order that the matter be remitted to the Commissioner to deal with in the light of these reasons for judgment.
Subject to anything which I may hear to the contrary, I am of the view that the taxpayer's costs of the appeal should be taxed and when taxed paid by the Commissioner to the taxpayer.