Cliffs International, Inc. v. Federal Commissioner of Taxation.

Kennedy J

Supreme Court of Western Australia

Judgment date: Judgment handed down 28 June 1985.

Kennedy J.

The appellant, Cliffs International, Inc. (``Cliffs''), appealed against the disallowance by the respondent of its objections to assessments and amended assessments of income tax for the five years of income ended 31 December 1975 to 31 December 1979. The matters now remaining in dispute are the inclusion in its assessable income of commission earned by the appellant under certain World Sales Representation Agreements, together with associated exchange gains, and the disallowance of certain deductions, comprising overseas travelling expenses, the amounts contributed by the appellant to the conducting of the ``Mitsui Golf Classic'' in Japan, and professional fees in connection with the preparation of staff tax returns, in connection with the objections and

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subsequent appeals which culminated in the decision in
Cliffs International Inc. v. F.C. of T. 79 ATC 4059; (1979) 142 C.L.R. 140 and for certain advice with respect to withholding tax. During the course of the hearing, senior counsel for the respondent intimated that he did not seek to support the assessments insofar as they related to penalties.

The appeals arise out of the participation of Cliffs in the Robe River iron ore project. That project is owned by the participants in Cliffs Robe River Iron Associates, an international joint venture. The participants are Robe River Limited (having an interest of 35%), Cliffs Western Australian Mining Co. Pty. Ltd. (``C.W.A.M.'') (having an interest of 30%), Mitsui Iron Ore Development Pty. Ltd. (having an interest of 30%) and Cape Lambert Iron Associates (having an interest of 5%).

The interest of Cape Lambert Iron Associates was, prior to 1 July 1977, held by Mt. Enid Iron Co. Pty. Ltd., a company incorporated in this State and associated with the interests of Garrick Agnew. The shares in C.W.A.M. are owned, as to 12% by Bank of America International and First Chicago International, as to.33% by The Cleveland-Cliffs Iron Company (``Cleveland-Cliffs''), as to 52.67% by Cliffs International Investment Inc. and as to 35% by Mitsui Iron Ore Development Pty. Ltd. The latter holding was, it appears, acquired from Texas Gulf in the late seventies. Mitsui Iron Ore Development Pty. Ltd. also has an interest of 20% in Cape Lambert Iron Associates. Cliffs International Investment Inc. is a wholly owned subsidiary of Cliffs, which is a company incorporated in Ohio in the United States of America and which was registered as a foreign company in this State in January 1963. Cliffs is itself a wholly owned subsidiary of Cleveland-Cliffs, which was also incorporated in Ohio. The Robe River iron ore project is managed by C.W.A.M., which was incorporated in this State in 1965.

The joint venturers mine a substantial iron ore deposit at Pannawonica in the Robe River valley in the West Pilbara area of Western Australia. After treatment at Cape Lambert, the ore is shipped to overseas buyers who are located almost exclusively in Japan and in Europe.

By reason of the importance to the marketing of iron ore of its chemical composition and physical properties, it is necessary to refer briefly to the nature of Robe River ore. The ore which is mined is limonitic iron ore, a form of iron with a chemically combined water content which makes the ore of lower grade than the hematites available from other areas in the Pilbara. It comprises approximately 57% iron, as compared with 62% in the average hematite. The water content may be driven off in a sintering process, but it is an undesirable characteristic in ore, because the presence of water adds to the cost of shipping, and its use in the sintering process requires the addition of more coke than would otherwise be necessary. The Robe River iron ore does, however, have certain physical advantages in that, when crushed, it produces a relatively coarse natural fine and comparatively few ultrafines. It is beneficial, particularly in the sintering process, to blend this ore with the finer ores which are generally produced by processes of concentration.

The blending of Robe River ore also has advantages insofar as its alumina content is concerned. Most Atlantic basin ores are low in alumina, and the blending of those ores with Western Australian ores, with their higher alumina content, can produce an optimum level of alumina for the particular purpose of the mill. One advantage which Robe River ore possesses, as against its competitors from the Pilbara, is that it contains approximately half the phosphorus being regarded as an undesirable element in iron ore.

The post war expansion of the world's steel industry saw two particular developments in ore processing, namely, sintering and pelletizing. Making sinter first involves mixing iron ore fines which cannot be charged directly into a blast furnace because their size would allow them to be blown out. The fines, when mixed, are burnt into a clinker with coke, whilst, at the same time, other additives which it is desired to put into the furnace are wrapped into the clinker.

With pelletizing, the iron is ground very finely, primarily to remove undesirable constituents, such as silicone and alumina. Water is added, and it is rolled into balls in a drum. The temperature is then raised to the level at which the balls are converted into artificial stone or pellets. Pelletizing was largely developed in response to a technical

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requirement in the iron ore reserves remaining in the United States after World War II. It was being pioneered in Europe when the European steel mills were in the middle of their expansion into sintering.

The Robe River project had its genesis in 1962, with the creation of a temporary reserve covering the area of the iron ore deposit. Occupancy rights in relation to the reserve were conferred upon Basic Materials Pty. Ltd. (``Basic''), a company incorporated in this State and whose shares were then owned by Howe Sound (later Howmet Corporation), a company incorporated in the United States of America, and by Garrick Agnew Pty. Ltd., a company incorporated in this State. The ore at that time was regarded as being virtually non-commercial, and in order to secure an evaluation of the deposit and, it would seem, its participation in any development which might eventuate, Howe Sound sought assistance from Cleveland-Cliffs, Cleveland-Cliffs having an internationally acknowledged expertise in the upgrading of low grade ore.

As a result of this approach, Mr W.E. Dohnal, one of the principal witnesses for the appellant, was sent to Western Australia by Cleveland-Cliffs in June 1962 to consider the involvement of that company in the development of the deposit. Thereafter, until his retirement at the end of 1979, Mr Dohnal was the chief executive in Australia for the Cleveland group. During the relevant financial years, he was to be the president and managing director of each of Cliffs and of C.W.A.M.

Samples of the Robe River ore were sent to the United States for thorough testing, there not being at that time adequate facilities in Australia for conducting the tests which were necessary to determine the viability of the development. The evaluation by Cleveland-Cliffs commenced with bench scale tests and progressed to testing the ore in a pilot plant in order to assess its suitability for pelletizing. All of this involved making use of the company's very extensive research laboratory and its staff of specialist metallurgists.

The earliest assessment was that a roasting process could be employed to dry off the excess chemical water in the ore, so as to leave a lump and a fine product. But it was then realised that heating the ore to a sufficient temperature to dry off the excess water caused it to disintegrate, leaving no lumps. At this time, the sintering process had not developed to the extent to which it later did, and the conclusion reached was that, if the project were to go ahead, it would require that the ore be pelletized, a process in which Cleveland-Cliffs had already built up a considerable expertise, but which was then still a relatively new process, involving a new approach to steel making technology.

At the end of 1962, Cleveland-Cliffs took an option to acquire all the shares in Basic. The option was exercised early in 1964, with the purchase being taken in the name of Cliffs, which was the vehicle through which Cleveland-Cliffs operated in Australia. Under the agreement so constituted, Cliffs became obliged to pay to Howe Sound and to Garrick Agnew Pty. Ltd. what were therein described as deferred payments, but which were, in reality, royalties, on all iron ore mined and transported from the reserve.

On 18 November 1964, the Western Australian Government entered into an agreement with Basic, which was approved by the Iron Ore (Cleveland-Cliffs) Agreement Act, 1964, for the development of the deposits and, inter alia, the pelletizing of the ore. The agreement expressly recognised the low quality of the Robe River ore and the substantial costs which would be involved in its upgrading in order to make it saleable. The Act identified two stages of development, at the end of the first of which Basic was to be entitled to a mining lease of the area in which the ore deposits were situated.

Shortly thereafter, Basic went into voluntary liquidation, and its assets were distributed in specie, its interest in the agreement with the State, with the approval of the State Government, being assigned to Cliffs accordingly.

By this time, sales contracts had been secured with Japanese interests for the sale of both pellets and fines. In January 1966, C.W.A.M., which had become by then the manager for the project, appointed Mitsui & Co. Ltd. (``Mitsui & Co.''), one of the major Japanese trading houses, its agent for the sale of iron ore products to Japanese consumers. When Cliffs, notwithstanding all its efforts, was unable to find other participants willing to take an interest in the project, and in this way

ATC 4378

to raise the considerable finance needed for the development, these contracts lapsed.

There was at this time some concern as to the capacity of the Robe River deposit to support the proposed venture. Cliffs therefore sought additional reserves and eventually, by an agreement with Dampier Mining Company Limited, dated 30 September 1969, Cliffs secured from that company, in effect, a sub-lease of additional iron ore deposits at nearby Deepdale, in return for options to purchase iron ore and to acquire certain interests in the railway and port proposed to be constructed by the participants in the Robe River development. This arrangement was important for the viability of the project, because it resulted in the securing of access to approximately 160,000,000 additional tonnes of ore, and so enabled economies of scale to be achieved by the mining of larger quantities of ore.

The Japanese contracts were revived in April 1969, when C.W.A.M. entered into iron ore pellet and sintering fines sales agreements with a number of Japanese steel mills. In February 1970, it entered into a similar agreement with Mitsui & Co.

By the early months of 1970, Cliffs had secured Japanese and, importantly, Australian participation in the venture, and it was in a position to complete arrangements for a joint venture to develop the deposit. A number of agreements were then entered into, each dated 25 May 1970. They included, in particular, the Joint Venture Agreement, the Cliffs International, Inc. Agreement, the Management Agreement, the Advisory Services Agreement, the Japan Agency Agreement, the Japanese Sales Representation Agreement and the World Sales Representation Agreements.

The Joint Venture Agreement was made between C.W.A.M., Mitsui Iron Ore Development Pty. Ltd., Robe River Limited and Mt. Enid Iron Co. Pty. Ltd. and provided for the development, construction, maintenance and operation of the Robe River project for the purpose of the mining, overland transportation, processing, pelletizing and loading for shipment of iron ore and the delivery of it to the participants to enable them to fulfil the contracts and obligations for the sale of iron ore to which they were, or proposed to become, parties, and to provide additional iron ore for them.

By the Cliffs International, Inc. Agreement, Cliffs agreed to assign to the participants, in effect, the mining rights which it had acquired in the Pilbara, whilst retaining its mineral lease. In return, each participant agreed, inter alia, to pay to Cliffs a royalty on iron ore produced by or for it and sold or shipped for sale for commercial use from the mineral lease area and on iron ore purchased by it from Dampier Mining Company Limited under the agreement with that company.

By the Management Agreement, the participants engaged C.W.A.M. as manager of operations for the joint venture.

The Advisory Services Agreement was made between the participants of the first part, C.W.A.M., as manager, of the second part, Cliffs of the third part and Cleveland-Cliffs of the fourth part. It was designed to enable the manager to obtain the benefit of the advice and services of Cliffs and of Cleveland-Cliffs, recognising that the participants would be dealing with an iron ore which would require in its handling a great deal of expertise and that Cliffs and Cleveland-Cliffs had expertise in each of the areas of mining, transportation, processing, pelletizing and shipment of iron ore, together with substantial research, engineering and administrative facilities and staff. It was expressly recognised that the participants had entered into the Management Agreement in reliance upon these arrangements being made. Additionally, it is apparent that the institutions financing the project regarded the arrangements as being necessary and had requested that they be made. It would appear that, as between Cliffs and Cleveland-Cliffs, the expertise resided in the parent company.

Under the Japan Agency Agreement, each of the participants appointed Mitsui & Co. its exclusive agent for the sale of iron ore to Japanese consumers and undertook not to sell or export iron ore, without the approval of that company, directly or indirectly, to any Japanese consumer or to any person, firm or corporation in Japan except through Mitsui & Co. or in accordance with the Japanese Sales Representation Agreement. For its part, Mitsui & Co. undertook, at its own expense and without payment by the participants of any compensation, fee or other charge, to exert its

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best efforts, in consultation with Cliffs and with the support of Cliffs and pursuant to the sales policies and practices established by Cliffs and the participants, to promote the sale of iron ore by the participants to Japanese consumers and promptly to submit every order which it obtained to Cliffs as sales representative for each of the participants for prompt consideration, acceptance or rejection by each participant. It was recognised by the participants that, in accordance with Japanese custom, Mitsui & Co. would secure a commission from the Japanese buyers.

Under the Japanese Sales Representation Agreement, made between the participants, Cliffs and Mitsui & Co., each of the participants appointed Cliffs its exclusive sales representative for sales of its iron ore to Japanese consumers, subject to the powers, authorities and rights of Mitsui & Co. pursuant to the Japan Agency Agreement. For its part, Cliffs undertook to carry out and perform all such activities and obligations in Japan on behalf of the participants as might be necessary or appropriate in connection with the fulfilment by the participants of their obligations under the sales agreements which had been or might be entered into, including the appointment and supervision of representatives to observe the procedures used by the buyers in taking samples of iron ore for analysis, arranging on behalf of the participants for analysing samples taken for them, consulting with the buyers as to differences in analyses and reconciling on behalf of the participants any such differences and arranging where necessary for umpire analyses, participating on behalf of the participants with buyers in the establishment and operation of the Joint Technical Committee referred to in the sales agreements, and consulting with the buyers as to measures taken by or on behalf of the participants to improve quality in the case of a request by a buyer to improve quality in the event of the failure of any delivery of iron ore to meet the specifications set forth in the sales agreements. It also undertook, in consultation with Mitsui & Co., to endeavour faithfully and diligently, in accordance with sound merchandising practices, to obtain orders for purchases of iron ore by Japanese consumers upon such terms and in such quantities as Cliffs, in consultation with the participants and Mitsui & Co., should deem appropriate in light of the existing and potential supply of iron ore available for sale by the participants, and it further undertook promptly to advise the participants and Mitsui & Co. of any such orders or formal proposals with respect thereto. It was not empowered to bind any participant to any sale of iron ore. The participants and Mitsui & Co. were to be advised immediately by Cliffs of all quotations, proposals, offers or negotiations, and Mitsui & Co. was to be entitled to be present at any such negotiations, if it so desired. Cliffs was further required annually to prepare, in consultation with the participants, and to submit to each participant for approval, proposals for the marketing and the negotiation and servicing of such sales of iron ore as each participant should desire to produce and sell and it was required concurrently to submit for each participant's approval a proposed detailed budget of expenditures to be incurred by Cliffs in carrying out its duties under the agreement. Cliffs was to be governed by and to comply with such marketing program and budget, and any amendments thereto approved by each participant, and to co-operate and consult at all times with each participant in connection with the services under the agreement. It also had certain reporting functions.

By way of remuneration under the Japanese Sales Representation Agreement, Cliffs was entitled only to reimbursement of all costs, expenses and liabilities reasonably incurred by it in carrying out its duties under the agreement, including reasonable charges not in excess of cost for services supplied by related companies. The commercial reason for that was simply that the sales contracts in Japan were considered to be part and parcel of the package which had been acquired by the participants at the commencement of the joint venture. This was described as a recognition that the Japanese contracts were the basis for assessing the viability of the project and putting it on the road.

Under the World Sales Representation Agreements, the agreements which are central to the first issue in these appeals, entered into between Cliffs and each of the participants (described in the agreements as ``the Principal''), initially for five years, but later extended, Cliffs was engaged by each participant as its sales representative for sales of its iron ore throughout the world, except sales to Japanese consumers. Initially, the

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agreements reserved to the participant the right to make such sales otherwise than through Cliffs; but these rights were subsequently abandoned.

By cl. 2 of the World Sales Representation Agreements, Cliffs undertook to endeavour, faithfully and diligently in accordance with sound merchandising practices, to obtain orders for purchases of iron ore, other than by Japanese consumers, upon such terms, and in such quantities, as Cliffs, in consultation with the participant, should deem appropriate in light of the existing and potential supply of iron ore available for sale, and it undertook promptly to advise each participant of any such orders or formal proposals with respect thereto. Cliffs was not authorised to bind any participant to any sale of iron ore. All quotations, proposals, offers or negotiations by Cliffs on behalf of a participant were to be subject to acceptance, confirmation or rejection by the participant, who was to be immediately advised of all quotations, proposals, offers or negotiations.

By cl. 4, in the event of any sale by the participant of iron ore (other than to a Japanese consumer) Cliffs was required to carry out such sales servicing activities and obligations outside Western Australia with respect to such sales as the participant might request in connection with the fulfilment of the participant's sales agreements.

By cl. 5, Cliffs was required annually to prepare, and to submit to each participant for approval, proposals for the marketing and the negotiation and servicing of such sales of iron ore as each participant should desire to produce and sell and it was required concurrently to submit for each participant's approval a proposed detailed budget of expenditures to be incurred by Cliffs in carrying out its duties under the agreement. Cliffs was to be governed by and to comply with such marketing program and budget and any amendments thereto approved by each participant and to co-operate and consult at all times with each participant in connection with the services under the agreement.

By cl. 6, Cliffs was entitled to be reimbursed by the participant for that participant's allocated portion of all costs, expenses and liabilities reasonably incurred by Cliffs in carrying out and performing its obligations under the agreement, including reasonable charges not in excess of cost for services supplied by related companies and for fees and expenses of agents and other representatives.

By cl. 7, Cliffs was required at quarterly intervals to furnish the participant with full and detailed reports as to Cliffs' activities pursuant to the agreement, together with copies of all material reports received or prepared by Cliffs or any related company and significant written communications in relation to serious enquiries.

Clauses 8 and 9 provided as follows:

``8. Cliffs shall be paid a commission on all sales of Iron Ore by the Principal, other than sales to Japanese consumers, equal to one and one quarter per centum (1.25%) of the selling price realized by the Principal from such sales. Such commission shall be paid to Cliffs in the currency in which the sales price is paid (or, at the election of the Principal, in Australian or United States currency) at such convenient intervals not less frequently than quarterly as the Principal shall determine.

9. The provisions of Sections 4 and 8 of this agreement shall not apply to a sale of Iron Ore by the Principal if the agreement for such sale was made by the Principal without any significant participation by Cliffs in the negotiation thereof and if prior written proposals or offers or quotations made by Cliffs to the purchaser or prior direct negotiations by Cliffs with the purchaser did not contribute in a significant way to such sale.''

By a supplementary agreement, made on 21 October 1977, Cliffs was made the exclusive sales representative outside Japan. This was effected by deleting the reservation to which I have referred, whereby the participants could effect their own sales, and by substituting a new cl. 9 in the following terms:

``9. Except with the written approval of Cliffs, and excluding sales to Japanese Consumers, the Principal will not sell or export Iron ore anywhere in the world except Australia except through Cliffs.''

It was said, and I accept, that Cliffs never gave, and was never asked to give, its written approval under the substituted clause.

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The fixed costs of the Robe River project were high, and there was a need, in order to enhance profits, to maximise sales, expansion of production being possible at a relatively small cost. It was appreciated that additional ore would be difficult to place in Japan, and that Europe was the logical place to which to turn. The view of Japanese consumers was that, for technical reasons, they were already absorbing as much Australian ore as they could. It was also considered that diversification was desirable in order to avoid total dependence upon one geographical location. Diversification of markets had the additional merit of enabling advantage to be taken of any changes in the economy of a particular region.

Consistently with the notion of diversification, the general view of the participants was that an attempt should be made to get fewer tonnes into more steel mills in Europe, rather than seeking to place larger quantities with one or two mills. Accordingly, from the beginning, sales of 500,000 or 600,000 tonnes per annum to each of the half dozen most reputable mills in Europe were sought to be achieved. Cliffs determined upon areas and companies within those areas in and to which sales might be effected. To some extent, the companies selected themselves, because what were being sought were those with annual outputs of some 3,000,000 tonnes of steel, of which there were probably less than 50.

Production of iron ore from the Robe River project commenced in July 1972, and at about this time it appears that Mr Dohnal visited Europe, providing mills with basic information on the Robe River project, largely directed to assuring prospective purchasers of stability of supply, and obtaining an indication from a number of them of their interest in having a meeting with technical experts, as well as arranging for samples of Robe River fines and pellets to be provided for testing by their own organisations.

The technical aspects of ore are of critical importance. Mills buy ore with a view to their end product. Their aim is to obtain a suitable feed for their blast furnaces. This can frequently be achieved in the most economical manner by blending different types of ore, having different qualities, so that what might be regarded as a deficiency in one ore may be compensated for by another or others. As many as ten or eleven ores may be blended in this way. Decisions in such matters must be based upon full technical information as to the qualities of the various ores.

In September 1972, a major technical mission to Europe was arranged. It was undertaken by Mr V.F. Koontz and by Dr J.E. Stukel, after the completion of extensive preliminary technical investigations. Mr Koontz was a civil engineer by training and an expert in sintering and pelletization of iron ore. He had been very heavily involved in the earlier transfer of European sintering technology to the United States, in the course of which he had spent a great deal of time in Germany, Holland and Britain. He had been a vice president and the manager of operations of C.W.A.M. since 1970, and he it was who had supervised the construction of the production plant, having been responsible for the design and sale of the plant prior to his joining the Cliffs group. Dr Stukel was a technical specialist associated with Cleveland-Cliffs. He was probably one of the half dozen leading blast furnace technologists in the United States and he was well known internationally.

In addition to ascertaining the likely sales requirements in Europe, the purposes of the trip were twofold. First, it was planned to analyse what the mills were doing, and, secondly, it was intended to explain to the mills how they could use Robe River ore. To assist them in their task, preliminary tests on the ore were commissioned from Lurgi Chemie of Frankfurt, Germany, which was the most prominent builder of sintering plants in Europe, having built approximately three-quarters of all the sintering plants which had been built in Europe during the past 30 years. The purpose of the evaluation by Lurgi Chemie was to satisfy the participants that, with basic European mixes of iron ore, the project had something to offer. The results were very encouraging and, as Dr Stukel expressed it in his report on the trip:

``It was possible to present positive date without apologies or excuses to the steel plant technical people.''

At the commencement of the trip, they also called on a German firm, Burghardt and Kostmann, who operated a leading testing laboratory of high standing in the European, and particularly in the German, steel

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community, and discussed with them pellet, sinter and coarse ore testing. These discussions also were encouraging. Thereafter, Mr Koontz and Dr Stukel visited mills in Germany, Holland, England, Italy, Spain, France and Belgium.

The major effort to achieve sales in Europe commenced in 1973, when Mr Dohnal, who was the officer of Cliffs charged with negotiating sales, followed up the visit of the technical experts. His task was to tailor possible contracts to take account of the technical findings of the mills.

European buyers did not present such a monolithic front as did the Japanese buyers. They were interested in a range of contracts and frequently chose to meet some of their ore requirements by spot purchases. Overall, their contracts tended to be for shorter terms than was the case with the Japanese contracts. Furthermore, some of them preferred c.i.f. contracts, although the well established practice of the participants was to sell on f.o.b. terms. There was, it appears, only one exception made to this practice, and that was in the mid-seventies, when there was a single c. & f. contract entered into for the sale of approximately 1,000,000 tonnes of pellets. An added complication with respect to European buyers was that it was not simply a matter of negotiating with each company as a completely independent entity. It was also necessary to ensure that none might feel disadvantaged as against the others. By a long process of negotiations in Europe, Cliffs was able to arrive at what was termed a process differential, which took into account in the price the additional cost of processing Robe River ore, as compared with other ores, prior to its shipment.

So far as European sales were concerned, there was an annual ritual whereby Cliffs reviewed the existing contracts as to tonnage and price, as to terms of payment and as to the details of despatch and demurrage.

After it had been selling in the European market for some time, on 19 December 1978, Cliffs entered into a European Sales Agency Agreement with Philipp Bros. A.G. This agreement was entered into in order to take account of the preference of some European buyers for purchasing on a c.i.f. landed basis and because a number of European buyers did not wish to take a full vessel of ore at any one time, preferring that the ore be stockpiled and delivered on a month by month basis. Stockpiling was something in which the participants did not wish to become involved. Philipp Bros. A.G. was, however, prepared to perform these services for buyers, thereby opening up a much wider range of consumers in Europe than could otherwise have been contemplated. As it turned out, the company did not act as agent, but as a principal, buying and redistributing the ore, so that no commission was, in fact, ever paid under the agreement. The company made its profit margin in its shipping and stockpiling arrangements, and not through any profit on the sale of the ore itself. After this arrangement with Philipp Bros. A.G., there were no sales made by the participants to any new buyers in Europe.

So far as sales in Asia outside Japan were concerned, this was a later development. Contracts were negotiated by Cliffs in Korea and, to a lesser extent, in Taiwan in 1977 and 1978. Since that time, there have been at least six visits by representatives of Cliffs to Korea, one visit to Taiwan and six or seven to mainland China. The procedure adopted has been very similar to that adopted in the early stages of the project's expansion into Europe, Cliffs making use of information gained from the mills utilising Robe River ore, correlating this information with that from other ore sources and endeavouring to interest prospective buyers in Robe River ore by demonstrating how they could benefit from the inclusion of that ore in their sintering mixes. Up to the date of the hearing, there had been three shipments of ore to Korea, the first being in 1979. Recently, subsequent to the periods in question, there has been an agreement with mainland China for the first shipment of ore to a newly constructed plant near Shanghai.

It is important to appreciate that steel mills, or purchasing groups, never took the initiative in regard to purchases of iron ore. The practice of buyers was and is to work from their own corporate offices or plants rather than to seek out supplies of ore from overseas. Although representatives of mills have visited the Robe River project, this has always been in the course of their visiting other iron ore projects in Australia generally, and no visit has ever been made by a prospective buyer to Robe River alone. None of the visits has been directed to

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negotiating purchases of iron ore and I accept that no useful discussions have ever taken place in Australia with any buyer. Nor have any buyers been secured merely by correspondence. It has always been necessary, in order to effect sales, for representatives of Cliffs to negotiate personally with buyers at the various steel mills.

The nature of the services provided by sales representatives plays an extremely important role in the iron ore industry in effecting sales. There is considerable competition, and there are many representatives of iron ore projects visiting mills. In this respect, Cliffs benefited greatly from its relationship to Cleveland-Cliffs, a long established and highly respected and reliable company which was exceedingly well known throughout the industry as one of the largest iron ore producers, with particular expertise in concentrating and pelletizing ore. This relationship, of which Cliffs made considerable use, assisted to a large degree in surmounting the two major initial hurdles of gaining entry into steel mills in order to talk to significant personnel and of establishing technical credibility and reliability. Cliffs additionally benefited from Mr Dohnal's earlier contacts with the mills when he was representing Cleveland-Cliffs overseas. Mr Koontz had also been a visitor to many European steel mills when he was working for a previous employer, and, as I have already indicated, Dr Stukel was a world authority in his field.

The negotiating of sales of iron ore calls for the exercise of a variety of skills on the part of the negotiator. He must himself have a deep knowledge of the industry and he must have available immediate access to technological information and advice. Cliffs' representatives met all the requirements. In particular, the necessary information and advice was readily available from Cleveland-Cliffs.

So far as Japan was concerned, whilst Mitsui & Co. was the appointed agent for the participants in that country, it played a somewhat passive role in sales negotiations, which were conducted essentially by Mr Dohnal and by Mr Koontz acting on behalf of Cliffs. In particular, Mr Dohnal made frequent visits to Japan for what amounted to continuous negotiations and in order to promote the venture and to endeavour to increase sales. Mitsui & Co. declined to enter into any discussions on behalf of either side during these negotiations, although the final arrangements were always made through it. It regarded its task as being to arrange appointments and to bring the parties together, in addition to contributing local experience and knowledge and aiding in the roles of shipping agent and, in some instances, of financial agent. It did not deal with any technical questions, all of which were left to Cliffs to answer.

As was the case in Europe, in Japan, the iron ore market was a buyer's market, and no negotiations with Japanese steel mills ever took place in Australia, it being traditional that the iron ore producer must visit the mills.

It was an essential part of the responsibilities of Cliffs to establish with the mills that Robe River ore was in fact performing the task which it should have been performing and to ensure that the ore was being used in the most efficient manner. Its sales servicing activities included receiving complaints, expediting shipping arrangements and generally ensuring that the sales agreements had been complied with by the participants. If technical problems arose, it arranged for technical experts to be sent to investigate them. Such problems sometimes originated within the mills and sometimes in the Robe River plant. Thus, a particular dust problem overseas was resolved by carrying out modifications to the plant, whilst a complaint of excessive zinc in the end product was found not to have had its origin in Robe River ore. Difficulties in blast furnaces were examined and advised upon, and Cliffs itself sponsored tests of the ore. Although, in one sense, these activities might be regarded as merely amounting to the servicing of existing sales, which Cliffs was required to undertake, in reality, they went far beyond that function. Negotiations for the sale of iron ore were never finally completed, and the performance of these services played a most important role in preparing the ground for future sales. Furthermore, the taking by buyers of the full contract tonnages was the exception rather than the rule, and in an industry where contracts tend not to be observed to the letter, a solid continuing relationship between buyer and seller is essential. This is what Cliffs set out to achieve.

The process of negotiation leading up to the concluding of a contract of sale was generally long drawn out. There might be two, or

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sometimes three, preliminary meetings, then, when the parties came closer to agreement, it might be necessary to meet on consecutive days. Having reached some broad consensus with a buyer, the practice of Cliffs was to reduce the arrangement to a memorandum of understanding or letter of intent, with a view to producing a document which was reasonably conclusive. Wherever possible, there was a ceremonial signing arranged in the buyer's offices. Sometimes there might only be a handshake.

Cliffs had no power under the agreements to bind the participants. However, there would generally be a prior understanding, within a broad range, of what Cliffs could negotiate as to price, quantities, and shipment, and it endeavoured always to keep within that range, so that it was only necessary to communicate with the participants from overseas in order to advise them where the negotiations stood, rather than to seek instructions.

If a formal agreement had been prepared and was ready for signature and was in accord with the range of the authority which had been indicated by the participants, that agreement might be signed overseas as an indication of good faith and as an assurance to the buyer that the contract would be signed by the other participants. On occasions Mr Dohnal might sign on behalf of C.W.A.M. as a participant, and on other occasions he might sign for Cliffs as the sales agent. But there was no fixed pattern. Everything depended upon the exigencies of the moment.

If no agreement within the authorised range could be arranged, nothing would be signed, and the matter would be referred back by Cliffs to the participants with an explanation of the circumstances and a recommendation as to whether Cliffs should proceed with further negotiations or whether it should abandon all negotiations for the time being.

It was not made clear to me how contracts were executed on the occasions when formal contracts had not been signed by the buyer. A local firm of solicitors advised, when necessary, on the wording; but it was not said whether the buyer executed the contract before the participants did so.

So far as the execution of contracts by the participants other than C.W.A.M. was concerned, the procedure generally was to circulate them around Australia for this purpose. But they would very seldom be returned by post to an overseas buyer when all parties had signed. The almost invariable practice was for Mr Dohnal to deliver them personally, because their delivery provided another opportunity to meet the buyer and afforded an opportunity for the discussion of future sales.

As I have already indicated, with one exception, sales contracts were arranged on an f.o.b. basis. In general, the terms of payment were that a fixed percentage of a provisional invoice should be paid within a specified number of days, or upon the arrival of the cargo at the purchaser's port. All payments were required to be made in United States dollars through Cliffs' bank in New York. Distribution of these funds was then effected by Cliffs to the participants' nominated accounts. Payments of commission to Cliffs were not made on a shipment basis, but followed the rendering by it of monthly invoices to C.W.A.M. There was some uncertainty as to how they were paid. Mr Dohnal indicated that they were paid directly by the participants, as commission was not regarded as a project expense. That, of course, is strictly correct; but the evidence of Mr A.D. Paice, the general manager, finance and administration, of Cliffs Robe River Iron Associates, was that payments were in fact made by C.W.A.M., and he is more likely to have been familiar with the system. Be that as it may, payments of commission were made in Australian dollars through the bank account of Cliffs in Perth and the funds were then remitted by it to Cleveland.

Mr Dohnal was, during the years in question, almost a monthly visitor to the offices of Cleveland-Cliffs in Cleveland, where he had an office available for his own use. He was required at all times to keep his Cleveland principals fully informed as to the Australian project, and sales strategies, in particular, required their approval. Mr Dohnal also needed regularly to avail himself of the marketing information available from various persons in the Cleveland office, where there existed a very strong and effective sales organisation. Board meetings of Cliffs were mainly held in Cleveland, and its formal books of account and its statutory records were kept there.

During the relevant years of income, Cliffs had only three major activities. The first

ATC 4385

consisted of the performance of its duties under the agreements to which I have referred. The second was to receive the royalties to which I have also referred. The third was to conduct mineral exploration in Australia.

Cliffs had only two offices, one in Cleveland and the other in Perth. It was suggested that the Cleveland office consisted of the room from time to time used by Mr Dohnal; but clearly there were officers of Cleveland-Cliffs with responsibilities in relation to Cliffs. The Perth office was, effectively, located in the premises of C.W.A.M. Both names appeared on the door and there was a common telex and cable address. With the exception of the non-ferrous mineral exploration section, which occupied a separate and distinct portion of the premises, no particular area was set aside for Cliffs' exclusive use. Indeed, except for members of the non-ferrous mineral exploration section, on the evidence, it did not appear that Cliffs had any employees working for it in Perth during the relevant period, apart from Mr Dohnal, who divided his time between C.W.A.M., Cliffs and Cleveland-Cliffs, and his successor, Mr Koontz. The financial statements of Cliffs appear to confirm this. Any necessary services were performed by employees of C.W.A.M., although, no doubt, they were charged out to Cliffs. As it was explained, the tasks undertaken in Perth for C.W.A.M. and Cliffs were performed by the same people.

The Perth office of Cliffs, I am quite satisfied, played a minimal role in the process of negotiating sales contracts. It was the official mailing address, and it was generally the communication centre. Mails, the telex and the telephone, however, played only an incidental role in negotiations, being used mainly for the purpose of arranging itineraries and appointments and on occasions for the clarification of particulars points which arose in the course of negotiations. Even the itineraries had frequently to be modified overseas, after the first leg had been completed. When Mr Dohnal and other representatives went overseas, they had, of course, to take with term certain information from Perth, such as records of shipments and historical information; but that was, no doubt, supplied by the joint venture and, in any case, it was generally reviewed overseas. Much of the necessary technical information came from Cleveland, which was usually visited by Mr Dohnal on his way through to overseas negotiations. Technical information from Japan was normally handed to Mr Dohnal in Japan, where, indeed, he retained a secretary, and was not transmitted to Perth. Cliffs relied heavily upon Japanese information to learn of any quality considerations to learn of any quality considerations which might have been occasioned by operating practices.

Whilst Mr Dohnal and other senior officers of Cliffs were overseas, they were in daily contact with the Perth office, in order to keep in touch with such matters as how production was proceeding, whether shipments were being made on time and whether quality considerations were being met, for all of these matters had to be spoken about with confidence and with assurance to prospective buyers; but to describe it as the Perth office is to conceal rather than to illuminate the position. For these purposes, it would appear that the contact would, of necessity, have been with officers of C.W.A.M. Telexes to participants were sometimes sent from Perth, having been telephoned through from overseas for security reasons.

Although the Overseas Sales Representation Agreements required quarterly reports on Cliffs' activities, with the agreement of the participants, a number of the reporting functions were put into a different form. In particular, Cliffs made informal reports at each meeting of the participants. Further information was disseminated by Cliffs between meetings by telex or by telephone, depending upon the urgency and importance of the subject matter. Pursuant to the agreements, budgets were prepared by Cliffs for marketing and negotiating and for the servicing of sales. Budgets were normally prepared in Perth, although the information which went into them was the culmination of work which was largely performed in places outside Australia.

I turn now to the principal question arising for decision in this appeal. It is whether the commission paid to Cliffs pursuant to cl. 8 of the several World Sales Representation Agreements during the relevant years of income constituted assessable income of Cliffs. This in turn depends upon the source of the commission.

Section 23(r) of the Income Tax Assessment Act 1935 (as amended) (``the Act'') provides that income derived by a non-resident from

ATC 4386

sources wholly out of Australia shall be exempt from income tax. By sec. 25(1) of the Act, the assessable income of a taxpayer, where the taxpayer is a non-resident, includes the gross income derived directly or indirectly from all sources in Australia which is not exempt income. It is accepted by the respondent, as is clearly the case, that Cliffs is a non-resident for the purposes of the Act.

The meaning of the word ``source'' was considered by Isaacs J. in delivering the judgment of the High Court in
Nathan v. F.C. of T. (1918) 25 C.L.R. 183. At pp. 189-190 he observed:

``The Legislature in using the word `source' mean, not a legal concept, but something which a practical man would regard as a real source of income. Legal concepts must, of course, enter into the question when we have to consider to whom a given source belongs. But the ascertainment of the actual source of a given income is a practical, hard matter of fact. The Act, on examination, so treats it.''

The Court there held that dividends declared and received in England by a shareholder from a company incorporated in England and having its registered office and central management and control there, to the extent that they represented a share of the profits of that part of the business which was carried on in Australia, were derived from a source within Australia, that being the real source of production of the dividend.

The Act to which Isaacs J. was referring was the Income Tax Assessment Act, 1915, but his observations are equally applicable to the present Act. Thus, in
F.C. of T. v. Mitchum (1965) 113 C.L.R. 401, Barwick C.J., in whose judgment Menzies and Owen JJ., agreed said:

``It has been said authoritatively that the question as to what is the source of income or whence it is derived for the purposes of the Act is a `hard practical matter of fact' and that the source of income is not so much a legal concept but that which a practical man would regard as the real sources of income, see Nathan v. Federal Commissioner of Taxation (1918) 25 C.L.R. 183, at pp. 189, 190. It would therefore be unlikely that there should be some rule of law which would compel the adoption of a particular conclusion where the facts themselves leave room for more than one view''


``... The conclusion as to the source of income for the purposes of the Act is a conclusion of fact. There is no statutory definition of `source' to be applied, the matter being judged as one of practical reality. In each case, the relative weight to be given to the various facts which can be taken into consideration is to be determined by the tribunal entitled to draw the ultimate conclusion as to source. In my opinion, there are no presumptions and no rules of law which require that that question be resolved in any particular sense.''


This case concerned the actor Robert Mitchum, who spent 11 weeks in Australia in 1959 acting in the film ``The Sundowners'' and advising as a consultant in connection with its production. Remuneration was payable to him under an agreement with a Swiss company by which he had been employed and which had loaned his services to Warner Bros. Pictures Inc., which had in turn loaned his services to Warner Bros. Production Ltd. In answer to questions asked in a case stated, it was held that it was open to the Justice who stated the case, although he was not bound to do so, to hold that portion of the remuneration paid to Mitchum was derived directly or indirectly from a source in Australia, there being no rule that, where work forms the consideration for wages or salary paid, the source of the income constituted by the wages or salary is in the place where the work is done. It was not the province of the Court in that case actually to determine the source of the income of the respondent.

There have been a number of other cases concerning the source of income derived from personal services, the first of which was a decision of the Full Court of this Court,
Watson v. C. of T. (W.A.) (1929) 32 W.A.L.R. 36. The relevant question in that case was whether Watson's profession of an accountant was carried on in Western Australia. It was held that it was, notwithstanding that he had to go out of the State to Victoria to do some of the work necessary to entitle him to his reward. It was further held, with Draper J. doubting, that he had earned nothing in Victoria. In the opinion of McMillan C.J., he simply did work in Victoria which led to his earning money in Western Australia.

ATC 4387

The next significant decision was that of the Full Court of the Supreme Court of New South Wales in
C. of T. (N.S.W.) v. Cam & Sons Ltd. (1936) 36 S.R. (N.S.W.) 544, in which the Commissioner of Taxation claimed wages tax in respect of wages paid by the respondent to men engaged in fish trawling operations, the critical question being whether those wages constituted income derived from a source outside New South Wales. The men were engaged in New South Wales at the ship's side on the morning of each cruise. The trawling was done in the open sea, chiefly off the coasts of New Zealand and Victoria. As soon as the ship berthed in New South Wales on its return from a cruise, the men were paid off. At pp. 547-549 Jordan C.J. said:

``Except in so far as the Statute otherwise provides, the matter is to be determined by the concepts of ordinary people. Now, a source may, and commonly does, consist of several factors. The character of the source may depend upon which of the factors is dominant... In the present instance, for example, in the case of all the men concerned, in a very real sense it may be said that the source of their wages consisted of the three elements of getting the job, doing it, and getting paid for it. Which of these factors is the most important element of the sources in any given case depends upon the facts of that case.

In the ordinary case of the employment of a seaman, such as is now under consideration, where there is nothing special, either in the circumstances of the contract of employment and the payment, and where the work is both done and paid for in the ordinary course, the all-important factor is the doing of the work; and the contract of employment and the payment are relatively insignificant and formal elements. But this is not necessarily so with respect to all wages or salary. In the case of an appointment to a sinecure, the engagement and the payment may be the only significant factors. In the case now before us, the engagement and the payment took place, and part of work was done in New South Wales, but the bulk of it was done outside New South Wales. The source of the wages was thus partly within and partly without the State. It is well established that, where the criterion of liability to tax is derivation from a source in the State, and income is derived from a multiple source, it must be apportioned, and only so much of it as is attributable to the source within the State is liable to be taxed. Whether an apportionment is called for depends upon the facts of each particular case. Apart from statute, it need not necessarily be made by reason merely of the fact that something which is in strictness part of the source occurred in New South Wales. If, in the circumstances, this element is nominal and insignificant, so that it would be impossible to attribute to it more than a nominal amount of the particular head of income, the whole of this income may be treated as in substance derived outside New South Wales. On the other hand, if the extra-State element is a substantially contributing factor, an apportionment must be made...''

In the event, it was held that the respondent's wages should be apportioned in proportion to the wage earning time spent in and out of ``New South Wales territorial waters''.

F.C. of T. v. French (1957) 98 C.L.R. 398, the respondent, a taxpayer resident in New South Wales, was employed by a company as an engineer under an oral contract and his salary was paid monthly into a bank account in Sydney. The company, which was incorporated in New South Wales and registered in New Zealand as a foreign company, sent the respondent to New Zealand and for a short period he did work for it in that country. He then returned to work in New South Wales. The sum payable in respect of the period spent in New Zealand was included without distinction in two normal monthly payments of salary into his Sydney bank account. Dixon C.J., Williams and Taylor JJ. held that the sum paid to the respondent in respect of the period of service in New Zealand was income derived by him from a source out of Australia within the meaning of sec. 23(q) of the Income Tax Assessment Act. McTiernan J. held that it was not so derived, whilst Kitto J. considered that there were insufficient facts to enable the question to be decided.

In agreeing in the reasoning of Williams J., Dixon C.J. observed at p. 405:

``In the first place it is important to notice that Mr French does not occupy an office as for example a director may be considered to

ATC 4388

do. The case is one, at all events we are so treating it, where month by month by doing his work in this or that place the employee earns his salary. It would I think be impossible to say that an ordinary artisan does not earn his pay where he does his work. Doubtless Mr French is by no means an artisan but it is by the same reasoning that his case should be adjudged.''

At p. 411, Williams J., having cited an earlier observation of Dixon C.J. that, ``(t)he common understanding of a contract of employment at wages or salary periodically payable is that it is the service that earns the remuneration...'', went on to say:

``The result is that income may be derived from more than one source where it is derived from trade or business activities carried on in more than one place and may have to be apportioned for the purposes of taxation between the sources. If the principle of these decisions is applied to a contract of employment it would seem to require the conclusion that the locality of the source of the income must be the place where the duties of the employment are performed and that where these duties are performed in more than one place the income is derived from more than one source.''

The Privy Council was concerned, in
C. of T. (N.S.W.) v. Kirk (1900) A.C. 588, with the source of income from sales of ore mined in New South Wales, some of which had been treated in that State and some in South Australia. None of the contracts of sale was made in New South Wales, and none of the purchase money was paid in that State. The Privy Council identified four processes in the earning or production of the income - (i) the extraction of the ore from the soil; (ii) the conversion of the crude ore into a merchantable product; (iii) the sale of the product; and (iv) the receipt of the moneys arising from the sale. All of these processes were regarded as necessary stages which terminated in money. It was considered fallacious to leave out of sight the initial stages and to fasten attention exclusively on the final stage in the production of the income. It was not necessary for their Lordships to apportion the income between the four stages, because the question asked in the special case was, in effect, simply whether the companies earned any part of their profits in New South Wales. It was held that they did.

A similar conclusion was reached by the High Court in
C. of T. (N.S.W.) v. Meeks (1915) 19 C.L.R. 568. In discussing the New South Wales legislation, Griffiths C.J. said, at p. 579:

``The Act uses the word `source' in connection with income to denote a concept to which locality can be attributed. The first question for determination, therefore, is what was the source from which this income was derived. The next question is what is the locality of that source. Without attempting to give an exhaustive definition, I am of opinion that, when a person or company carries on in the State of New South Wales the business of dealing with natural products for the purposes of preparing them for use, or of extracting from them other products, and then disposing of the ultimate product by way of sale, any income arising from contracts entered into in the ordinary course of that business for disposing of those products, wherever the contracts themselves are made, has its source, in part at least, in the business undertaking. In another sense the source may be said to be the capital embarked in the undertaking, which in this case must be very large. In either view there can be no doubt that the locality of the source is the place where the undertaking is carried on, in this case of New South Wales.''

It was not disputed that some of the income might properly be apportioned as deriving from a source outside New South Wales. Indeed, Isaacs J. was of the view that there should be an apportionment. However, no formula for any such apportionment was suggested.

An apportionment of profits as between different localities was not, however, considered to be appropriate under the Dividends Duties Act, 1902 (W.A.) in
C. of T. (W.A.) v. D. & W. Murray Ltd. (1929) 42 C.L.R. 332. There, a company incorporated in England carried on the business of wholesale softgoods warehousemen in Western Australia and in other States. The London head office bought and exported the goods required by its Australian branches. The relevant legislation imposed a duty on profits made in Western Australia by companies carrying on business

ATC 4389

within Western Australia. The High Court, in a joint judgment, said, at pp. 345-346:

``The business of wholesale softgoods warehousemen, which the respondent carries on, depends for its profits or gains upon the sale of softgoods bought or acquired for that purpose. Profits are ascertained by comparing on the one side the amount representing the total of (1) the value of stock on hand at the beginning of an accounting period, (2) the cost of purchases and (3) the expenses of conducting the undertaking in the meantime, with the amount representing (a) the value of stock on hand at the end of the period, and (b) the amount recovered by the sale of the commodities on the other side. This means that the profits are obtained and recovered by selling the goods. In our opinion the place where the whole profit of such a business is made is that where the goods are sold. It is, of course, true that buying the goods is a necessary part of a business of this kind, which derives its profits from selling them. It is also true that skill and judgment in buying are or may be essential to the successful or profitable conduct of the business. But it does not follow that in order to determine where the profits were made it is proper to inquire into all the causes which, in combination or in succession, operated to produce them. If it were possible to discover and discriminate among the innumerable factors which contribute to the profitable exercise of a trade and to assign locality to each of them, still no light would be thrown upon the place where profits were made. To attempt to appraise the relative efficacy or potency of these contributory factors, when and if ascertained, and to distribute the profit accordingly among the localities to which the factors have been assigned, is to lose sight of the true nature of the question, which is not why, but where, the profits were earned.''

The High Court once again considered the problems associated with the identification of the source of income in
C. of T. (N.S.W.) v. Hillsdon Watts Ltd. (1937) 57 C.L.R. 36, the particular question for decision being whether the whole or any part of certain income was taxable as being derived directly or indirectly from any source in New South Wales. The respondent was a wholesale nurseryman and seedsman. It bought certain palm seeds from Lord Howe Island, taking delivery of them in Sydney, where it warehoused and repacked them before selling them overseas on c.i.f. and e. terms. Sales were effected by cables to likely buyers and sometimes unsolicited orders by cable or mail were received by the respondent from buyers abroad. Sales so effected were carried out by shipping in Sydney packages of palm seeds and handing the bills of lading, drafts and other usual documents to its bankers for presentation to the buyers. The bankers rarely discounted the drafts and usually acted as collecting bankers only. It also sold abroad in the same manner nursery seeds and plants produced by it in New South Wales, or occasionally pursuant to offers received in response to catalogues previously distributed by it overseas. It was held that the source of income derived by it from the sale of the seeds and plants was not exclusively in New South Wales.

At pp. 43-44, Latham C.J. stressed, following Kirk's case, that where income is the result of a whole series of operations conducted in different countries and it becomes necessary to determine what are the sources of income, it is a mistake to concentrate on the final stage which actually brings in the money which constitutes the gross income, and he added, at p. 45, that in his opinion it was also a mistake to say that, because the contracts of sale were made in foreign countries, the whole income was derived from sources in those countries. He went on to say:

``Nor am I able to reach the conclusion that the whole income is derived from sources in New South Wales. If the contracts of sale had not been made overseas there would have been no income at all. The existence of an apparently select number of purchasers was the element which made it commercially, worth while to undertake the preliminary work in New South Wales of buying the seed, packing it, and despatching it. It may further be noted that the actual payment of the price was made abroad to the collecting bank in exchange for documents. Some portion of the ultimate profit must be attributed, in my opinion, to foreign sources and some of it to a source in New South Wales.''

ATC 4390

I was also referred to a decision of the Supreme Court of Hong Kong in its appellate jurisdiction,
Commissioner of Inland Revenue v. Hong Kong & Whampoa Dock Co. Ltd. (1960) H.K.T.C. 85, which concerned profits derived by a company carrying on business in Hong Kong from a salvage operation performed largely outside the colony under a contract made outside the colony under a contract made outside the colony. It was held that, although the place where the contract was made was of some importance in determining the place where the profits arose, the place of payment was of no importance. Since almost the entire services which gave rise to the profits were performed outside the colony, the profits did not arise in, or derive from, the colony. Whilst it is to be observed that the relevant legislation then made no provision for apportionment of the income, there is no doubt that, for the Court, the critical factor was the place where the services were performed.

The foregoing decisions clearly demonstrate that there is no simple universal rule which can be applied to identify the source of any particular income. In some cases, particular features may be determinative. In others, they may not. Thus, in C. of T. (N.S.W.) v. Meeks (1915) 19 C.L.R. 568, the place where the relevant contract, from which the income was derived, was made, was of no particular significance, whereas in
Premier Automatic Ticket Issuers Ltd. v. F.C. of T. (1933) 50 C.L.R. 268 and in
Tariff Reinsurances Ltd. v. C. of T. (Vict.) (1938) 59 C.L.R. 194, the position was held to be otherwise - but see
F.C. of T. v. United Aircraft Corporation (1943) 68 C.L.R. 525 per Rich J. at p. 538. The same is true of the place of receipt of the income, as to which see Tariff Reinsurances Ltd. v. C. of T. (Vict.) per Dixon J. at p. 217. In these circumstances, it is scarcely surprising that different minds frequently produce different results - see, for example,
Dickson v. C. of T. (N.S.W.) (1925) 36 C.L.R. 489. In the end, as Bowen C.J. said in
F.C. of T. v. Efstathakis 79 ATC 4256 at p. 4259, ``the answer is not to be found in the cases, but in the weighing of the relative importance of the various factors which the cases have shown to be relevant''.

When the various factors are considered, it is undoubtedly the case that there are a number which point in the direction of the commission having had its source, or at least one of its sources, in Australia. The Overseas Sales Representation Agreements, under which the commission became payable, were made in Australia, and the contracts of sale were executed here by the participants, at least on some occasions, it would seem, after they had been executed by the buyers, although, in the absence of any evidence, as to the mode of notification of acceptance, it does not necessarily follow that even these contracts were made here. The sales of iron ore appear, with one exception, to have been made in Australia, having been made on an f.o.b. basis and it not being questioned that property passed thereunder in the usual way. Payment of the commission, although not of the sale price, was made in Australia, and Cliffs carried on business here.

In further support of an Australian source of the income, it was argued that Cliffs was paid by results, the commission not being paid for its services under the agreements, but for the contracts which were made, admittedly as a result of its services. Negotiations with prospective purchasers were, it was submitted, irrelevant.

The weight of the majority of these factors is unquestionable; but, in the end, I have formed the view that they do not outweigh the remaining factors, and that, as a ``practical, hard matter of fact'', the source of the commission paid to Cliffs was overseas. To the extent to which it is possible for me to put myself in the place of a practical man, I do not believe that he would regard the real source of the income as having been in Australia. Cliffs is a company controlled in the United States, which was engaged by the participants by reason of the expertise which it had, or which was readily available to it, through its parent company, in negotiating sales of iron ore with prospective overseas purchasers. All of those negotiations took place overseas. The great bulk of the technical information which was used by Cliffs in those negotiations came either from the United States or from Japan. By the time that Cliffs had concluded its negotiations and secured offers to purchase iron ore, its work in obtaining contracts of sale effectively was done. All that remained was to submit the offers to the participants for their acceptance, which would appear to have been almost automatic, because the negotiations themselves were conducted within broadly predetermined limits, and, in, some cases, to complete the

ATC 4391

documentation. There is nothing to suggest that any contract submitted for approval to the Australian participants was ever the subject of further negotiations. When the negotiations were concluded overseas the execution of the contracts in Australia was, it seems to me, on the evidence, to have been very much a formality.

No doubt some of the work in connection with sales negotiations was performed in Australia. For example, Cliffs' broad authority must have been determined here, production and shipping information was necessarily obtained in Australia and whilst Cliffs' officers were overseas negotiating with prospective buyers, there was regular contact with the Perth office, and through it with the participants. However, it seems to me not to be without significance that Cliffs was entitled to be reimbursed by the participants for all costs, expenses and liabilities reasonably incurred by it in carrying out and performing all its obligations under the World Sales Representation Agreements. The commission represented a payment over and above the reimbursement of its expenses. That it was a payment essentially in relation to the work performed by Cliffs in connection with negotiating contracts is confirmed by cl. 9 of the agreements which, in the earlier part of the period now in question, expected from commission sales of iron ore where the agreement for the sale was made by the participant without any significant participation by Cliffs in the negotiation thereof, and if prior written proposals or offers or quotations made by Cliffs to the purchaser, or prior direct negotiations by Cliffs with the purchaser, did not contribute in a significant way to such sale.

Nor is it to be overlooked that the commission was payable on sales, rather than on agreements for sale, and it was payable at a particular rate on the realised selling price, that price being realised overseas. This distinction assumes greater significance when it is appreciated that adherence to contracts was the exception rather than the rule in the iron ore trade, thereby placing added importance upon the continuing relationship between the buyers and the participants, that relationship in the present case depending essentially upon the work undertaken overseas by senior persons from, or acting on behalf of, Cliffs.

I have given consideration to the appropriateness in this case of an apportionment of the income between overseas and Australian sources. However, finally, I have reached the conclusion that the extent to which there was an Australian source was minimal, being merely incidental, and not such as to justify any apportionment. It is not therefore necessary to consider whether sec. 42 of the Act might have been capable of being applied. In my opinion, Cliffs is entitled to succeed on this aspect of its appeals, and the commission should be deleted from the assessable income of the company in the relevant years.

There are certain exchange gains and losses directly associated with the commission. Both parties have agreed that they simply follow the event, the losses not being deductible and the gains not being assessable. That appears clearly to be correct.

The next area of dispute relates to certain travelling expenses. The appeal was opened upon the basis that, if the commission constituted exempt income, as I have held, then the travelling expenses were not deductible, as they were incurred by officers of Cliffs in connection with the production of exempt income. However, it became apparent during the hearing that, if the travelling expenses were incurred in relation to the earning of the commission, they were recoverable from the participants under the World Sales Representation Agreements, and that they were not therefore deductible in either event.

It was the responsibility of Mr Dohnal to allocate the travelling expenses. He was unable to say why the expenses, the subject of the objections, had not been allocated to the participants. At one point he indicated that some, at least, of their expenses were recoverable. Indeed, in the end he was unable to explain adequately what the claimed travelling expenses represented. The first question he was asked in re-examination, after he had been recalled, was:

``Would there be any other kind of travelling expenses or would there have been travel to any purpose other than in relation to exploration that would lead to Cliffs International ultimately bearing the burden of travelling expenses?''

He replied:

ATC 4392

``Not to my knowledge other than again it would pertain - for instance, if I was attending a directors meeting of Cleveland-Cliffs Iron Company and asking for further authorisation for exploration activities of Cliffs International, then that we would not consider as a charge under the World Sales Representation Agreement.''

That evidence, which, ultimately, was the strongest evidence upon which Cliffs could rely to sustain its objections is quite inadequate to justify any positive findings as to the nature of the expenditures.

In these circumstances, it is, in my view, impossible to maintain that Cliffs' objections in these respects were not properly disallowed. Nor would it be appropriate to remit these items to the respondent, for it would not simply be a matter of calculation, but of ascertaining the true facts. The burden of proving the assessments to be excessive lies upon Cliffs, and it has not been satisfied in this regard.

The next expenditures, the disallowance of which as deductions has been challenged, relate to Cliffs' share of the cost of the Mitsui Golf Classic. This event was a carefully planned annual function, which was specifically directed to enhancing the relationship between the Robe River joint venture and its customers in Japan, being six of the major steel mills. It was the only formal social function held each year and was carefully adapted to the nature of Japanese business. It was attended by senior executives from Cliffs, whilst Mitsui & Co. was represented by the highest ranking personnel within its iron ore department, together with one of its corporate executive vice-presidents. Each of the mills was represented by its highest ranking purchasing officer and two or three of his subordinates. The day was meticulously planned, so that those whom it was desired to bring together for business reasons were brought together. The day concluded with formal speeches of goodwill and presentations.

The executives of Cliffs did not visit Japan specifically for the purpose of the event. It was arranged at a time when they were undertaking other activities in Japan, such as, for example, paying the requisite courtesy visits to the head offices of mills.

The respondent did not suggest that expenditures on the Mitsui Golf Classic could not have been considered as deductible expenses had they been incurred by the participants. On his behalf, it was argued that the expenditures could not be deducted under either limb of sec. 51(1) and, in particular, that they could not be regarded as outgoings necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, because Cliffs did not carry on a business for the purpose of earning royalties. It had, it was said, simply entered into a contract which enabled it to derive an income from the sale of iron ore. Further, it was suggested that it was difficult to understand the relationship of the goodwill generated by the golf day to the royalties, they being paid by the participants to Cliffs. It was therefore submitted that the relationship between the Mitsui Golf Classic and the sale of iron ore in Japan was a relationship, not with the business of Cliffs, but with the businesses of C.W.A.M. and of the other participants.

The royalties provided the principal source of income for the taxpayer. They were payable under the Cliffs International, Inc. Agreement on every tonne of iron ore produced by or for the participants and sold or shipped for sale for commercial use from the mineral lease area and on iron ore purchased by the participants from Dampier Mining Company Limited under the agreement earlier referred to. I accept the submission made on its behalf that it was clearly open to Cliffs to regard it as being in its financial interests to promote the Robe River project to the Japanese steel mills. The greater the quantity of Robe River iron ore sold, the greater would be its income. Nor, it might be added, is it possible completely to isolate sales of iron ore to the Japanese mills, upon which Cliffs was not entitled to a commission, from sales elsewhere, upon which it was. The success of sales in Japan and the technical information generated there may well be thought to have played some role in assisting negotiations elsewhere. It was all part of the projection of the Robe River joint venture. Furthermore, as was pointed out, the sale of ore in China would appear to have been achieved because Nippon Steel Corporation, the co-ordinator of the Japanese mills and the supplier of the plant for the mill to China, specified Robe River iron ore. However,

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having found the commission to constitute exempt income, this latter point cannot now assist Cliffs.

It does not appear to me that, having entered into a contract in the course of its business, under which it became entitled to royalties, that portion of its business thereafter ceased and that Cliffs should not be expected to do anything to increase those royalties by endeavouring to increase sales of iron ore and to charge the expenses of so doing against its income. The position of Cliffs was very different from that of Ronpibon Tin No Liability in
Ronpibon Tin N.L. v. F.C. of T. (1949) 78 C.L.R. 47, which, at the critical time, was receiving no income whatever from its mining operations. The fact that, had the participants paid the expenses, they would have been entitled to deduct them from their respective assessable incomes does not prevent Cliffs from securing a deduction in an appropriate case. Indeed, in a real sense, their respective positions were no different. Cliffs and the participants all received income from the sale of iron ore to Japanese mills, although the immediate source might have differed. In my opinion, the expenses in relation to the Mitsui Golf Classic are deductible under sec. 51(1), whether they be regarded as having been incidental and relevant to the gaining or producing of assessable income or as having been necessarily (in the sense of clearly appropriate or adapted for) incurred in carrying on its business for the purpose of gaining or producing such income.

The next issue relates to the deductibility of professional fees paid by Cliffs. Those fees related to services rendered in what emerged as three quite distinct areas. The first concerned tax advice and the preparation of tax returns both in the United States and in Australia for certain expatriates, described as ``loaned employees'', the second related to accounting and unrecovered legal expenses incurred by Cliffs in connection with its earlier income tax objections with respect to royalties and to the subsequent appeals, to which reference has already been made, and the third related to professional advice to Cliffs with respect to the impact of withholding tax on the payment of royalties to Howmet Corporation.

As to the first of these areas, Cleveland-Cliffs had established certain guidelines in relation to compensation and personnel policies for United States and Canadian citizens assigned to work in Australia for what were described in the guidelines as construction, exploration and start up operations. It would seem that those guidelines were subsequently extended, at least insofar as the presently relevant section of the guidelines is concerned, into the production phase of the project. Under the heading ``Income Tax and other Government Requirements'', the guidelines provided: ``The necessary details relating to tax administration will be developed for all expatriates. The Company will provide assistance for each expatriate in preparing his U.S. and Australian tax returns.''

Although I am satisfied that the relevant fees were incurred by Cliffs for the services outlined in the guidelines, it is far from clear why they were incurred by that company. Of the ten persons in respect of whom fees were incurred, only four were performing any services directly for Cliffs. In the majority of the cases, it was not even established satisfactorily who any particular person's employer in fact was.

Mr Dohnal's position was that, during the relevant periods, he was a senior executive both of Cleveland-Cliffs and of Cliffs. His salary was allocated between those two companies and C.W.A.M. in the proportions Cleveland-Cliffs 50%, Cliffs 25% and C.W.A.M. 25%. The salary itself was, he said, paid by Cleveland-Cliffs and by Cliffs; but the proportion paid by each was not stated. Nor was it explained why the fees in question were not allocated, as was his salary. An added complication is that, in the case of Mr Dohnal, a major part of his work for Cliffs was directed to the production of what I have held to be exempt income. It appears to me to be impossible in those circumstances to allow the whole of the fee as a deduction from the assessable income of Cliffs, although it may well be that an apportionment of some part of the fee as constituting an allowable deduction would have been appropriate. The evidence before me is quite inadequate to permit me to make any rational apportionment.

The position with respect to Mr Koontz is even less satisfactory. He described himself as an employee of Cliffs, and said that he was paid in the United States ``through'' Cliffs. It was, he said, a term of his working in Australia that the relevant taxation service would be provided by Cliffs. His services in Australia were performed directly for C.W.A.M., with

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which he held positions ranging from executive engineer to vice president and manager of operations. The salaries and overheads of all employees of the Cliffs Group in Australia, including those of Mr Koontz, were allocated on a budget basis prior to the start of each financial year. During the relevant years, according to Mr Paice, the total allocation of the salary and overheads of Mr Koontz was to Cliffs Robe River Iron Associates. If, during a particular year, he performed services for other companies, there would then have been a distribution back to those companies. Thus, some part of his salary and overheads was allocated back to C.W.A.M. Furthermore, Mr Koontz was involved with Mr Dohnal, on behalf of Cliffs, in seeking sales of ore overseas. Mr Dohnal's evidence was that Mr Koontz accompanied him on half of his overseas trips. Accordingly, the question of the expenditure being in part in relation to the production of exempt income once again arises.

The other persons on whose behalf Cliffs incurred fees were Messrs J.K. Mok, D.L. Adair, W.M. Le Clair, J.P. Meyers, F.R. Madden, R.J. Schroeder, O.R. Bell and J.A. Marvin. Mr Mok was the general manager, engineering, of the venture. Mr Adair was the general manager, exploration, research and development. Mr Le Clair was the general manager, operations. Mr Meyers was the general manager, engineering. Mr Madden was the general manager, special projects. Mr Schroeder was the manager, exploration. Mr Bell was the mine manager at Pannawonica, then the general manager, operations, at Cape Lambert and subsequently the general manager, operations in Perth. Mr Marvin was the manager, engineering, on site and later he became the chief project engineer.

The evidence of Mr Koontz was that the loaned employees were paid by Cliffs, and that their salaries and overheads were charged to C.W.A.M. The evidence of Mr Paice, on the other hand, was that, with the exception of Mr Adair and of Mr Schroeder, their salaries and overheads were wholly charged to Cliffs Robe River Iron Associates. It may be that this was simply the result of on-charging by C.W.A.M.; but this was not made clear. As to Mr Adair, Mr Paice said that he had two roles, his primary role being to achieve mineral diversification in Australia for Cliffs and his secondary role being to provide technical and ore evaluation advice to the joint venture. The major part of his salary and overheads was charged to Cliffs and the balance to the joint venture. As to Mr Schroeder, his salary and overheads were sometimes charged to Cliffs and sometimes to the joint venture. Moreover, Mr Paice described the persons concerned as being employees of Cleveland-Cliffs although, in re-examination, he described their employer in Australia as being Cliffs. The basis on which this statement was made was not explored.

In this uncertain state of the evidence, notwithstanding that the fees were paid by Cliffs, it has not been established to my satisfaction that the outgoings were to any particular extent incurred by it in gaining or producing assessable income or were necessarily incurred by it in carrying on its business for the purpose of gaining or producing such income. It may be that the outgoings in relation to Mr Dohnal, Mr Koontz and Mr Adair and possibly Mr Schroeder were to some extent so incurred; but the evidence provides me with no rational basis upon which to determine that extent. It may even be the fact that some or all of the other outgoings were so incurred; but the burden of proving the assessments to be excessive lying upon Cliffs, that burden has not, in my view, been discharged. There is no evidence as to the reasons why Cliffs expended the moneys, the weight of the evidence favouring the view that the persons concerned, with the exception of Mr Dohnal, who appears to have been an employee of both Cliffs and Cleveland-Cliffs, were employees of Cleveland-Cliffs, and the contractual obligation to meet the fees was its. No attempt was made to explore any benefits which might have accrued to Cliffs from these expenditures. There was no evidence showing that the services of the loaned employees were secured by Cliffs and then provided to other companies in the group or to the participants pursuant to any particular contract. Nor is it enough, as was done, baldly to assert that these costs were merely one of the incidental costs of having efficient and appropriate executives in the right place at the right time. That may be, but it was not demonstrated to be so. The mere fact that they were incurred by Cliffs is insufficient to bring them within sec. 51(1).

The next area concerns the accounting costs and unrecovered legal costs, including the cost

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of a transcript, in connection with the earlier objections and taxation appeals, which culminated in the decision in Cliffs International Inc. v. F.C. of T. 79 ATC 4059; (1979) 142 C.L.R. 140, concerning the royalties payable by Cliffs under the agreement for the acquisition of the shares in Basic. The appellant contended that these outgoings fell within the second limb of sec. 51, being expenses necessarily incurred in carrying on a business for the purpose of producing assessable income, and it was argued that they fell into the same category as other incidents in business which are not immediately productive, or at all productive, of revenue, such as audit fees, fees payable to the stock exchange for the listing of a public company and the like. It was said in support of this contention that attention to one's income tax affairs and the scrutiny of claims for income tax are an inevitable and ordinary incident of the carrying on of any business in the same way as other claims, and that, accordingly, they fell within sec. 51 as they flowed necessarily and directly from the conduct of the business and more especially so where the very financial foundation of the business was in question, as it was in the case of the royalties. This was for the reason that, had Cliffs not been successful in its earlier appeals, the consequence would have been that it would have been required to pay out 101% of the royalties received, comprising 50% to Howmet Corporation and to Garrick Agnew Pty. Ltd. in royalties and 51% to the respondent in income tax.

Surprisingly, at first sight, there appears to be no decision of any Australian court on this point, although there are some decisions of Boards of Review, which have all found against the taxpayer in relation to similar claims - see, in particular,
(1951) 2 T.B.R.D., Case B63, and Case F50,
74 ATC 276. It should, however, be observed that, in
F.C. of T. v. Green (1950) 81 C.L.R. 313, at p. 319, the High Court declined to decide whether or not the cost of preparing taxation returns or of advising in relation to taxation liability is a deductible expenditure.

In the end, the answer depends upon whether the principles laid down by the decision of the House of Lords in
Smith's Potato Estates Ltd. v. Bolland (1948) A.C. 508 are applicable to the Income Tax Assessment Act. The question which there arose was whether legal and accountancy expenses incurred by a trader in contesting the amount of an assessment to excess profits tax constituted ``money wholly and exclusively laid out and expended for the purposes of the trade'' within r. 3(a) of the rules applicable to Cases I and II of Sch. D to the Income Tax Act, 1918. It was held by Lord Porter, Lord Simonds and Lord Normand, with Viscount Simon and Lord Oaksey dissenting, that they did not.

In considering the meaning of the expression in the Schedule, Lord Porter said, at pp. 519-520:

``... The widest meaning attributed to it, and that for which the appellants contend is perhaps best expressed by saying that it includes every expense to which the trader is put because he carries on the trade. Were he not a trader, it is contended, he would not have to pay excess profits tax and therefore any expense to which he is put in arriving as its correct figure is wholly and exclusively laid out for the purposes of the trade. Similarly it is maintained that as the law obliges him to pay income tax, his expenses of calculating the balance of profits and gains for income tax purposes are incurred wholly and exclusively for the purpose of his trade, more particularly where the taxpayer is a company which by law is compelled to publish its accounts. In support of this argument it is urged that even the amount available to be put aside as reserve or for distribution in dividends cannot be ascertained until it is known what sum must be provided for excess profits and income tax purposes. The argument, so far, extends only to expenditure incurred for the purpose of finding out what the balance of profits or gains is, but it is said, if the cost of ascertaining that balance by making up the company's accounts is wholly and exclusively laid out for the purposes of the trade, so the expense of ensuring by an appeal to the Board of Referees the correctness of the figure reached is equally wholly and exclusively laid out for that purpose...''

Having referred to the desirability of drawing a distinction between accounts made up on a purely trading basis and those prepared for and accepted by the Inland Revenue and what he perceived as an illogicality in such a practice, his Lordship continued, at p. 521:

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``But no such illogicality has to be faced when the sum which is alleged to be deductible is not the cost of accountants' work in ascertaining trading profits, but the expense of an appeal to the Board of Referees for the purpose of discovering the true measure of profits for tax purposes only. Such expenditure is incurred directly for tax purposes and for nothing else, though it may indirectly affect both the amount available for distribution to the proprietors of the business and that proper to be put to reserve. This is the conclusion which I should have reached if left to determine the question unassisted and unembarrassed by authority. It remains to be determined whether your Lordships' decisions in previous cases throw doubt upon this view.''

A consideration of the authorities led him to conclude that they did not. Then, at p. 523, he said:

``With all respect to the opposing view, expenditure to ascertain the true amount of tax to be paid, whether it be income tax or excess profits tax and whether successful or unsuccessful, is in my opinion incurred, at any rate in part, in order to determine the correct amount of income tax or excess profits tax as the case may be and not in order to earn gain, even though that phrase be given a broad significance. The same conclusion might be reached by saying in the words of this statute that such expense is not wholly or exclusively laid out for the purposes of trade. It is in truth partially, if not wholly, laid out in order to discover what sum is to be paid to the Crown out of the profits or gains, which have already been earned and computed.''

At pp. 526-527 Lord Simonds said:

``... But it is significant that counsel were not able to call to the attention of the House any case in which the appellant's present contention has been put forward. For a long period of years large sums of money have been devoted to the litigation of income tax claims: the most acute minds of the legal and accountancy professions have been at the service of the taxpayer: yet the claim that such money was expended wholly or exclusively for the purpose of the trade appears never to have reached a court of law. The reason is not far to seek: it is that neither the cost of ascertaining taxable profit nor the cost of disputing it with the Revenue authorities is money spent to enable the trader to earn a profit in his trade. What profit he has earned, he has earned before ever the voice of the tax gatherer is heard. He would have earned no more and no less if there was no such thing as income tax. His profit is no more affected by the exigibility of tax than is a man's temperature altered by the purchase of a thermometer, even though he starts by haggling about the price of it.''

This decision was considered by the Supreme Court of Canada in
Premium Iron Ores Ltd. v. Minister of National Revenue (1966) S.C.R. 685. The question which there arose for decision was whether legal expenses incurred by the appellant in successfully contesting a claim asserted by the United States tax authorities were deductible as business expenses. Martland, Hall and Spence JJ., with Abbott and Ritchie JJ. dissenting, held that they were. The legislation there in question was sec. 12(1)(a) of the Income Tax Act, which provided that no deduction should be made in respect of an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from property or a business of the taxpayer.

Abbott and Ritchie JJ. declined to distinguish the instant case from one where it was the Canadian authorities who were levying the tax. They did not regard the expenditures concerned as having been made ``for the purpose of gaining or producing income'', but rather for the purpose of preserving profits already earned by the appellant from a claim made by the United States tax authorities. They held the reasoning in Smith's Potato Estates Ltd. v. Bolland to be applicable.

Martland J., with whom Spence J. agreed on this point, distinguished the House of Lords decision. At p. 705, Martland J. said:

``The Smith case was concerned with legal expenses paid by an English company in England with a view to reducing its liability for tax in England. The effect of the decision is that an expenditure by a trader for legal fees incurred for the purpose of contesting an assessment of income tax cannot, as against the assessor of that tax,

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be claimed as money wholly and exclusively expended for the purpose of the trade. But that is not this case. The expense incurred here was for the purpose of resisting the demands of a foreign taxing authority, which, had it succeeded, would have substantially depleted the income of the Canadian company. In my opinion, a claim of that kind is a claim by a third party. The resistance of the claim is an attempt to protect Canadian income, and it matters not, so far as the Canadian taxing authority is concerned, that the nature of the claim is one for income tax. In so far as the Canadian taxing authority is concerned, I can see no difference, in principle, between an expenditure in the form of legal fees paid by a railway company to defend a damage claim by a passenger, and thus to protect the company's income, and the expenditure for legal fees paid by the appellant to resist a foreign tax claim and thus to protect its income. The former type of expense is admittedly properly deductible.''

Hall J. held that the expenses were deductible, observing that the working capital of the appellant and its profit earning potential were preserved by the rejection of the unjustified demand. Had the claim succeeded, according to certain evidence, it would have taken up nearly all the income of the appellant, leaving it unable to carry out its obligations under a contract or to earn the income needed to sustain its operations. Hall J. concluded his reasons at pp. 724-725:

``In conclusion, as I see it, the expenditures here were ones which under sound accounting and commercial practice would be deducted in the Statement of Profit and Loss as expenditures for the year in determining the profit, if any, of the company for that year. Cattanach J. appears to have placed too much reliance on Lord Simonds' words in Smith's Potato Estates case: `What profit he has earned, he has earned before ever the voice of the tax gatherer is heard.' I think it proper to observe that in each of the years in question before ever the voice of the tax gatherer was heard the expenditures in question had to be made to preserve the income and the working capital from the unwarranted claim of a foreign taxing authority otherwise the Canadian tax gatherer would have called in vain. He would have found an empty treasury and a commercial operation condemned to pay the United States Internal Revenue Service tribute by way of income tax in future years.''

There are two distinctions to be drawn between Premium Iron Ores Ltd. v. Minister of National Revenue and Smith's Potato Estates Ltd. v. Bolland. The first is that the Canadian legislation was slightly wider than the United Kingdom legislation. Secondly, and more importantly, it appears to me that there is a significant difference between expenditures in relation to foreign and to domestic taxes and this was a difference which was stressed by Martland J. I cannot regard Premium Iron Ores Ltd. v. Minister of National Revenue as diminishing in any respect the weight of the House of Lords' decision.

In my opinion, the reasoning in Smith's Potato Estates Ltd. v. Bolland is applicable in the present case. The difference between the United Kingdom and the Australian legislation do not require a different answer. Income tax is not a deductible expense, nor, in my view, are the expenses of determining the taxable income upon which it is assessed. They were incurred by Cliffs merely as a taxpayer in ascertaining the extent of its liability as such. I can find no proper basis for distinguishing the professional fees in relation to the objections and the subsequent negotiations from those in relation to the appeals themselves. All the fees appear to me to fall outside the ambit of sec. 51.

I should, perhaps, add that I do not consider the existence of sec. 69 in the Act to be of any significance in the resolution of this problem. That is a general provision which entitles a taxpayer to deduct expenditure incurred by him for the preparation of a return, irrespective of whether or not he is carrying on a business. Nor do I consider that, the assessments standing, the fact that Cliffs would effectively have had to expend 101% of the royalties it received from the participants in the payment of royalties to Garrick Agnew Pty. Ltd. and to Howmet Corporation and in the payment of income tax can affect the characterisation of the payment. How can it be said that, at 99%, the expenditure is non-deductible, but that at 100% it is deductible?

The final area of professional fees in dispute relates to the professional fees paid by Cliffs in

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relation to advice as to the deduction of withholding taxes from the royalties payable to Howmet Corporation under the agreement for the acquisition of its shares in Basic. In the earlier appeals, it was accepted that similar outgoings incurred in relation to such advice were deductible - see
F.C. of T. v. Cliffs International Inc. 77 ATC 4564 at pp. 4575-4576, 4581-4582, 4588; (1977) 31 F.L.R. 276 at pp. 293, 302-303, 313-314 (Federal Court); 79 ATC 4059 at pp. 4065-4066; (1979) 142 C.L.R. 140 at p. 151 (High Court). Had these expenses been segregated from the other professional fees which I have held on the evidence not to be deductible, they clearly should have been allowed as deductions; but they were not. Nevertheless, the assessment has been demonstrated to be excessive on this ground, and it has been demonstrated to be excessive by reference to decisions in appeals involving the present parties. In these special circumstances, and notwithstanding that the extent to which the assessments have been demonstrated to be excessive has not been proved by Cliffs, and although the amounts are small, I have concluded that this is a proper case in which to remit the assessments to the respondent for the determination of the amounts in question so that they may be deleted from the assessments.

In summary, subject to verification of the figures by the parties, the assessments should be amended by the deletion of the following amounts of commission, taking into account the associated exchange losses and gains, from the assessable income of Cliffs, namely, $484,853 (1975), $396,105 (1976), $397,989 (1977), $243,858 (1978) and $361,873 (1979), by the deduction of the following amounts incurred in relation to the Mitsui Golf Classic from the assessable income, $12,234 (1978) and $4,679 (1979) and by the deletion of the following penalties $4,173 (1975), $9,657 (1976), $9,217 (1977), $16,043 (1978) and $17,646 (1979). In addition, as I have indicated, the assessments will be remitted to the respondent for the determination and deduction of the proper amount in relation to advice given with respect to the withholding tax in relation to Howmet Corporation. The appeals will therefore be allowed to this extent.

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