WEA Records Pty. Ltd. v. Federal Commissioner of TaxationJudges:
The applicant, WEA Records Pty. Ltd., (``WEA'') has appealed against the decision of the Commissioner on its objection to assessment of sales tax and penalty on recorded video cassettes sold by WEA by wholesale during the period 1 June 1984 to 30 June 1985. The issue apparently arose because WEA sold recorded video cassettes to an organisation which, unbeknown to WEA, not only hired out video cassettes to franchisees but
ATC 4781also sold them by retail. The following two questions, the subject of the present judgment, have been set aside to be decided separately from any other questions arising in the proceedings:
- 1. Whether on the evidence before the Court the duplication of video cassettes by either or both of Videocopy Pty. Ltd and Image Concepts Pty. Ltd. during the period 1 June 1984 to 30 June 1985 constituted the ``manufacture'' of goods within the meaning of sec. 3(1) of the Sales Tax Assessment Act (No. 1) 1930-1985?
- 2. Whether, if the answer to question (1) is in the affirmative, the applicant was, in the circumstances of the case, deemed to be the manufacturer of such goods by virtue of the definition of ``manufacturer'' in sec. 3(1) of the Sales Tax Act (No. 1) 1930-1985?
As part of its business, WEA supplies pre-recorded or duplicate video cassettes to video rental stores. At the relevant time, WEA traded as Warner Home Video (``WHV''). Until June 1984, WEA hired duplicate video cassettes to the stores but from 1 June 1984, WEA sold the cassettes to the stores.
WEA obtained from its American parent master tapes of particular movie titles. Each master tape comprised large reel-to-reel one inch tape. Copyright in the master tapes was owned by the American parent and WEA was a licensee. During the period 1 June 1984 to 30 June 1985, WEA arranged for the duplication first by Image Concepts Pty. Ltd. (``Image'') and later a company associated with Image, Videocopy Pty. Ltd., of video cassettes. It is sufficient to refer to the arrangements with Image. Only one written agreement was executed, that with Image dated 9 April 1984. Subsequent arrangements adopted that written agreement as their basis. WEA advised Image from time to time as to the video cassette titles it proposed to release and placed order forms for the number of duplicate video cassettes required. In some instances, the master tape of a particular video cassette title would be held by Image. If this was not so, the master tape would be delivered by WEA to Image. WEA would also deliver to Image centre and spine labels to be placed on the recorded video cassettes, and sleeves for insertion in the packaging cases. Image purchased the blank cassettes and the cases from another source.
Each master tape supplied by WEA contained blank tape at the beginning and at the end so as to enable trailers or previews of forthcoming releases and the like to be recorded. The trailer masters were also provided by WEA.
From the master tapes, a master video tape called a ``configured master'' was prepared by Image and, from the configured master, duplicate video cassettes were recorded. Test duplicate video cassettes were recorded first and examined to ensure quality. A test duplicate video cassette would be sent to WEA. Assured of the quality, the configured master would be placed on a relay machine. Blank video cassettes were placed into approximately two hundred ``slave machines''. The process of duplication then took place. Once completed, the duplicate video cassettes were labelled and packaged. Labelling and packaging were undertaken manually.
Mr K.F. Mooy, a chief engineer in the field of video recording, described the duplication process as follows:
``3. The duplication process comprises magnetic reorientation of the magnetically sensitive particles present on the surface of the video tape. Other than for such magnetic reorientation there occurs no physical change or alteration to the blank video tape.
4. The tape utilised in video cassette tape is physically constituted by an oxide coating bonded to a backing material. Magnetically sensitive particles are contained in the oxide coating.
5. During the duplication or dubbing process, as it occurs on a typical VHS and Beta video cassette recorder:
- (a) the video tape is wound through the cassette case from the supply reel on one side, via the capstan and pinch roller and related items in the transport path, to the take-up reel on the other side;
- (b) as it is wound through it passes over a stationary erase head. An electric current passing through the erase head creates a magnetic field; as the tape passes through the magnetic field the magnetic signal (if any) previously recorded on the tape is erased;
- (c) the tape next passes over the rotating recording head. An electric current
ATC 4782passing through the video recording head creates a magnetic field. As the tape passes through the magnetic field a recording signal is recorded by the magnetically sensitive particles being magnetically oriented in a specific way;
- (d) the tape next passes over the fixed audio and control head. By the same means as described in para. (c), an audio and control signal is recorded on the tape.''
The blank video cassettes used by Image contained lockout tabs or what are more commonly called ``lugs''. Lugs enable recording or dubbing. Once the material on the configured master was recorded on to the video cassettes, the lugs were punched out. This acted as a protective device so as to avoid accidental recording over the material on a video cassette. To enable redubbing, the indentation left by the removal of the lugs could be covered. This could be done by the use of adhesive tape. Mr Mooy and Mr A. Byron, a former director of Image, both gave evidence that the Konica video cassettes mostly used by Image could be re-recorded up to 50 times. Mr Byron, however, stated that the policy was that they would not be re-recorded more than three times. Thus, an unpopular title could be erased and redubbed with another title.
The first issue to be determined is whether the duplication process was one whereby goods were manufactured for the purposes of the Sales Tax Assessment Act (No. 1) 1930 (Cth) (``the Act''). Section 3(1) of the Act at the time read inter alia:
```Manufacture' includes -
- (a) production;
- (b) the combination of parts or ingredients whereby an article or substance is formed which is commercially distinct from those parts or ingredients, except such combination (not being a combination whereby concrete, cement mortar, lime mortar or any similar preparation of a kind used in the construction, repair or maintenance of buildings or other structures is formed, or whereby any other prescribed article or substance is formed) as, in the opinion of the Commissioner, it is customary or reasonably practicable for users or consumers of those articles or substances to undertake; and
- (c) any treatment applied to foodstuffs as a process in the preparation of the foodstuffs for human consumption;
`Manufacturer' means a person who engages, whether exclusively or not, in the manufacture of goods, and includes a printer, publisher, lithographer or engraver, and a person (not being an employee) who manufacturers goods, whether or not the materials out of which the goods are manufactured are owned by him, but, where one person manufactures goods for another, wholly or in part out of materials supplied by that other, and the goods are not for the use of, but are for sale by, that other, the person supplying the materials shall be deemed to be the manufacturer, and the person who so manufactures the goods shall be deemed not to be the manufacturer;''
The legislation has since been amended in several respects by Act No. 99 of 1986 and now includes, inter alia, in the definition of ``manufacture'', the following:
``(f) the copying or reproduction of visual images or sounds, or visual images and sounds so as to embody the images or sounds, or images and sounds, as the case may be (whether in the same material form in a different material form) in goods (including goods and commodities of the kind referred to in paragraph (a) of the definition of `Goods'),''
Mr D. Bloom Q.C., with whom Mr B. Sullivan of counsel appeared for WEA, submitted that the duplication process was one not of manufacture or production, but of treatment. He submitted that the process did not physically alter the cassettes but merely effected a magnetic reorientation of the magnetically sensitive particles on the surface of the tape, that this process was a process of treatment and treatment was mentioned in para. (c) of the definition only in relation to foodstuffs. Mr Bloom submitted that Parliament recognised the necessity to widen the definition of ``manufacture'' when it passed the 1986 amendment.
However, the term ``manufacture'' in the sales tax legislation has a wide operation as the definitions of ``manufacture'' and ``manufacturer'' show and its denotation is well understood. In
F.C. of T. v. Rochester (1934) 50 C.L.R. 225 at p. 227, Dixon J. advised that:
``... we follow the method laid down in
Adams v. Rau (1931) 46 C.L.R. 572 and
Irving v. Munro & Sons Ltd. (1931) 46 C.L.R. 279 and simply apply the terms used in the Act as they are ordinarily applied in English speech...''
F.C. of T. v. Jack Zinader Pty. Ltd. (1949) 78 C.L.R. 336, a furrier company received from customers fur garments too badly worn or damaged to be repaired and remodelled the garments into coats, capes and stoles. Dixon and Williams JJ., Webb J. dissenting, held that the remodelled articles were manufactured goods. Dixon J., at p. 343, stated that the test to be applied was that formulated by Darling J. in
McNicol v. Pinch (1906) 2 K.B. 352:
```The essence of making or of manufacturing is that what is made shall be a different thing from that out of which it is made'...''
At p. 350, Williams J. said:
``Work which could be fairly described as a mere repair or modification of the goods would not affect their original character. But once the work done causes the goods to lose this character, they become goods within the meaning of the Act.''
M.P. Metals Pty. Ltd. v. F.C. of T. (1968) 117 C.L.R. 631, Windeyer J., at first instance, said at p. 638:
Federal Commissioner of Taxation v. Jack Zinader Pty. Ltd. (1949) 78 C.L.R. 336, at p. 343 (a case under the Sales Tax Acts), Dixon J. quoted a statement by Darling J. in McNicol v. Pinch (1906) 2 K.B. 352, at p. 361 that `the essence of making or of manufacturing is that what is made shall be a different thing from that out of which it is made'. That is indisputable. But what is a different thing? Various paraphrases were offered to me, such as a `substantially different thing', not merely an `altered thing'; `a new entity'; `a distinct commodity'. But these are all pregnant with ambiguity. Identity and difference, as concepts, must always be related to some quality of the thing or things in respect of which identity or difference is to be determined. It may be colour, shape, chemical composition or any other quality. To speak of `substantial differences', as distinct from small differences, means little or nothing, unless some quality of the thing is postulated as its essential. And whether a thing is so different a thing from the thing or things out of which it was made as to be properly described as a new commodity may depend not only upon physical characteristics but also on differences in its utility for some purpose.''
These principles have oft been cited and applied. Thus, in
F.C. of T. v. Jax Tyres Pty. Ltd. 85 ATC 4001. Lockhart J. said at p. 4004:
``The definition of the word `manufacture' in the Act is not exhaustive. When the word `includes' is used in a definition section it is generally used to enlarge the meaning of the word it defines. So far as its meaning is not defined in the relevant statute it must be given its ordinary meaning.
It is not possible to formulate precise definitions of such general terms as `manufacture' and `production'; but they do not bear a restricted meaning. Whatever answers the description of `manufacture' or `production' of goods according to accepted usage of the English language is within the Act.''
Sheppard J. stated that the test to be applied concerns the result of the process and not the process itself. At p. 4009, his Honour said:
``I can understand that some may think that the process here is characteristically a manufacturing process. It has the hallmarks of it. But that looks only to the operations which are carried on and the machinery and other equipment which is used. It seems to me clear from the way the matter was approached by Dixon J. that the fact that a process may characteristically be a manufacturing process is not the determining factor. The critical question is always that earlier stated by his Honour when adopting what was said by Darling J. in McNicol v. Pinch (supra). What is made must be a different thing from that out of
ATC 4784which it is made; otherwise there is no manufacture.''
In my opinion, the duplication process undertaken by Image and Videocopy brought into being a commodity which was different from the blank cassettes on which the videos were recorded. A cassette adapted to take a video recording is one thing. A cassette containing a video recording is another, as Mr Byron recognised in his evidence. The commodities are different because the video recording, which is the predominant feature of the one, is absent from the other. The process whereby this occurs is not mere treatment but production and, to my mind, manufacture, using that term in its ordinary sense.
Mr Bloom submitted that the contract between WEA and Image was one for the supply of skilled services rather than a contract for the sale of goods. The written contract of 9 April 1984 contained, inter alia, these terms:
- (iii) IMAGE CONCEPTS shall during the term hereof:
- (a) duplicate and supply to WHV or its nominee duplicated videocassettes as WHV may from time to time order from IMAGE CONCEPTS to be produced from masters as delivered by WHV.
- (b) comply with and satisfy orders for duplicated videocassettes and deliver the same to WHV or to its nominee at such period or periods as agreed upon between the parties from time to time.
2. DUPLICATION AND FACILITIES
- (ii) IMAGE CONCEPTS will use separate video and audio input connections on all videocassette recording equipment used for duplication work for WHV and will not under any circumstances use RF connections.
- (iii) IMAGE CONCEPTS will record a minimum of 30 seconds but not more than 60 seconds black at the beginning of each videocassette prior to the start of the programme material and a further 60 seconds black following the end of the programme material.
- (iv) IMAGE CONCEPTS will not record on to the videocassettes any copies of any test signals and clocks recorded on the master tape.
- (v) IMAGE CONCEPTS will record on to the beginning and the end of each videocassette any company logo, sequence or promotional material as requested by WHV from time to time without any additional cost to WHV. There will be a small `once up' charge to make up a master tape of the appropriate copyright warning notices and Company logo payable by WHV.
- (vi) Immediately any master is received by IMAGE CONCEPTS that master is to be fully tested and a complete, detailed technical report is to be furnished by IMAGE CONCEPTS to WHV together with two (2) VHS samples of each programme. The cost of such samples to be payable by WHV will be the duplication fee and cost of raw stock as set out in the attached Schedule C.
- (i) IMAGE CONCEPTS will use its best endeavours to ensure that all packaging of WHV's duplicated videocassettes is executed in an efficient manner and in particular that self adhesive labels are affixed neatly to the videocassette and that inlay wraps are inserted into WHV's cases uniformly.
- (ii) IMAGE CONCEPTS will account to WHV for every item of packaging used on WHV's duplication work including videocassette cases, inlay wraps, copyright and spine label and in particular WHV's security stickers.
- (iii) IMAGE CONCEPTS will package duplicated videocassettes into cartons as agreed to by WHV in separate VHS and Beta format sizes and will then seal those cartons and mark the external faces of the cartons with the catalogue number and quantity contained therein.
- (i) IMAGE CONCEPTS invoice pertaining to duplication work for WHV will state catalogue number, title of material, quantities of videocassettes duplicated by format, WHV's relevant purchase order number, IMAGE CONCEPTS relevant delivery advice note number(s) and the appropriate duplication rate. Raw stock charges should be included as a separate entry.
- (ii) The duplication rates chargeable as detailed on the attached Schedule C shall include all expenses incurred by IMAGE CONCEPTS in the duplication, quality control, packaging and delivery of videocassettes.
- (iii) WHV undertakes to pay the full invoiced amount within thirty (30) days from date of each invoice and all such invoices to be with WHV by the last Friday of each month.
- (iv) It is understood that IMAGE CONCEPTS will collect and remit any sales tax that may be applicable.
Stock purchased direct by IMAGE CONCEPTS for WHV are to be supplied at cost plus 12% for finance, handling and storage. Current prices, including the 12% surcharge, valid for 12 months for top quality cassettes is as follows:
(Not set out)
A flat fee of $2.50 per videocassette will apply to all lengths subject to a minimum quantity order of 100 units per title covering both formats.
For orders to 100 units covering both formats a 10% surcharge on the above fee will apply.''
This present case is unlike Adams v. Rau & Anor (1931) 46 C.L.R. 572, in which Gavan Duffy C.J., Starke, Dixon, Evatt and McTiernan JJ. held that shorthand writers, when they produced transcripts, did not engage in the manufacture of goods within the meaning of the sales tax legislation. More relevant is
F.C. of T. v. Riley (1935) 53 C.L.R. 69, in which Rich, Starke, Dixon and McTiernan JJ., Evatt J. dissenting, held that photographs taken of and supplied to clients in the course of a photographer's business were manufactured goods. Rich, Dixon and McTiernan JJ. said at pp. 78-79:
``... there are many vocations and pursuits in the exercise of which physical things incidentally come into existence, and become the property of the client or customer, although the essential character of the work is the performance of skilled services and not the supply of things...
The end of the organized business of a portrait photographer is to produce as many copies of a picture as his customer will buy, and to sell them to him with a view to profit. It differs from many other productive arts in the fact that its products must be designed in each case for one individual, and in its attempt to secure some aesthetic value. But it is a process practised commercially to produce an article which will be bought.''
F.C. of T. v. Butcher (1935) 53 C.L.R. 82;
Dominion Press Ltd. v. Minister of Customs & Excise (1928) A.C. 340.
In my opinion, the contract between WEA and Image was not one for the performance of skilled services but for the supply, by an organisation skilled in the art, of duplicate video cassettes. The fact that the blank cassettes were purchased from another source is a sufficient illustration of the point.
I shall therefore answer question one - Yes.
The second question is whether WEA was deemed to be the manufacturer of such goods by virtue of the definition of ``manufacturer'' in sec. 3(1) of the Act.
The respondent's amended statement of facts, issues and contentions sets out the following:
``3. The applicant during the period from 1 June 1984 to 30 June 1985 inclusive made available to two or more duplicators master
ATC 4786video cassette recordings (`the master tapes').
5. The applicant supplied the duplicators with materials, namely spine and centre labels.
6. The duplicators used the master tapes to produce copies of video cassette recordings.
7. Video Copy Pty. Ltd. and Image Concepts Pty. Limited (and possibly other duplicators) affixed labels to the video cassette tape cartridges that they duplicated for the applicant.
8. The applicant purchased the packaged copies of the video cassette recordings from the duplicators.''
Mr C. Stevens, counsel for the Commissioner, argued that the goods supplied by WEA to Image were the centre and spine labels and the master tape. However, as Mr Bloom submitted, it appears from the respondent's amended statement that it was not contemplated as an issue that the master tape itself was material out of which the duplicate video cassette was manufactured. Paragraph 5 of the amended statement uses the word ``supplied'' and ``materials''. It seems to me that para. 6 and 7 merely form part of the description of what occurred. Thus, I reject the reference to the master tapes.
Davies Coop & Co. Ltd. v. F.C. of T. (1948) 77 C.L.R. 299, Dixon J. said at p. 317:
``What goes into a manufactured article and forms part of its substance is sold as part of it so to speak, and then bears sales tax in its manufactured form and for the first time.''
Thus, to be material out of which the goods were manufactured, the centre and spine labels must form part of the substance of the duplicate video cassettes.
D.F.C. of T. v. Australian Safeway Stores Pty. Ltd. 85 ATC 4276, a machine known as the Valuematic System, was alleged to be exempt from sales tax as an aid to manufacture. In the meat department of Safeway supermarkets, meat was delivered daily in carcass form, then trimmed or treated and if necessary cut into portions. Each portion was placed in a plastic tray and was put through a shrink-wrapping machine which placed plastic wrapping over the meat and tray. Each package was conveyed to the Valuematic machine where the weight and price was recorded and printed on to a label with the date, type of meat, weight, price per kilogram and retail price. A label was then affixed to the packaged meat by another machine. Gray J., when considering the process, said at p. 4283:
``But if one takes the view, as I do, that the subject matter of the manufacture is meat or meat products, then a line has to be drawn at the point where the manufacture is complete and the marketing phase begins. I accept Mr Larkin's proposition that the very latest point to which the manufacturing phase can be taken is when the wrapped product emerges from the shrink-wrapping tunnel. The product is then complete as a marketable commodity. The activities of Safeway thereafter are concerned with the marketing of the product, including the compliance with any relevant laws.''
Australian Safeway Stores Pty. Ltd. v. D.F.C. of T. 86 ATC 4406, the Full Court of the Supreme Court of Victoria affirmed Gray J.'s decision. Beach J. at p. 4413 said:
``In my opinion the labelling of the packaged meat forms no part of its processing or treatment, nor does it serve to maintain the packaged meat in the form or condition in which it is marketed.
Once the packaged meat leaves the shrink-wrapping tunnel it is in its final form and condition. The subsequent affixing of an adhesive label to it does nothing to alter that form or condition.''
The function of the centre label on the duplicate video cassette is threefold. First, it identifies the movie title on the duplicate video cassette, secondly, it provides a copyright warning and thirdly, it provides the censorship identification. In my view, the centre and spine labels were not materials out of which the duplicate video cassettes were manufactured. The labels did not form an integral part of the duplicate video cassettes. The cassettes could be played and their visual images produced whether the duplicate video cassettes were labelled or not. The label assists in identifying the movie title recorded on the video cassette and, to adopt the words of King J. in the Safeway Stores case (at p. 4412) ``[t]he labels are applied... to facilitate the marketing of the
ATC 4787manufactured goods and not to complete their manufacture''. The process of manufacture ceased when the recording from the configured master to the video cassettes in the slave machines was completed.
Thus, WEA is not deemed to be a manufacturer by reason of the definition in sec. 3(1) of the Act.
In these proceedings it was not suggested that, on those occasions on which recorded video cassettes were sold back by WEA to the duplicator to be re-recorded, the supply of the tapes themselves constituted material out of which the goods were manufactured. Therefore I need not consider this issue.
I would answer the questions as follows:
- 1. Yes.
- 2. No.
I direct the parties to bring in short minutes of order within 14 days dealing with the whole of the proceedings and the costs thereof.
THE COURT ORDERS THAT:
The parties bring in short minutes of order within 14 days dealing with the whole of the proceedings and the costs thereof.