CASE Z29

Members:
BH Pascoe M

Tribunal:
Administrative Appeals Tribunal

Decision date: 4 August 1992

BH Pascoe (Member)

This is an application for review of a decision (``the reviewable decision'') to disallow objections against assessments of Sales Tax for each of the nine months from June 1990 to February 1991 inclusive. The first mentioned applicant was the taxpayer for the month of June 1990 and the second mentioned applicant was the taxpayer for the remaining eight months. As the subject matter was identical for each of the months concerned and the applicants are related companies, it was agreed that the applications be heard together.

For ease of argument in the hearing and also in these reasons the second applicant was referred to solely, it being accepted that the identical facts would result in the same decision for both applicants.

The taxpayer company was at all times during the relevant period an importer and wholesaler of electrical goods. In particular, the application related to the sale of three specific products, television receivers, video cassette recorders and players and microwave ovens.

The issue in this case is whether or not amounts invoiced to retailer customers for ``Five Year Complete Cover Protection Plan'' (``the Protection Plan'') were part of the sale value of goods sold by the taxpayer pursuant to Section 4(1) of Sales Tax Assessment Act (No. 6). Assessments were requested by the taxpayer and issued to levy sales tax on the payments received in respect of the Protection Plan.

Under the terms of the Protection Plan, the taxpayer company undertook to provide the original retail purchaser with five years of parts or labour service protection for the particular product purchased. Subject to certain conditions, the taxpayer promised to replace or repair free of charge any component which failed within five years after the date of purchase.

The taxpayer marketed the goods through conventional retail stores and sold the goods by wholesale to the retailer at prices which included a profit margin and which covered costs in bringing the goods into a form and condition in which they were marketed. It additionally offered to retailers the option of selling the Protection Plan to their customers. It did this by offering retailers the opportunity to prepay the Plan.

Where the retailer elected to prepay for the Protection Plan with the purchase of the product, the invoice which was issued described the product and the quantity sold, the unit price, the sales tax levied and the amount due. In addition, it showed the cost of the plan as a separate item, and stated the number of Plans sold, the unit price and the total amount due. The company stated that the Protection Plan was shown separately on invoices to retailers as it was not regarded as part of the amount for which goods are sold. It was nevertheless included on invoices for the sale of goods because it was said to be the natural and most economic time at which to pass the charge to

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the retailer, as the raising of separate invoices at a later date would be costly and inefficient.

Though retailers were encouraged to take up the Protection Plan facilities, and were able to pass on the charge to consumers, the taxpayer company maintained that the retailer was entirely at liberty to purchase products from it without the Protection Plan.

In circumstances in which the price of the Protection Plan had been prepaid by the retailer, the consumer could still elect not to purchase the Protection Plan with the product. The retailer could then obtain a refund from the taxpayer company for the cost of the plan.

In converse circumstances in which the prices of the Protection Plan had not been prepaid by the retailer and the consumer wished to purchase goods with the cover where available, the retailer could request the taxpayer company to invoice it for the charge or the consumer could complete the registration card and return it by mail with the stipulated remittance within 30 days of purchase.

The practicalities of operating and marketing the Protection Plan were set out in the Commissioner's statement which accepted that the retailer had the option to prepay for the Protection Plan. If it elected to do so, the goods were delivered by the taxpayer company to the retailer with cover and the Protection Plan card was attached to the product carton within a plastic ``envelope'' which was bonded to the carton. The retailer could then sell the product with the Protection Plan to the customer, or it could exclude the Plan from the retail sale either at its own option or at the request of the customer. If the Protection Plan was to be excluded from the sale, the retailer would remove the Protection Plan Card from the product carton and either return it to the company for credit or attach it to another applicable product carton. It is noted that the card and cover was not ``customised'' to an individual product when sold to the retailer in the sense that neither the product type, model number or serial number of the product was imprinted on it.

The further option available to the customer arose on purchase of a product which had not been sold with the Protection Plan prepaid by the retailer but was of a type where cover was available. In this instance the consumer could request the cover and the retailer would be invoiced by the taxpayer company, or the consumer could purchase the cover directly from the taxpayer company.

The taxpayer company offered the normal twelve months standard manufacturer's product warranty. Therefore the Protection Plan provided the consumer with four years additional cover. This additional cover, on the reading of the Protection Plan Card, would include repair and/or replacement of equipment and parts that have failed through normal wear and tear.

A condition of the Protection Plan was that it was open to original purchasers only and the registration card setting out the name and address of the purchaser and the model number and serial number of the product was to be completed and returned to the taxpayer company within 30 days. In evidence, it was indicated that the company did not adhere strictly to the 30 day requirement and would honour the Protection Plan commitment where originally prepaid by the retailer although the registration had not been affected within that time limit.

In certain circumstances the end customer could obtain a refund of the amount paid for the Protection Plan. If the customer subsequently decides not to proceed with the Plan and does not register the unit with the applicant, a refund can be obtained from the retailer. If, after registration, the unit is returned as faulty or is stolen or in other limited circumstances the customer may apply to the taxpayer company for a refund.

The sole witness in this application was an employee of the taxpayer company who was at all times during the relevant period the financial and administration manager of the division of the company responsible for the importation and sale of the appliances concerned.

Introduced into evidence were samples of the standard twelve months warranty registration card, the Protection Plan registration card, the prepaid notification card and the certificate recording the Protection Plan registration. Apart from the ``prepaid notification card'' all of the other items were required to be completed with the name and address of the customer and the model and serial number of the particular appliance. As indicated earlier, the ``prepaid notification card'' was described as ``generic'' in that it simply confirmed that prepayment for the Protection Plan had been made by the

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retailer but contained no reference to the type of appliance, model number or serial number.

Also produced were examples of invoices and credit notes covering the period under review. There was no dispute that these were a representative sample and showed examples of the sale of appliances alone, sale of appliances and Protection Plans relevant to those appliances together and sale of Protection Plans alone. Similarly the credit notes contained examples of each of these three types of transactions. Where Protection Plans are invoiced they are shown as having a product code which identifies them with the relevant model number to which they are intended to apply. The taxpayer company's witness stated that the purpose of referring to a model number in the charges for prepaid Protection Plan was for marketing analysis and for the establishment of an appropriate provision for future liability given that future costs can vary according to the particular model. However it was clear that, on the return of the prepaid notification card with the registration card, the taxpayer company had no means of relating the prepayment to a specific invoice or model number.

The taxpayer company produced examples of refunds direct to customers and the evidence indicated that there was no attempt to ascertain whether or not these refunds related to customers who had purchased the prepaid Protection Plan with the appliance from the retailer or who had forwarded payment direct to the taxpayer company after purchase of the appliance.

Internal accounting records of the taxpayer company were produced to demonstrate that the company regarded the Protection Plan as a completely separate item with its own sales statistics and costing.

There was little dispute as to the facts of this case. The dispute was about the construction which could be placed on those facts and whether or not ``the amount for which the goods are sold'' pursuant to Section 4 of Sales Tax Assessment Act (No. 6) included the amount paid by the retailer for the Protection Plan.

Both Mr G. Davies for the applicant and Dr S. Kenny for the respondent took comfort from the decision of the High Court in
Union Quarries (Footscray) Pty Ltd v FC of T (1938) 4 ATD 477;
Commonwealth Quarries (Footscray) Pty Ltd v FC of T (1938) 59 CLR 111 and quoted as support for their arguments the extract from the joint judgment of Dixon and McTiernan JJ on ATD page 482; CLR page 121 where their Honours said:

``But delivery is so essential to a sale of goods that it cannot be distinguished in this manner from the sale of a separate and independent act or service to which part of the consideration forming the selling price must be allocated.''

The clear difference between the parties was that the taxpayer company applicant regarded the Protection Plan as a separate and independent service to be distinguished from the sale of the relevant goods, whereas the respondent took the view that the provision of the Protection Plan went with the provision of the appliance so as to be an essential part of the sale of the relevant goods.

As Hill J said in
Queensland Independent Wholesalers Ltd v FC of T 91 ATC 4492; (1991) 29 FCR 312, at ATC page 4498; FCR page 321:

``The amount for which the goods are sold will be a question of fact to be determined in each case. As I have already said, it will usually be the contractual price arrived at between seller and buyer. However, this will not invariably be so.''

For the taxpayer company, the reasons advanced for the construction sought to be placed on the facts can be summarised as:

On the other hand, the respondent's reasons for including the payments for the Protection Plan as part of the sale value of the relevant goods may be summarised as:

Again, both parties relied on the decision of Windeyer J in
EMI (Australia) Ltd v FC of T 71 ATC 4112; (1971) 45 ALJR 349, which was concerned with whether reimbursement of royalties were part of the amount for which the goods were sold. His Honour, in this case, said at page 4118:

``It is enough to say that, as used in the Assessment Act, `the amount' for which a thing is sold means I consider the sum total of all moneys that the buyer promises, expressly or tacitly, to pay to, or for, the seller in order that he, the buyer, may get a good title to goods that he has agreed to buy.''

The differences between opposing counsel was, of course, the question of what were the goods which the buyer had agreed to buy and what consideration was necessary to obtain title to those goods.

Many other references to Court and former Commonwealth Taxation Board of Review cases were given to the Tribunal by both Counsel. It is no disrespect to Counsel that these are not referred to in detail here. In my view, they do not advance the position beyond the basic premise that ``the amount for which the goods are sold'' is a question of fact in each case. The question to be answered in this case is what were the goods which the buyer had agreed to buy and what consideration was necessary to pay in order that the buyer may obtain a good title to the goods that he had agreed to buy? The various cases quoted were invariably related to these questions.

It was agreed that where the Protection Plan was sold to a customer who contracted directly with the taxpayer company after purchase of an appliance without the prepaid notification card, the transaction was not a taxable transaction. It is not a contract for the sale of goods but a contract of service. Even if it could be argued that it is additional sale value of the relevant appliance, by that time the goods have gone into use on consumption in Australia and are not included as goods as defined by Section 3(a) of Sales Tax Assessment Act (No. 1).

Where a retailer orders a number of Protection Plan prepayment notification forms without, at the same time, ordering relevant appliances, the Commissioner argued that the prepaid Protection Plan was only of value if then attached to specific goods and that it formed part of the purchase price of these goods. This concept provides some difficulty. The retailer could acquire a number of appliances and various models of those appliances. The cost of the Protection Plan was

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the same for all models of the same appliances. The cost of the Plan was $45 for a television receiver and $55 for a video cassette recorder. Although the wholesaler required the retailer to nominate the model number of the relevant appliance when ordering the Protection Plan, the prepayment notification form delivered to the retailer contained no reference to any appliance, model number or serial number. It was quite competent for the retailer to attach the prepayment notification form to any appliance of the wholesaler which he had in stock or may purchase subsequently or even to an appliance already sold to a customer. It could later return the prepayment card to the wholesaler for credit.

The Commissioner saw the identification by model number on invoices for Protection Plans sold to retailers as significant. On the other hand, it was argued strongly and, in my view, correctly for the Commissioner that the internal accounting methods of the taxpayer company and the separate accounting and invoicing of the Protection Plan was not relevant in determining the issue.

Dr Kenny argued strongly that, typically, the retailer ordered either an appliance with the Protection Plan or an appliance without the Protection Plan and these were two distinct products. The latter carried with it a standard twelve months manufacturer's warranty and the former a five year promise to rectify any parts which failed including by wear and tear. The question is whether the additional Protection Plan could be said to be a separate and independent service to which a separate and distinct consideration must be allocated.

In the case of Commonwealth Quarries (Footscray) Pty Ltd (supra) the question for the High Court was whether the sale value of the goods included the cost of delivery. It was found that the contract of sale was a contract for goods sold and delivered at a specific place. Delivery was an essential part of the contract which was only satisfied by delivery at the place nominated by the buyer. The Court had no difficulty in finding that, in such a contract, the cost of delivery could not be severed from the contract price. In the joint judgement of Dixon and McTiernan JJ at ATD page 482; CLR page 121 and immediately prior to the extract quoted earlier they said:

``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 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.''

In this case the buyer could order and be invoiced for an appliance with a prepaid Protection Plan and it could be said that he will pay the total consideration. On the other hand, he could order the appliance and the Protection Plan separately at different times.

As a practical matter, the average man in the street, the mythical ``man on a Clapham Omnibus'' when looking at two identical 14[inch ] Push Button Television Receivers would regard them as identical. The fact that for an additional $45, one can be provided with a five year Protection Plan as opposed to the standard twelve month warranty is unlikely to have him regard them as different products. It can be assumed that an accessory could be acquired also such as a portable indoor antenna or a specially designed stand for the appliance which would alter the manner of use in the house. Again, it does not change the nature of the basic product.

Mr Davies made much of the contractual arrangement with the end customer as an essential factor in the Protection Plan and argued that this was the contract with which the Tribunal should direct its attention to. However, I regard Dr Kenny's view that this contract is irrelevant, it being necessary to consider solely the question of the contractual relationship between wholesaler and retailer, as correct. The retailer contracted to purchase prepaid notification cards for the Protection Plan, was supplied with such cards which in effect, provided the retailer with a promise that, subject to the consumer requesting the product in the appropriate form, the wholesaler would repair and replace any parts which failed within five years of the original purchase by his customer. Nevertheless, the question remains of whether this promise was separate and independent from the goods to which the promise would relate.

For the Commissioner, it was argued that the Protection Plan was a form of extended

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warranty which could be attached to an appliance for payment of an additional price. The retailer could choose to purchase units with the standard twelve months warranty or units with a five year ``warranty''. There was no dispute that the amounts included in the wholesaler's costs for providing the standard twelve months warranty could not be separately identified and excluded from the sale value of the goods sold. Why then, asked the Commissioner, should it be seen as appropriate to exclude the cost of the extended five year warranty from the sale value of those goods which carried it? The separate invoicing of the element of the cost is irrelevant.

For the taxpayer company there was no concern at the use of the term ``warranty'' even though, in correspondence to retailers, the taxpayer urged them not to use that term for the five year Protection Plan. It was accepted that the term meant no more than contractual promise and it is necessary to look at the terms. However, it was argued that this particular promise is extraneous to the transfer of title as an option which may or not be taken up by the retailer or by the consumer.

There is in my view, a clear difference between the two ``warranties''. The standard twelve months warranty applies to every unit sold by the taxpayer company and, to a substantial degree dictated by statutory requirements, goes to the quality and fitness of the unit. It is an essential characteristic of the sale value of the item and cannot be regarded as severable from the unit for the buyer to get a good title to the goods. The five year Protection Plan, on the other hand was attached to an appliance as an option by the buyer and only attached to the specific goods when the end customer chose to do so. In general terms, it was a prepaid repair service beyond the required implied or specific warranties which applied to all appliances.

The various factors which the taxpayer company raised in seeking to demonstrate that the Protection Plan was separate and independent of the goods were:-

Although, taken separately, any one of the foregoing factors may not determine the matter, when considered together they provide a clear indication that the Protection Plan was separate and independent from the goods. The acquisition by the retailer of the Protection Plan was not an essential character in the sale of the goods and was not a part of the consideration for the buyer to get a good title to the goods he had agreed to buy. In my view, the purchase of Protection Plan prepaid notification cards was a separate and identifiable contract, separate and distinct from the purchase of an appliance.

It follows therefore, that the payments received from retailers for purchase of the Protection Plan were not part of the sale value of goods pursuant to Section 4(1) of Sales Tax Assessment Act (No. 6) 1930.

The decision under review will be set aside and the taxpayers' objections to the relevant assessments allowed.

 

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