TANU PTY LTD v FC of T

Judges:
Finkelstein J
Lehane J
Lindgren J

Court:
Full Federal Court

Judgment date: 13 January 1999

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Finkelstein J

The appellant carries on the business of developing exposed photographic film, that is producing negatives from the exposed film, and making prints from negatives. The appellant may be employed by a

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ATC 4158

customer to develop exposed film supplied by the customer and to make prints from the negatives or it may be engaged only to develop exposed films supplied by a customer or to make prints from negatives supplied by a customer. When the appellant undertakes the composite process of developing the film and making prints, the appellant returns the negatives to the customer along with the prints and charges a single fee for the work undertaken and the materials supplied.

2. An excise, known as sales tax, is imposed on the ``taxable value'' of goods when there has been an ``assessable dealing'' in respect of those goods: Sales Tax Assessment Act 1992 (Cth). Table 1 of the Sales Tax Assessment Act sets out the assessable dealings that are subject to sales tax and the taxable value on which the excise is imposed. Relevantly, those assessable dealings include a ``retail sale by a person who manufactured the goods in the course of any business'' where the taxable value is the ``notional wholesale selling price'' of the goods (AD2a) and a ``delivery of customer's materials goods as defined by section 22'' where the taxable value is ``the amount (excluding sales tax) charged by the manufacturer to the customer in respect of the goods'' (AD4a).

3. Section 22 explains the meaning of ``delivery of customer's materials goods''. The section provides:

``(1) This dealing involves assessable goods that are manufactured by a person, in the course of a business, for another person ( `the customer' ) wholly or partly out of materials that:

• (a) were supplied by the customer (or by someone else at the request of the customer); or
• (b) were purchased from the manufacturer by the customer (or by someone else at the request of the customer).

(2) The dealing consists of the delivery of the goods either to the customer or to someone else at the direction of the customer or under an agreement to which the customer is a party.

(3) In this section:

`materials' includes exposed photographic film or cinematograph film that is to be processed or treated so as to produce a negative, transparency or film strip.''

4. The question raised by this appeal is whether sales tax is payable on the delivery by the appellant to a customer of negatives that were produced from the exposed photographic film supplied by the customer under a contract for the development of that film and the making of prints.

5. Before turning to answer this question it is convenient to mention those matters that are not in dispute between the parties. The first is that a print falls within the statutory definition of ``goods'' for the purposes of the Sales Tax Assessment Act : ``goods'' are defined in s 5 to mean ``any form of tangible personal property'' with certain irrelevant exceptions. The second matter that is common ground is that the composite process of producing negatives from an exposed film and the making of prints from those negatives is a process of manufacture: see the definition of ``manufacture'' in s 5; see also
FC of T v Riley (1935) 3 ATD 183 ; (1935) 53 CLR 69 ; FC of T v Butcher (1935) 3 ATD 192; (1935) 53 CLR 82. Thirdly, it is agreed that when the appellant produces prints from exposed film that has been provided to it by a customer, there is a sale of those prints to the customer: Pacific Film Laboratories Pty Ltd v FC of T 70 ATC 4104; (1970) 121 CLR 154. The last matter on which the parties are in agreement is that a sale of prints by the appellant to a customer is an assessable dealing being either a ``wholesale sale by a person who manufactured the goods in the course of any business'' (Table 1, AD1a) or a ``retail sale by a person who manufactured the goods in the course of any business'' (AD2a) dependent upon the circumstances of the sale. This appeal is only concerned with sales by retail.

6. I can now mention those areas where the parties are in contest. The Commissioner, whose submissions were accepted by the trial Judge, contends that the performance by the appellant of its obligations under a composite contract gives rise to two assessable dealings; viz. a retail sale (AD2a) and a delivery of customer's materials goods (AD4a) and that sales tax is payable in respect of each dealing.

7. I have already mentioned that where there is a retail sale (AD2a) sales tax is imposed on the notional wholesale selling price of the goods. In the Notes to Table 1 ``notional wholesale selling price'' is defined to mean

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``the price (excluding sales tax) for which the taxpayer could reasonably have been expected to sell the goods by wholesale under an arm's length transaction.'' I have also mentioned that in relation to delivery of customer's materials goods (AD4a) sales tax is imposed on the amount (excluding sales tax) charged to the customer in respect of the goods. This could be either the retail or the wholesale charge for the cost, labour and expenditure incurred dependent upon whether the customer's materials goods were manufactured in the course of a retail or wholesale transaction.

8. The Commissioner recognises that the policy of the Sales Tax Assessment Act is that sales tax is only to be levied upon one transaction involving goods so that the retail price of goods is not increased by the imposition of more than one tax: see
DFC of T (SA) v Ellis & Clark Ltd (1934) 3 ATD 98 ; (1934) 52 CLR 85 in relation to the Sales Tax Assessment Acts of 1930 that were replaced by the new law.

9. Although the Commissioner argues that two assessable dealings arise out of a composite contract that is entered into by the appellant, he says that the retail price of the prints sold by the taxpayer is not unduly increased by the imposition of sales tax. The reason is, so the argument goes, that in determining the notional wholesale selling price of the prints, no account is to be taken of the cost, labour or expenditure incurred in the production of the negatives. That is to say, the notional wholesale selling price of the prints is to be ascertained by reference only to the cost, labour and expenditure of producing prints from negatives.

10. With regard to the ascertainment of the taxable value of the returned negatives, the appellant does not in fact charge its customer for the ``manufacture'' of those negatives, at least in the sense of allocate a price to the negatives. But it does not necessarily follow that there is no taxable value of the negatives for the purposes of the imposition of sales tax. Section 95 of the Sales Tax Assessment Act provides:

``(1) If there is a need to know the price for which particular goods were sold, but the parties have not allocated a particular amount to those goods, the price for which those goods were sold is (for the purposes of the sales tax law) the price for which the goods could reasonably be expected to have been sold if they had been sold separately.

(2) Similarly, if there is a need to know how much of a global amount relates to some other element of a transaction, but the parties have not allocated a particular amount to that element, the amount to be allocated to that element (for the purposes of the sales tax law) is the amount that could reasonably be expected to have been allocated to that element if that element had been the only subject matter of the transaction.''

The Commissioner says that subsection (2) enables the charge for the negatives to be ascertained by ascribing a portion of the total amount charged by the appellant as the charge for the production of the negatives.

1. The way the appellant puts its case is as follows. Sales tax is assessable on the notional wholesale selling price of the prints. That price must include a component for the production of the negatives. In consequence, if the delivery of the negatives is also an assessable dealing there would be double taxation: the cost, labour and expenditure of producing the negatives would be twice subjected to sales tax. This result is irrational or unintended (that is, it is a result that the parliament did not intend) so that the legislation must be construed to avoid it. As an alternative argument the appellant submits that, on its proper construction, s 95(2) cannot be used to create an ``amount charged'' for the purposes of AD4a when there has been no amount actually charged by the taxpayer for the manufacture of the customer's materials goods and accordingly there is no charge on which sales tax can be levied.

I have set out the competing contentions of the parties for the purpose of highlighting one step in the chain of reasoning of each of them where there is a fundamental disagreement. It is a disagreement the resolution of which will have a crucial bearing on the outcome of this appeal.

The issue is whether, when determining the notional wholesale price (that is the taxable value) of the prints the subject of a retail sale, it is permissible to exclude from that notional price the cost, labour and expenditure that relates to the developing process. The trial Judge held that it was but did not give any reason for his conclusion. If the trial Judge was

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ATC 4160

wrong in that regard but correct in his conclusion that the appellant was also liable to pay sales tax on the taxable value of customer's materials goods (AD4a) then there would indeed be the imposition of double taxation. In that event the question that would arise is whether, on a proper construction of the Sales Tax Assessment Act , double taxation must be avoided.

A convenient starting point for the resolution of these issues is to consider how the taxable value of the prints would have been determined under the replaced Sales Tax Assessment Acts of 1930. The legislative policy of those Acts was explained in detail by Dixon J in Ellis & Clark Ltd , supra. Two aspects of that description should be mentioned. First, sales tax was intended to be levied upon the last wholesale sale of all imported or locally manufactured goods. Second, when there was no wholesale sale of goods, provision was made for sales tax to be paid upon the sale value of goods where there was a retail sale of the goods by the taxpayer or where the goods were treated by him as stock for sale by retail or were applied to his own use. Sales tax was then imposed on the wholesale value of the goods in question.

In this connection reference should be made to s 18(1) of the Sales Tax Assessment Act (No 1) 1930. It provided:

``(1) For the purposes of this Act, the sale value of goods, not being goods to which the next succeeding sub-section applies which are sold by the manufacturer to an unregistered person or to a registered person who has not quoted his certificate in respect of that sale shall be -

• (a) where the goods are sold by wholesale - the amount for which those goods are sold;
• (b) where the goods are sold by retail -
  • (i) if the goods are of a class which the manufacturer himself sells by wholesale - the amount for which the goods would be sold by the manufacturer if sold by wholesale; and
  • (ii) in any other case - the amount for which those goods would have been purchased by the taxpayer from another manufacturer if that other manufacturer had manufactured those goods in the ordinary course of his business for sale to the taxpayer.''

In Commonwealth Quarries (Footscray) Pty Ltd v FC of T (1938) 59 CLR 111 the questions that were raised for determination by the High Court were how the phrases ``the amount for which those goods are sold'' and ``the amount for which the goods would be sold by the manufacturer if sold by wholesale'' were to be applied to the facts of the case. It is not necessary to set out those facts in any detail. Briefly stated, they were as follows. A taxpayer sold goods by retail and wholesale at a published price. The published price varied with the locality where the goods were to be delivered. The issue raised was whether there should be deducted from the price charged an allowance for the cost of carriage and delivery.

In the course of their joint judgment Dixon and McTiernan JJ considered the means by which the notional wholesale selling price of goods sold by retail should be established. They said (at 122):

``If in such a case [ a manufacturer selling by retail] the goods are of a class which he usually sells by wholesale, the sale value is to be the amount for which the goods would be sold by the manufacturer if sold by wholesale.... In the context we should interpret the paragraph [ s 18(1)] as requiring that a sale by wholesale should be supposed with the same terms and conditions as the actual retail sale made, except in respect of price and any other term or condition which would be absent or modified in a sale by wholesale .''

[ emphasis added]

Is there any reason why the same approach should not be adopted in the determination of the notional wholesale selling price of goods under the current legislation? In my view there is no reason. Let me explain.

The primary object of the Sales Tax Assessment Act is not different from the legislation that it has replaced. That object is to impose sales tax on the wholesale value of goods when a particular dealing with respect to those goods takes place. For example, in the case of a wholesale sale by the manufacturer of the goods (AD1a) the taxable value is ``the price for which the goods were sold'': see Table 1. No deduction from this price is contemplated or permitted to determine the taxable value of the goods sold.

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ATC 4161

Consider then the case of a wholesale sale of prints produced from exposed photographic film supplied by a customer. In an ordinary market the manufacturer will recover the cost labour and expenditure of producing the negatives and the prints together with a wholesale mark-up. Is this amount ``the price for which the [ prints] were sold''? In my opinion it is. First, the contract is for the sale of goods (prints) and is not a contract for work and labour: see eg
Lee v Griffin (1861) 121 ER 716 , which was concerned with the making and supply of a set of artificial teeth;
Harvey v McDonald [ 1927] StRQd 50 where the contract was to manufacture and prepare steel parts for a car shed;
Marcel (Furriers) Ltd v Tapper [ 1953] 1 WLR 49 where the contract was to make a mutation mink coat to the special measurements of the customer. Accordingly the consideration that is paid to the manufacturer can only be characterised as the price for the goods sold: it is the amount paid to obtain title. Second, although this might be stating the same proposition in a different way, the production of the negatives is an essential step in and forms part of the process of the manufacture of the prints. Thus, the cost labour and expenditure incurred in that regard is part of the total cost etc incurred in the manufacture of the prints. If the prints are sold but no price is agreed, the purchaser will be required to pay a reasonable price. In that event the cost etc of producing of the negatives will be taken into account in determining the price.

Assessable dealing AD2a is concerned with a retail sale by the manufacturer of the goods. Here there is no wholesale price charged and accordingly the taxable value of the goods is the ``notional'' wholesale selling price. But it is the notional wholesale selling price that would be charged by the manufacturer of the goods in question, that is, the price that the manufacturer would have charged if the transaction was a wholesale sale. Provided the supposed wholesale sale is on the same terms and conditions as the actual retail sale, the manufacturer, now a deemed wholesaler, would charge a price to derive a reasonable (wholesale) return for the cost, labour and expenditure incurred in all steps in the process of manufacture undertaken by him. It is only on this basis, which appears to me to be the correct basis to adopt, that the taxable value of goods sold by retail will be their true wholesale value; the taxable value will also be substantially the same as the taxable value of the same goods if sold by wholesale. Of course, market forces such as the demand for goods, the nature of competition that exists in a particular market and so on, may produce some differences in the wholesale selling price but that does not affect the general principle.

11. It would be both anomalous and unjust if, in the case of a retail sale by a manufacturer, some part of the manufacturing process could be ignored for the purpose of determining the taxable value of the goods sold and the same position does not apply to the case of a wholesale sale of the same goods. It would be anomalous because there is no reason in principle why the manufacturer of goods who sells by retail should be treated differently from a manufacturer of goods who sells by wholesale. It would be unjust because the taxable value of the goods in question, and therefore the amount of sales tax levied in respect of those goods, will be different. Such consequences should be avoided unless the language of the statute clearly mandates that result.

12. I should say that I have given consideration to a possible construction of the legislation not put forward by the Commissioner but one that would avoid double taxation and support the result for which he contends. The argument is that when one dealing with goods can give rise to two or more assessable dealings (eg AD2a and AD4a) then the taxable value of one of those dealings (eg AD4a) should be deducted from the taxable value of the other dealing (eg AD2a). For such a construction to be adopted it would also be necessary to imply that it is the lowest taxable value that should be deducted from the highest taxable value so that sales tax will be levied upon a value that would approximate the true wholesale value of the goods in question. But, in the end, I can not see any justification for this construction. It would require, by a process of construction or implication, the making of significant amendments to various of the definitions of taxable value appearing in Table 1 and it is by no means apparent to me precisely how those amendments should be formulated so that they would operate sensibly in all cases.

13. Accordingly, I am of the view that the premise upon which the trial Judge has based his decision is false. The taxable value of the

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ATC 4162

prints, if sold by retail by the appellant, is the notional wholesale selling price of those prints determined by taking into account all aspects of the process of manufacture undertaken by the appellant.

Now it is necessary to consider whether the appellant is also liable to pay sales tax on the delivery of customer's materials goods (AD4a). The Commissioner's case is that, however anomalous this position may be, it is what the legislation requires notwithstanding that it is the object of the legislation to impose sales tax on only one dealing with respect to goods manufactured in or imported into Australia. The Commissioner says that this anomalous result can only be cured by the parliament.

I do not agree. It is the obligation of a court of construction to determine what parliament intended by its legislation so that the legal consequences of what was intended can be put into effect. When legislation uses clear language generally there will be no difficulty. The legislation will be taken to mean what it says. However there are many circumstances where it is appropriate to depart from the literal language of a statute when it is apparent that to give effect to the literal meaning is not to give it its intended operation.

Importantly, a court of construction will seek to avoid absurd or unjust consequences that would follow from the literal reading of a statute. It does so on the basis that it is unlikely to have been the intention of parliament that its statutes should give rise to absurd or unjust consequences:
Mills v Meeking (1990) 169 CLR 214 at 242 ;
Cooper Brookes (Wollongong) Pty Ltd v FC of T 81 ATC 4292 at 4295; (1981) 147 CLR 297 at 304 . In that circumstance the court is entitled to remedy the situation by a strained construction of the words used, or by the addition of words, or by the omission of words:
Saraswati v The Queen (1991) 172 CLR 1 at 22 .

In my view, the unintended imposition of double taxation can be avoided in one of two ways. The first is by excluding as an assessable dealing any dealing in goods where the taxable value of those goods is brought to account as one component in the ascertainment of the taxable value of goods for the purpose of another assessable dealing. To achieve this result would require an implication to be made or, perhaps, but not necessarily, the addition of words to the legislation to avoid the unintended effect that I have identified. The second method is to confine the operation of s 95(2) to those circumstances where double taxation will not be imposed. That is to say, s 95(2) applies when there is ``a need to know'' how much of a global amount relates to some element of a particular transaction and there is no ``need to know'' what the amount is in a case where, if that amount is ascertained, double taxation will be imposed. It seems to me that either approach is permissible and will produce the required result in this case.

For the foregoing reasons I would allow the appeal, set aside the declaration and orders made by the trial Judge and in lieu thereof would make the following declaration and orders:

• 1. Declare that in respect of the contracts referred to in the statement of claim the delivery of negatives by the appellant to its customers is not an assessable dealing under Table 1 of Schedule 1 to the Sales Tax Assessment Act 1992.
• 2. The respondent is to pay the appellant's costs of the appeal and of the hearing below.

THE COURT ORDERS THAT:

1. The appeal be dismissed.

2. The appellant pay the respondent's costs.