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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Lehane J

This appeal from a decision of a judge of the Court (Hill J) [ reported at 98 ATC 4419; (1998) 154 ALR 102] has to do with the sales tax consequences of contracts by which the appellant taxpayer agreed, for a global price, to develop its customers' photographic film and to make prints from the resulting negatives. The primary judge made a declaration in the following terms [ at ATC 4432; ALR 118]:

``The Court declares that, in respect of each of the contracts..., sales tax is payable at the time of delivery of the negatives of the respective customer by reference, in the case of negatives to a charge for developing apportioned in accordance with s 95 of the Sales Tax Assessment Act 1992 and, in the case of prints, by reference to a notional wholesale selling price of those prints excluding therefrom developing charges.''

2. The taxpayer's primary contention is that there should be no such apportionment; the entire contract should be regarded as one for the manufacture and sale of the prints, the entire sum paid by a customer being properly characterised as the price paid on a retail sale of the prints. The taxpayer propounds an alternative case: if the Court were to hold that the price should be apportioned, the taxpayer would be entitled to a credit equal to the amount of the sales tax on that part of the price apportioned to the developing of the film.

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ATC 4153

Film processing

3. It is unnecessary to describe in detail the way in which the taxpayer deals with its customers' film. It is common ground that the processes involved are those described in some detail by Hill J in Genex Corporation Pty Ltd & Ors v Commonwealth of Australia & Anor 91 ATC 4564 at 4567; (1991) 30 FCR 193 at 195, 196. In broad terms, developing and printing are performed separately in machines designed for those purposes. Exposed film is subjected to a series of chemical processes to produce the developed negatives. Printing involves the projection on to light sensitive paper of the image recorded on a negative and then subjecting the paper to a series of chemical processes. The negatives and the prints are then placed in wallets which are placed in turn in bags, to await collection by the customer. They are delivered to the customer on payment of the global price.

The legislation

4. The appeal involves the construction and application of a number of provisions of the Sales Tax Assessment Act 1992 (Cth) (the 1992 Act).

5. Section 16 of the 1992 Act provides what its heading describes as ``general rules for taxing assessable dealings''. Sales tax is calculated by reference to the taxable value of a taxable dealing; a taxable dealing is an assessable dealing to which no exemption applies; Table 1 in Schedule 1 to the 1992 Act describes those dealings which are assessable dealings and specifies the person liable to pay the tax, the time at which the tax is payable and the ``normal taxable value''.

6. Two kinds of assessable dealing are relevant for the purposes of this appeal. One is item AD2a in Table 1, described as ``retail sale by a person who manufactured the goods in the course of any business''. The person liable to tax in respect of such a dealing is the seller, tax becomes payable at the time of sale and the normal taxable value is ``the notional wholesale selling price'': that expression, in turn, is defined in note 2 at the foot of Table 1 as meaning ``the price (excluding sales tax) for which the taxpayer could reasonably have been expected to purchase the goods by wholesale under an arm's length transaction''.

7. It may be interpolated at this point that it is common ground that the sale of the prints is an assessable dealing of that type. There is, however, an issue between the parties as to whether the notional wholesale selling price is to be calculated by reference to the whole, or only to a part, of the global retail price charged to the customer.

8. The other kind of assessable dealing in question is AD4a, described as ``delivery of customer's materials goods as defined by section 22''; the person liable in respect of such a dealing is the manufacturer, the tax becomes payable at the time of delivery and the normal taxable value is ``the amount (excluding the sales tax) charged by the manufacturer to the customer in respect of the goods...''. The description of that category of assessable dealing refers the reader to s 22 and, in turn, to the definition of ``manufacture'' in s 5. That definition includes:

``(d) processing or treating exposed photographic film... so as to produce a negative...;''

Section 22 provides:

``22(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...

22(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.

22(3) In this section:

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

9. The Commissioner contends, and the primary judge held, that the delivery of the negatives (with the prints) to a customer under one of the contracts in question is an assessable dealing of that kind. The taxpayer contends that it is not. It is common ground - inevitably given the terms of the provisions - that if the taxpayer contracted with a customer only to develop the customer's film (not, additionally, to make prints from the negatives) the delivery of the negatives would be an assessable dealing within category AD4a.

10. The basis of the decision of the primary judge, upholding the contention of the

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Commissioner that the global price might be apportioned, was s 95(2). It is necessary to set out s 95 in full. It is headed ``apportionment of global amounts'' and provides:

``95(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.

95(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.''

11. If apportionment under that provision is both possible and appropriate, then the question arises whether the taxpayer is entitled to a credit. Credits are dealt with in Pt 4 of the Act and s 51 provides that Table 3 sets out the situations in which a claimant is entitled to a credit. The taxpayer claims, if the global price is to be apportioned, an entitlement to a credit under item CR6 in that table: the details of that credit ground are:

``Claimant is liable to tax on an assessable dealing with goods ( `the output goods' ) and has borne tax on other goods ( `the input goods' ) that have a sufficient link (as defined by section 52) with the output goods.''

12. That directs the reader's attention to s 52. Section 52 provides the information that for the purpose of, among others, credit ground CR6, input goods have a sufficient link with output goods in the following cases:

``(a) the input goods, or some essential element of the input goods, has become an integral part of the output goods;

...

(c) something that formed part of the input goods at the time of the tax-bearing dealing with the input goods has become an integral part of the output goods.''

Taxpayer's primary case: submissions and discussion

13. It is convenient to begin with the following abbreviated summary of the reasoning of the learned primary judge, supported by the Commissioner on the appeal. The transaction between the taxpayer and a customer incorporates two elements, each of which is an assessable dealing. The taxpayer manufactures the prints and sells them to the customer by retail: a dealing the normal taxable value of which is the notional wholesale selling price. Additionally, the taxpayer manufactures (within the meaning of that term in s 5) the negatives out of materials (exposed film) supplied by the customer: accordingly, the delivery of the negatives is an assessable dealing in category AD4a. The circumstance that the price is not apportioned between the two elements does not give rise to difficulty - particularly, does not give rise to double taxation - because s 95 permits apportionment. The delivery of the negatives is ``some other element of'' the global transaction, the parties have not allocated a particular amount to that element and subs (2) accordingly requires that the amount to be allocated to it, for the purposes of the sales tax law, is the amount that could reasonably be expected to have been allocated to it had it been the only subject matter of the transaction (that is, in substance, if the contract had been one for development only, not printing as well). There is no difficulty about the taxable value to be attributed to the sale of the prints: it is the notional wholesale purchase price, being the price for which the taxpayer could reasonably have been expected to purchase them (that is, presumably, the prints alone under a ``print only'' contract - and, apparently, one under which the taxpayer was the customer) under an arm's length transaction.

14. In essence, the taxpayer's argument proceeded as follows. The contract between taxpayer and customer is to be regarded, and regarded only, as one for the manufacture and sale of the prints. The developing of the film is to be regarded simply as a step in the manufacture of the prints, so that what the customer pays (the global price) is the price of what the customer has bought (the prints) which will include elements attributable to each step in the manufacturing process, including the development of the film. Such an approach, it

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was submitted, is warranted in principle by the decision of the High Court in Commonwealth Quarries (Footscray) Pty Ltd v FC of T (1938) 59 CLR 111 and, in the particular context, by the following observations of Hill J, with whom Beaumont and Burchett JJ agreed, in Genex at ATC 4579; FCR 211, 212:

``... Where the contract between the customer and the laboratory is one for developing only, s 17A [ of the earlier legislation] will operate to deem there to be a sale at the time the negatives, then unused, are delivered to the customer. The sale value in such a case will be determined under s 18(1B) to be the amount charged by the laboratory for the processing. Where, on the other hand, the contract between the customer and the laboratory is a contract for the developing of the film and the making of prints, there is much to be said for the view that the entire process should be seen as a process of manufacturing the prints, with the negatives but an intermediate stage of that process. In such a case there will be an actual sale of the prints, and the sale value of them will fall to be determined in accordance with s 18(1)(b) in the normal case of a sale by retail, as the amount for which the prints could reasonably be expected to have been sold by the manufacturer by wholesale.

In carrying out the hypothesis of a wholesale sale postulated by s 18(1)(b) the Commissioner may assume the hypothetical sale is made on the same terms and conditions as the actual retail sale is made, except in respect of price, there being no term of the contractual arrangement which would be absent or modified if the real sale were a wholesale sale.... On this basis the sale value of the prints would include an appropriate component for the process of developing. This appears to have been the way contracts of developing and printing were treated by the Commissioner in the transactions before the High Court in [ FC of T v Butcher (1935) 3 ATD 192; (1935) 53 CLR 82] and in the United States cases to which I have referred. The issue was not, however, the subject of argument before us and it is therefore not appropriate that I express a decided view upon it.''

15. That being the correct analysis of the contracts, the argument proceeded, there is no warrant in the 1992 Act for treating the price paid by the customers as anything other than the (retail) price of the prints or for ascertaining the notional wholesale price by reference to any other transaction than one which, save that it is a wholesale sale, does not differ at all from the actual contracts. As a result, to treat the delivery of the negatives separately as an assessable dealing in category AD4a would result in double taxation: the whole of the price is the basis of the amount on which tax is payable on the sale of the prints so that to tax separately any amount apportioned to the negatives is to tax that amount twice. The legislation should not be construed so as to impose double taxation. Section 95(2) is inapplicable, because while it might separate out from a contract partly for goods and partly for services an amount relating to the services, it could not, by finding an amount relating to the manufacture of the negatives, produce the amount charged by the taxpayer in respect of them required, if their delivery is to be regarded as an assessable dealing, by the terms of AD4a. And because the price paid is to be regarded as the price of the prints, and since nothing is charged for the manufacture or delivery of the negatives, there is no need to know how much of the global price relates to developing the film so as to produce the negatives.

16. Powerful as those arguments are, in my view they fail for two reasons: they place too much weight upon a particular, though important, aspect of the contracts and they give too little weight to the terms of the 1992 Act.

(a) The contracts

17. Undoubtedly the developing of the unexposed film, so as to produce negatives, is an essential preliminary step if prints are to be manufactured: prints cannot be made unless the film is first developed. It may well be that, for many customers at least, their principal object in entering into one of the contracts with the taxpayer is to obtain prints. And, no doubt, developing the film may not be within the class of case contemplated by the reservation expressed by Dixon and McTiernan JJ in Commonwealth Quarries at 121:

``In a contract under which for a single lump sum of money a party undertakes to do various things, including the transfer of property in goods, it is quite true that the entire money consideration or contract price cannot be regarded as the amount for which

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ATC 4156

the goods are sold. In such a case the amount for which the goods were sold could not be ascertained from the transaction except by allocating part of the consideration to the other acts or things to be done by the seller.''

18. But under their contracts with the taxpayer the customers do not only get (and are not entitled only to get) prints: they are entitled also to receive, and do receive, their developed film in the form of negatives cut into convenient lengths, placed in a protective covering and available for use in the future to obtain more prints. The taxpayer might if it chose, charge separate sums for developing the film and for the prints; and if it did so there is no reason why the amount apportioned to developing would necessarily be insubstantial. The remarks of Hill J in Genex were obiter, explicitly did not represent a final view and (importantly) were made in a different, and now superseded, legislative context. In my view, it is artificial and inappropriate to describe the contracts as contracts for the manufacture and sale, for the global price, of the prints, and nothing more. It may be added that the point simply did not arise in Butcher or in any of the other earlier authorities to which we were referred.

19. Within the literal terms of Table 1, two assessable dealings take place under each contract: there is a retail sale of the prints by the manufacturer (the taxpayer) to the customer (AD2a) and there is a delivery of the customer's materials goods (the negatives) as defined by s 22 (AD4a). The consequence that each separately attracts tax can, as a matter of construction, only be resisted by way of the proposition that the price paid represents (exclusively) the price of the prints, development of the film being merely a step along the way to producing the prints, so that there is no amount charged by the manufacturer in respect of the AD4a dealing. But to say that is simply to repeat the misconstruction of the contract. The customer pays one unapportioned price for all his or her entitlements under the contract. Those entitlements include delivery of the negatives. It is no more accurate to say that nothing is charged in respect of that entitlement than to assert that nothing is paid for the prints. Once that step is taken, it becomes difficult indeed to resist the preliminary conclusion that an amount is charged in respect of the delivery of the negatives, making it necessary to ascertain, for the purposes of the 1992 Act, what that amount is.

20. The task at hand, then, is to apportion a global amount. There is a need to know how much of the global price relates to the delivery of the negatives, an element of the transaction other than the price for which particular goods were sold. There is, I think, no artificiality or straining of language involved in applying s 95(2) or, particularly, in asking what is the amount that could reasonably be expected to have been allocated to the delivery of the negatives if that had been the only subject matter of the transaction.

21. To say that there is then double taxation is, I think, to engage once more in precisely the same misconstruction of the contract. Once it is seen that the global price paid is exclusively neither the price of the prints nor the amount charged for delivery of the negatives, it must follow that a portion only of the price is attributable to the prints as well. There being, relevantly, no element of the transaction other than the sale of the prints and the delivery of the negatives, there seems to me no difficulty with the proposition that, having by application of s 95(2) discovered what is the amount charged in respect of the delivery of the negatives, the balance is the price paid for the prints. The sale being a retail sale, the retail margin is then eliminated to arrive at the notional wholesale price. It is not obvious - it is not important here, but may be important in other cases - that the same result could not be arrived at by applying s 95(1) on the footing that there is a need to know the price for which particular goods (the prints) are sold. Whichever way the matter is approached, there is thus no double taxation.

22. Three other matters should be mentioned before I leave this aspect of the case. First, an AD4a dealing is taxed in a way which differs from the way in which other assessable dealings are taxed, and that difference explains what, in practical terms, has given rise to the controversy between the parties. Where the AD4a transaction is a retail transaction, the taxable value is not the amount which would be charged under a wholesale transaction otherwise on the same terms, but is the amount actually charged by the manufacturer to the customer, that is the retail price. That is unquestionably so in the case of a retail

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ATC 4157

``develop only'' contract and, even if anomalous, it is a consideration which cannot affect the questions of construction which we have to decide. Secondly, if the sale of prints by the taxpayer to a customer were a wholesale sale, within assessable dealing category AD1a, the normal taxable value would be the price (excluding sales tax) for which the goods were sold. There is no question of ascertaining a ``notional wholesale selling price''. But, on the proper construction of the contract, the price for which the prints were sold would not be the global price payable under the contract: it would be ascertained, as in the case of a retail contract, by applying s 95. Thirdly, although we were referred helpfully to corresponding provisions of the previous sales tax law and to the Explanatory Memorandum relating to the 1992 Act, I have reached my conclusions on this aspect of the case without specific reference to either: although no doubt it is true the 1992 Act brought about no essential change to the sales tax law, there are plainly differences between the two regimes, including particular changes relevant to the treatment of contracts for processing photographic film; and, while it may be that paragraph 9.34 of the Explanatory Memorandum contemplates a somewhat narrower operation of s 95 than I have given it, my construction of it is consistent with the specific treatment of photography in chapter 21 of the Explanatory Memorandum - as it is, in my view, with the words which the Parliament has chosen to use.

(b) Credit ground CR6

23. The only argument pursued on this aspect of the appeal by the taxpayer was that the negatives (input goods) had a sufficient link with the prints (output goods) on the footing that some essential element of the negatives had become an integral part of the prints (s 52(a)) or that something that formed part of the negatives at the time of the tax-bearing dealing with them had become an integral part of the prints (s 52(c)). On this aspect of the case, the primary judge said (ATC at 4431; ALR at 116):

``When one turns to the provisions of s 52 it seems clear that neither paragraph (a) nor (c) could have any application. Both require, as an essential element, that the exposed film become an integral part of the prints. No doubt it can be argued that the exposed film contains in a sense an image which ultimately is printed on the prints. However, in my view, this is not the correct construction of either paragraph (a) or (c); both having regard to the evidence as to how the exposed film is developed and printed and also to a view I take that reference to essential element refers to a physical element rather than the chemical displacement which occurs in the photographic process and produces the developed film.''

24. The taxpayer contended that in a statutory context where the definition of ``manufacture'' has been broadened to include such activities as ``processing or treating exposed photographic film'' (par (d)), ``duplicating a computer program'' (par (e)) and ``duplicating visual images or sounds'' (par (f)), there is no impediment to regarding the photographic image embedded in a negative as a physical element of it which, by the interaction of light passing through it with sensitised paper, causes a photographic image to be physically reproduced on that paper. I agree, however, with what his Honour said and do not accept the taxpayer's argument. I do not think that the process described in the taxpayer's submissions can properly be described as one through which something that formed part of the negatives has become an integral part of the prints any more than, where an object is photographed, or a painting of an object is made, it can sensibly be said that something that formed part of the object has become an integral part of the photograph or painting. Exactly the same may, I think, be said by reference to the terminology of s 52(a): the fact that the image on the negative is reproduced on the print does not, I think, mean that an essential element of the negative has become an integral part of the print. This is not a subject on which elaboration is likely to be profitable. The negatives remain intact and are delivered to the customer with the prints; in my view, the language of s 52(a) and (c) is not apt to describe what has been done.

Conclusion

25. For those reasons, which do not, I think, differ substantially from those given by the learned primary judge, the appeal in my view should be dismissed with costs.