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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Lindgren J

I have had the benefit of reading in draft the Reasons for Judgment of Lehane J and of Finkelstein J. Notwithstanding that advantage, and the helpful submissions of counsel on both sides, I have not found resolution of the appeal to be easy.

2. I gratefully adopt their Honours' account of the legislation and of the background to the appeal.

3. In my view the appeal should be dismissed with costs. I agree in substance with the reasons of Lehane J and add the following observations (I will refer to the appellant as ``Tanu'').

4. (1) It is not, and cannot be, in dispute that Tanu manufactures and sells the prints:
FC of T v Butcher (1935) 3 ATD 192 ; (1935) 53 CLR 82 (prints made from exposed film provided by amateur photographers and developed by the taxpayer are ``manufactured'' by the taxpayer);
Pacific Film Laboratories Pty Ltd v FC of T 70 ATC 4104 ; (1970) 121 CLR 154 (prints manufactured by the taxpayer and delivered to the amateur photographer who supplied the exposed photographic film are ``sold'' by it to him or her).

5. (2) It is not, and cannot be, in dispute that as a result, but only as a result, of para (d) of the definition of ``manufacture'' in s 5 of the Sales Tax Assessment Act 1992 (Cth) (``the Act'') (``manufacture'' includes ``processing or treating exposed photographic film... so as to produce a negative...''), the negatives are goods manufactured by Tanu:
Commonwealth of Australia & Anor v Genex Corporation Pty Ltd & Ors 92 ATC 4764 ; (1992) 176 CLR 277 ( ``Genex'' ) at ATC 4768-4769; CLR 289-291.

6. (3) It is not, and cannot be, in dispute that in the case of a ``develop-only'' contract, the negatives are goods manufactured by Tanu and upon delivery of them to the customer, a liability to sales tax arises under item AD4a of Table 1 in Schedule 1 to the Act, or that the normal taxable value in respect of that assessable dealing is the amount charged by Tanu for its chemical treatment of, and other work done in respect of, the exposed photographic film: Genex . (The processes of ``development'' and ``printing'' were described by Hill J in
Genex Corporation Pty Ltd & Ors v Commonwealth of Australia & Anor 91 ATC 4564 at 4566-4567; (1991) 30 FCR 193 at 194-196 (FC).)

7. (4) It is not in dispute, and is supported by authority, that where A, for a price, develops B's exposed photographic film and delivers the negatives to B, there is no sale of the negatives because the film is B's property throughout, that is, before, during and after A chemically treats and does other work in relation to the film in the development process: Genex at ATC 4767, 4772; CLR 288, 296. The position was described by Windeyer J in
Pacific Film Laboratories Pty Ltd v FC of T 70 ATC 4104 at 4109; (1970) 121 CLR 154 at 165 in these terms:

``Exposed photographic film may be developed for its owner by a person who carries on the business of film developing.

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The owner pays him for this when the developed film is delivered. There is no sale involved in that. The film remains the property of the owner throughout. He paid to have his film developed, not to buy the negatives thereby produced.''

8. (5) It has not been, and could not be, suggested that AD3b (``AOU by a person who manufactured the goods in the course of any business'') applies when Tanu uses the negatives to produce the prints, no doubt because of the ``insuperable difficulty'' that the negatives remain the customer's property throughout: Genex at ATC 4771-4772; CLR 295-296, referring with approval to Genex Corporation Pty Ltd & Ors v Commonwealth of Australia & Anor 91 ATC 4564 at 4576; (1991) 30 FCR 193 at 207 per Hill J (FC).

9. (6) There was evidence before the trial judge of two ``developing and printing'' (``D & P'') contracts entered into by Tanu. In my view, the amount charged by Tanu to the customer was truly a ``global'' amount which was not wholly for the prints but was in part a selling price of the prints and in part a charge made for the work done to convert the exposed photographic film into negatives. That is, Tanu actually charged the customer for the chemical treatment of, and other work done to, the exposed photographic film, even though the amount charged is not identified and was part of a larger amount.

10. The negatives themselves had commercial value. There was uncontradicted evidence before the primary judge that in addition to D & P contracts, Tanu performed ``develop-only'' and ``reprint'' contracts; that the develop-only contracts involved developing the customers' exposed photographic film for which the charge was $3.00 for films of 12, 24 or 36 exposures; that reprint contracts involved using the customer's negatives to make prints; and that develop-only and reprint contracts comprised a small part of Tanu's business. A customer can engage Tanu to produce further prints from the negatives at a cost less than what the customer would have to pay it under a D & P contract.

11. The negatives are unlike that part of a length of fabric which is surplus to a tailor's requirements and which he or she discards as waste. I have not been able to think of a satisfactory analogue to the negatives but some imperfect ones are:

• • a mould which the moulder sells to a product manufacturer with some sample products made by the use of the mould for a single global price;
• • a model structure which a builder sells to the client with the completed structure for a single global price;
• • a portrait painter's preliminary sketch which the painter delivers to the client with the completed portrait for a single global price.

12. The mould, the model structure and the preliminary sketch convey an idea which finds its ultimate expression in the manufactured product, the completed structure and the portrait, but have ongoing utility and value for the client in themselves.

13. (7) Let it be assumed, contrary to my opinion expressed in (6) above, that according to general legal principles the transactions into which Tanu entered are properly to be understood as sales of the prints for the whole of the price charged and that therefore there is no ``amount... charged... in respect of the negatives''. Nevertheless, in that case, and as an alternative basis on which the appeal should be dismissed, I think that the Act, on its proper construction, produces a different result for its purposes. On their proper construction the terms of AD4a, para (d) of the definition of ``manufacture'' in s 5, and s 22 (esp s 22(3)), evince a clear legislative intention to catch as an assessable dealing the making up and delivery of the negatives, and that intention is not, in my view, displaced by the considerations that those acts are performed by the manufacturer only as part of a D & P contract or that a separate price is not allocated to them.

14. (8) While it is usually inappropriate, in arriving at the normal taxable value of manufactured goods, to make any deduction from the cost, labour and expenditure of all steps in their manufacture, a case such as the present one is special. The reason is that although they were necessarily used in the manufacture of the prints, the negatives had an independent existence and value which survived the manufacture of the prints. Let it be assumed that a taxpayer manufactured a tool which it used to manufacture other goods and that it sold both the tool and those goods for a

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single undifferentiated price: it could hardly be suggested that the only taxable dealing was the sale of the other goods for that price.

15. (9) The fact that no part of the global amount was allocated to the negatives does not signify that no amount was ``charged'' in respect of them. The contrary view would arguably lead to the absurd result that in the case of a develop-only contract in respect of two films for a single price, no amount is charged in respect of either negative and so no tax is payable.

16. (10) Once it is accepted that the amount charged by a taxpayer to the customer includes a charge made for processing or treating the exposed photographic film so as to produce the negatives, much else falls into place. In the case of a wholesale sale, the normal taxable value of the prints (AD1a) is that part (wholesale) of the price (wholesale) for which the prints are sold. This would be ascertained in conformity with s 95(1), while the amount charged (wholesale) in respect of the negatives (AD4a) would be that part of the global amount ascertained in conformity with s 95(2). In my view, this is what the terms of the legislation require. Apparently the author of the Explanatory Memorandum which was distributed with the bill that became the Act thought that since the total of the two amounts would be the global wholesale figure, there is no ``need to know'' the separate normal taxable values and therefore no occasion to resort to s 95. The Explanatory Memorandum stated:

``21.5 If the print is sold by wholesale, the making up charge on the negative will be included in the wholesale price. The taxable value is simply the amount for which the goods were sold.''

17. As a practical matter, this approach would yield the same result as the ``two assessable dealings'' approach. But I think that the latter is correct because, as I have said above, in my view Tanu sold the prints, not for the whole price charged, but only for part of it, and the remainder was charged in respect of the negatives.

18. In the case of a retail sale, the normal taxable values would be, for the prints (AD2a) their ``notional wholesale selling price'' (as defined in the notes to Table 1 in Schedule 1 to the Act) and in the case of the negatives (AD4a) that part of the global amount that is charged in respect of them ascertained in conformity with s 95(2). There is no difference in approach according to whether the transaction is wholesale or retail: the legislature has seen fit to make a wholesale selling price (actual or notional according to whether the transaction is wholesale or retail) applicable in respect of the ``sale of prints'' part of the transaction, and the actual amount charged (whether the transaction is wholesale or retail) applicable in respect of the ``delivery of negatives'' part of the transaction.

19. (11) There is no double taxation in the scheme outlined. It may be thought, however, to involve an anomaly: in the case of a retail sale, tax will be calculated in respect of the negatives on ``the amount... charged by the manufacturer to the customer in respect of the [ negatives]'' (AD4a), that is, a retail charge, rather than a ``notional wholesale charge''. That is to say, the aggregate of the two taxable values in the case of a retail transaction will exceed the aggregate of the two normal taxable values in the case of a wholesale transaction because of the inclusion in the former case of a ``retail mark-up'' element in respect of the negatives. The position was illustrated by the primary judge in his Reasons for Judgment in the present case.

20. The ``anomaly'' is, however, also to be found in the construction urged by Tanu. Tanu concedes that in the case of a develop-only contract, the normal taxable value is the charge actually made: wholesale in the case of a wholesale transaction; retail in the case of a retail transaction.

21. (12) The ``notional wholesale selling price'' referred to in AD2a as applied to the prints must be applied to them as they are produced pursuant to a D & P contract. Accordingly, the notional wholesale selling price will allow for the fact that the global price includes a charge that is also being made in respect of the negatives. This is to give effect to the passage in
Commonwealth Quarries (Footscray) Pty Ltd v FC of T (1938) 59 CLR 111 at 122 set out by Finkelstein J in his Reasons for Judgment.

22. (13) If the transaction, in so far as it relates to the negatives, had constituted a sale of them, s 95(1) would apply, unless, again, one were to take the view that as a practical matter there was no ``need to know'' the separate prices for which the negatives and prints had been sold because the taxing result would be the

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same if the whole price were treated as being the selling price of the prints and the assessable dealing constituted by delivery of the negatives were ignored. As I have said above, however, in my view, this approach is not in conformity with the terms of the Act. If I am correct, a further reason suggests itself for the finding of the two assessable dealings in Tanu's transaction: it is desirable, and seems to have been intended, that a global transaction comprising two sales of goods for a global unapportioned amount be treated under s 95(1) in the same way as a global transaction comprising one sale of goods and an AD4a dealing is treated under s 95(2).

23. (14) Genex is distinguishable from the present case. The High Court there held that negatives delivered to the customer with prints pursuant to a D & P contract, although previously goods manufactured by the developer, had ceased to be ``goods'' in the meanwhile upon being used in the making of the prints. The reason was that they had then gone ``into use or consumption in Australia'' and the definition of ``goods'' in s 3(1) of the Sales Tax Assessment Act (No. 1) 1930 (Cth), with which that case was concerned, provided that ``goods'' did not include, inter alia, such goods. But that exclusion is not retained in the definition of ``goods'' in s 5 of the Act (the current definition retains another exclusion, namely, property that is ``sold as second-hand and is manufactured exclusively or principally from goods that'' satisfy certain descriptions, but the negatives are not sold as second-hand goods).

24. (15) The construction which I favour is consistent with the purpose of the introduction of para (d) into the definition of ``manufacture'' in the 1930 Act by the Sales Tax Laws Amendment Act 1986 (Cth). The Explanatory Memorandum which accompanied the Bill for that Act said this (p 38):

``The developing of a film is part of the process usually undertaken in laboratories in ultimately producing a photographic print or a cinematograph print. The cost of the developing charge has not previously been subject to sales tax as that process is not under the present law considered to be `manufacture' for WST [ wholesale sales tax ] purposes.

As was mentioned earlier in this memorandum, the exclusion of the developing charge from a liability to sales tax has led to avoidance arrangements where some laboratories inflate the developing charge of a `develop and print order' to reduce their sales tax liability on the prints.''

1. The legislature's purpose in introducing para (d) into the definition would not be achieved if the processing or treating of exposed photographic film so as to produce the negatives in part performance of a D & P contract remained uncaught. On the construction adopted by the primary judge, Lehane J and me, that misadventure would have occurred under the earlier legislation but for the fact that, as was held in Genex , the negatives ceased to be ``goods'' once they were used in the production of the prints (see (14) above).

As indicated earlier, in my opinion the appeal should be dismissed with costs.