E.M.I. (Australia) Ltd. v. Federal Commissioner of Taxation
Judges:Windeyer J
Court:
High Court
Windeyer J.: This is an appeal against an assessment of sales tax by the Commissioner of Taxation under the Sales Tax Assessment Act (No.1) 1930-1962 (which I shall refer to as ``the Assessment Act''). Sales were made by E.M.I. (Australia) Limited (which I shall call the taxpayer) of gramophone records of songs. The sales that are the subject of the present proceedings were, for taxation purposes, attributable to the month of June 1966. The case has been brought to the Court pursuant to sec.42(6) of the Assessment Act, as an appeal from a decision of the Board of Review involving a question of law.
The transactions in question occurred between the taxpayer and a company called World Record Club Pty. Limited (which I shall call World Record Club), a locally incorporated company. The process of producing records from an original matrix is called in the trade ``pressing records''. World Record Club from time to time employed the taxpayer to press large numbers of particular records for it. It distributed these by way of retail sale to customers whom it had enrolled and whom it called its members. The taxpayer's dealings were sales of goods by wholesale by it, the manufacturer, to World Record Club: see
Pacific Film Laboratories Pty. Ltd. v. F.C. of T. 70 ATC 4104. They thus rendered the taxpayer liable to pay sales tax pursuant to sec.17 of the Assessment Act upon the ``sale value'' of the goods so manufactured and sold. By sec.18 the ``sale value'' was ``the amount for which those goods are sold''.
The Commissioner was not satisfied with the return that, pursuant to sec.21 of the Assessment Act, the taxpayer made. He thereupon caused an assessment of tax to be made pursuant to sec.25(2A). In this he took the total sale value of records manufactured by the taxpayer and sold to World Record Club in the month in question as being $36,383.20. This figure was arrived at as follows -
Total price charged
(excluding tax) for
gramophone record pressings $31,560.96
Add: the amount which in
the opinion of the
Commissioner is the value of
royalties payable on those
gramophone record pressings $ 4,822.24
------------
$36,383.20
------------
The way in which the Commissioner calculated the sum of $4,822.24 is shewn by a document that he had prepared which was tendered as Exhibit A. I set it out here -
[see over]
The question in the case is whether the Commissioner was justified in including the above amount of $4,822 (or any part thereof) in computing the sale value of the goods sold. The taxpayer objected to the assessment, claiming that this amount was improperly taken into account. The Commissioner disallowed the objection. He claimed that the assessment was made in accordance with sec.3(3) of the Assessment Act.
Alternatively he said that the amount in question was part of the amount for which the goods were sold within the meaning of sec.18. At the taxpayer's request the Commissioner's decision was referred to a Board of Review. The Board of Review upheld the assessment. The Board's decision was supported by careful reasoning by
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Particulars of royalties payable in respect of to World Record Club Pty. Limited in the Gramophone Records manufactured and sold month of June 1966.Royalties payable under Copyright Act in respect of mechanical contrivances -
Records in respect of Payable to Payable to TOTAL
which payable J. Albert and other copy-
Son Pty. Ltd. right owners
and Southern
Music Pub-
lishing Co.
(A'asia) Pty.
Ltd.
$ $ $
E.M.I. Group of Companies 381.38 1,722.55
Decca 2.93 203.21
Everest 4.12 162.38
Capitol 85.51 811.28
Australian Broadcasting - 9.37
Commission
-------- ------------
$473.94 $2,908.79 $3,382.73
--------- -----------
Royalties payable pursuant to agreements -
Decca 296.25
Everest 666.96
Capitol 1,195.00
E.M.I. (Australia) Ltd.
(``Hymns of Childhood'') 31.94
Australian Broadcasting
Commission (``Australian
Christmas Carols'') 16.70
-----------
$2,206.85 $2,206.85
----------- -----------
$5,589.58
Less 15% of $2,908.79 and $2,206.85
to allow for records not sold
by World Record Club Pty.
Limited 767.34
-----------
$4,822.24
-----------
which the conclusion was based upon sec.3(3) of the Act and the Commissioner's contentions based upon sec.18.
Section 42(6) enables an appeal to this Court from a decision of the Board ``which, in the opinion of the High Court, involves a question of law''. The question in the present case depends upon the interpretation of provisions of the Act and their application to proved facts. In my opinion the decision of the Board did involve a question of law. The case is therefore within the competence of this Court. It is important in this connexion to remember that the question is not whether the Board could reasonably find as it did, as might be the case in an appeal on a question of fact. Parts of what their Lordships said in
Griffiths v. J.P. Harrison (Watford) Ltd., (1963) A.C. 1
ATC 4115
are only indirectly relevant. Although the Act, in sec.42(6), speaks of proceedings in this Court as an appeal from a decision of the Board, such proceedings are in the nature of a re-hearing. There is no appeal from a decision of the Board unless a question of law be involved; but, if one be involved and an appeal is brought, the whole matter, fact and law, comes before this Court in its original jurisdiction. That is as I understand the position. The jurisdiction of the Court may be exercised by a single Justice: Judiciary Act 1903-1968, sec. 15. Section 42(6) of the Assessment Act makes the decision of the Court final and conclusive. Thus, if the matter comes before a single Justice of the Court, as ordinarily it does, his decision is conclusive. There is no provision in the Assessment Act comparable to the provisions of the Income Tax Assessment Act enabling an appeal to a Full Court in its appellate jurisdiction. Section 18 of the Judiciary Act would enable me by stated case to refer any question to a Full Court. After I had heard evidence and lengthy argument, counsel for the taxpayer suggested that I should do so. But the Commissioner did not support this proposal; and the parties had not agreed upon the precise form of any question that could appropriately be made the subject of a case stated. I think, after full consideration of the facts, that I must myself decide this case. Similar matters await determination in respect of other periods than the month now in question. They will not necessarily be governed by my decision. They may be made the subject of proceedings in which perhaps another member of the Court, taking a view different from mine, may think that there is a question that should be decided by the Full Court.The oral evidence that was given was lengthy. The documentary evidence was voluminous. I shall state in a summarised way the effect of the evidence on what appear to me to be the essential issues of the case. But first I set out the provisions of the Act that are relied upon by the Commissioner. They are as follows -
sec.3(3). Any reference in this Act to the amount for which goods are sold shall, where the goods are sold subject to the payment of a royalty, be deemed to include such amount as, in the opinion of the Commissioner, is the value of the royalty.
sec.18(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.
sec.18(4). Notwithstanding anything contained in sub-sec.(1) of this section, where in respect of any sale to which that sub-sec applies -
(a) the vendor and the purchaser are companies the shareholding interests of which are, in the opinion of the Commissioner, directly or indirectly in substantially the same hands;
(b) the vendor or the purchaser is a company in which, in the opinion of the Commissioner, the purchaser or the vendor, as the case may be, directly or indirectly controls the voting power of the company;
(c) the circumstances are such that in the opinion of the Commissioner the vendor or the purchaser is directly or indirectly in substantial control of the business operations of the other; or
(d) the goods sold were manufactured, wholly or in part, from materials sold to the manufacturer by the purchaser;
- and it appears to the Commissioner that the amount for which those goods were sold is less than their fair and reasonable wholesale value, the Commissioner shall alter the sale value to the amount which, in his opinion, is the fair and reasonable wholesale value of the goods and the value as so altered shall be the sale value of those goods for the purposes of this Act.
The parties who, as seller and buyer, play the leading parts in most of the transactions on which the case depends were at relevant times associated one with the other, and associated too with companies of the same names incorporated in the United Kingdom which I shall refer to as E.M.I. (U.K.) and World Record Club (U.K.). The taxpayer is a subsidiary of E.M.I. (U.K.) (the full name of which is Electric and Musical Industries Limited). It, at relevant times, held more than half the issued shares of the taxpayer. The taxpayer held half the issued shares in World Record Club, the other half being held by World Record Club (U.K.). E.M.I. (U.K.) held seventy-five per cent of the issued shares in World Record Club (U.K.).
An agreement in writing, bearing date 3 April 1959, was made between four parties - the taxpayer, E.M.I. (U.K.), World Record Club and World Record Club (U.K.). The agreement is long, its clauses dealing in detail with several
ATC 4116
distinct matters. It provided first for the manner by which the parties were to become shareholders one in another, as I have mentioned. It then stated that the taxpayer would press and sell to World Record Club, and that World Record Club would buy from the taxpayer for a period of ten years, at an agreed price (now 72 cents) for each record, all records that World Record Club required which the taxpayer could supply. It was further provided that World Record Club should be entitled to obtain any record the copyright in which belonged to either E.M.I. (U.K.) or World Record Club (U.K.) - the pressing of such records in Australia to be done by the taxpayer for World Record Club. The main provisions to that effect, so far as relevant for present purposes, are in clauses 10 and 11. These parts I set out -``10. E.M.I. (Australia) undertakes to press and sell to World (Australia) and World (Australia) undertakes to purchase from E.M.I. (Australia) all its requirements of records over a period of ten years from the date of Completion subject to the following terms and conditions:
(i) All records derived from recordings provided by E.M.I. (U.K.) pursuant to Cl. 11 hereof shall be pressed by E.M.I. (Australia)
- 11.(i) For a period of ten years from the date of Completion World (Australia) shall have the right to call for and E.M.I. (U.K.) undertake to use its best endeavours to make available to World (Australia) such recordings of performances by Artists under contract to E.M.I. (U.K.) or any of its subsidiaries as E.M.I. (U.K.) shall in its discretion from time to time decide.......
(ii) World (Australia) will inform E.M.I. (U.K.) of the works and Artists' recordings referred to above which World (Australia) wish to issue and E.M.I. (U.K.) will subject to the provisions of the preceding sub-clause thereupon undertake to negotiate with such Artists the best possible special royalty terms for such issues and communicate the same to World (Australia)
(iii) World (Australia) shall pay to E.M.I. (U.K.): -
(a) a pressing fee of Five per cent of the retail selling price of each record sold by World (Australia) or by any person firm or corporation on its behalf the recording for which is made available to World (Australia) under sub-clause (i) of this Clause. The retail selling price shall exclude the cost of record sleeves and any sales tax levied in respect of the sale.
(b) a sum equivalent to all copyright and other royalties or fees (including Artists' royalties) paid or payable by E.M.I. (U.K.) or any of its subsidiaries in respect of recordings made available to World (Australia) under sub-clause (i) of this Clause or World (Australia) shall at the option of E.M.I. (U.K.) pay such royalties direct to the persons entitled
(iv) All sums payable to E.M.I. (U.K.) under this Clause shall be payable quarterly on the last day of the months of March June September and December the first of such payments to be made on the 30th day of September next in respect of the period from the date of this Agreement to the said 30th day of June 1969''
I have set out the above provisions because they were much referred to in the argument. But the question that I have to decide depends upon the substance of the dealings between the taxpayer and World Record Club. The words of the Assessment Act in relation to what they did as seller and buyer are what count - not the words of the contract in which their dealings had their source.
In addition to the rights to obtain and sell to its members records of E.M.I. (U.K.) and World Record Club (U.K.) that it gained by virtue of the 1959 agreement, World Record Club (Australia) by other agreements obtained rights in respect of records belonging to three other overseas companies which in these proceedings were referred to as Decca, a British company, and as Capitol and as Euram or Everest, American companies. I shall come later to the details of the arrangements with each of these companies. Two further transactions come into the case. One arises in relation to sums paid in relation to records of songs called ``Hymns of Childhood'' that the taxpayer produced for World Record Club. The other arises out of a recording made by the taxpayer of an Australian Broadcasting Commission production called ``Australian Christmas Carols''.
The term ``royalty'' has been used by the parties to describe three different kinds of payments which accrue to different recipients which in an economic sense enter into the price that retail purchasers pay for records. The word ``royalty'' is, I think, in a general sense apt to describe each form of these
ATC 4117
payments: seeMcCauley v. F.C. of T. (1944), 69 C.L.R. 235. How far the payments fall within the provisions of sec.3(3) of the Assessment Act is however another question. To it I shall come after I have described each kind of royalty in question.
First is what in documents tendered was called the ``mechanical royalty'' or ``mechanical copyright royalty''. These terms seem to have had their origin in sec.19(2) of the British Copyright Act 1911 in force in the Commonwealth by virtue of sec.8 of the Copyright Act 1912-1963. The statutory provision so far as relevant is as follows -
sec.19(1) Copyright shall subsist in records, perforated rolls, and other contrivances by means of which sounds may be mechanically reproduced, in like manner as if such contrivances were musical works, but the term of copyright shall be fifty years from the making of the original plate from which the contrivance was directly or indirectly derived, and the person who was the owner of such original plate at the time when such plate was made shall be deemed to be the author of the work.......
(2) It shall not be deemed to be an infringement of copyright in any musical work for any person to make within the parts of His Majesty's dominions to which this Act extends records, perforated rolls, or other contrivances by means of which the work may be mechanically performed, if such person proves-
(a) that such contrivances have previously been made by, or with the consent or acquiescence of, the owner of the copyright in the work; and
that he has given the prescribed notice of his intention to make the contrivances, and has paid in the prescribed manner to, or for the benefit of, the owner of the copyright in the work royalties in respect of all such contrivances sold by him, calculated at the rate hereinafter mentioned.
The Act of 1911 was repealed in the United Kingdom by the Copyright Act 1956. Section 8 of the latter Act substantially reproduced sec.19 of the Act of 1911. But sec.19 remained the law of Australia until the Copyright Act 1968: and the parties took it as common ground that it is the provision relevant in considering the nature of the copyright royalties in question in this case.
Next are payments that were called ``artists' royalties''. These are amounts due to a person who sang a song for the purpose of enabling a master recording to be made. They are payable either directly to the singer or to the person who engaged him and undertook that he would receive stipulated royalties. The amount is calculated by reference to the number of records of his song that are made for sale.
Thirdly are what were called ``pressing fees'' or ``pressing royalties''. These are sums paid to the owner of the matrix used for pressing records from it for the right so to use it. The amount is calculated by reference to the number of records so made for sale. These ``royalties'' are not to be confused with amounts payable by a person who has records made for the actual work of pressing them.
Copyright Royalties
I shall consider first the copyright royalties. By agreement between the taxpayer and World Record Club, the taxpayer paid these royalties on condition that it was reimbursed for doing so. They were in the course of the argument called the ``copyright royalty'', or the ``composer's royalty'' on the assumption that the original owner of the copyright was the composer of the song with its musical arrangement. The procedure for the payment of these royalties, required by the Act to be paid, was prescribed by regulation No.43 of the Commonwealth Copyright Regulations in force at the relevant time. Counsel for the taxpayer described these royalties as fees for obtaining what he called a statutory licence. The words used do not, I think, matter. They are called, and aptly called, royalties by the Act. Their payment in the manner prescribed enables records to be made without infringement of copyright and prevents records so made being infringing articles.
Early in 1960 there was correspondence and discussion between the taxpayer and World Record Club as to the discharge of copyright obligations. On 2 February the arrangements arrived at, to operate thereafter, were formulated in a letter from the secretary of the taxpayer to the managing director of World Record Club as follows -
``... I would now submit the following as a revision of the proposals previously made with regard to the work which this Company would perform on behalf of the World Record Club Pty. Limited: -
(1) The fulfilment of all formalities prescribed under the Copyright Act 1912-1950, and the Regulations issued thereunder, in order to permit the Club to make and sell contrivances reproducing works the subject of protection under the abovementioned Act.
(2) E.M.I. shall pay on behalf of the Club and for the benefit of the copyright owners concerned, all mechanical copyright royalties due in consequence of such sales.
ATC 4118
it is suggested that the arrangement should commence as from 1 April next, and be in force for a period of twelve months continuing thereafter subject to termination by either party giving three months notice in writing.
With regard to a charge for the proposed services, it is felt that a fee of £600. 0. 0. per annum, payable monthly, would be an equitable charge to both parties.''
In 1964 the stipulated fee was increased to £1,000 per annum. This fee was paid for the work of keeping accounts, sending notices and other clerical duties connected with the copyright royalties. It was not to reimburse the taxpayer for royalties it had paid. That was an additional obligation of World Record Club.
Counsel for the taxpayer set some store on the terms of this letter and other documents in which the taxpayer is described as acting for World Record Club and paying the royalties on its behalf. This was based on a proposition that the liability to pay the royalties was placed by the Act upon World Record Club: that it was the person who made the records within the meaning of sec.19(2) because it had employed the taxpayer to make them. At one stage World Record Club itself gave the prescribed notices of an intention to make the records and itself paid the royalties directly to the owner of the copyright. This procedure accorded with cl. 11(iii)(b) of the agreement of 1959. But, some accounting difficulties having arisen, the procedure outlined in the letter of February 1960 was adopted. Under this the taxpayer periodically paid the royalties and was periodically reimbursed by World Record Club. It seems to me that, however the matter be regarded as between the taxpayer and World Record Club, the taxpayer was the person who actually made the records. If the royalties had not been paid, it would have been guilty of an infringement of copyright, and all the records it made would have been infringing copies:
Chappell & Co. Limited v. Columbia Graphophone Company, (1914) 2 Ch. 745. The primary liability to pay the royalties, or to provide for their payment, was thus, as I read the Copyright Act, upon the taxpayer. Doubtless World Record Club could be described as the maker, on the principle that qui facit per alium facit per se: but that does not mean that the taxpayer would not have been an infringer if the royalties had not been paid. Therefore, as I see it, the payments made to the taxpayer by World Record Club to reimburse it for payments it had made to enable the lawful reproduction of records for sale to World Record Club ought to be taken into account as part of ``the amount for which those goods are sold''. The word ``amount'' of itself connotes a sum total to which items amount up. I hesitate to use here either of the words ``consideration'' or ``price'', because recently there has been some new academic analysis of the juristic concepts they express. 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. In
Commonwealth Quarries (Footscray) Pty. Ltd. v. F.C. of T. (1938), 59 C.L.R. 111 Dixon and McTiernan JJ. said (at p.121) that the words ``the amount for which those goods are sold'' appeared ``necessarily to mean the contract price''. It may be that in some agreements for sale the buyer agrees to meet some incidental charges that are not in a strict sense part of the contract price. But the judgments in the case to which I have referred support, I think, my view of the content of the word ``amount'' in this case. The Board of Review took a different view of sec.18 of the Assessment Act. The Board's conclusion was based on sec.3(3). I do not think it necessary to resort to sec.3(3) to make the copyright royalties part of the sale value of the goods sold. Nevertheless it is pertinent, for it seems to me to put the matter beyond doubt. I do not read it as operating only in a case which would not otherwise be within sec. 18(1)(a). The two provisions can overlap. It was argued for the taxpayer that the words in sec.3(3) ``where the goods are sold subject to the payment of a royalty'' predicated that the sale was upon a condition. I see no objection to this proposition if the word ``condition'' be used to mean simply a term, express or implied, of the agreement between the buyer and the seller. But I do not think that the words ``subject to'' must be read, as the argument for the taxpayer insisted, as importing either a condition precedent or, as I understood the argument, what in the civil law would be called a resolutive condition, of the sale. As I read sec.3(3), it applies in any case in which an obligation by the buyer to pay a royalty to a seller or to provide for the payment of a royalty is an element in the total amount that the buyer must pay to get the property in the goods free of claims by third parties. Whether a royalty forms a part of the price strictly understood or is payable pursuant to a collateral undertaking is, as I see it, immaterial. Payment of a sum described as a royalty may be an additional contractual obligation to payment of the sum called the price: cf.
Perpetual Trustee Company (Limited) v. Pacific Coal Company Pty. Limited, (1956) A.C. 165.
I turn now from transactions arising from the agreement of 3 April 1959 to the transactions of
ATC 4119
the taxpayer with respect to records of songs belonging to what were variously termed the ``repertoires'' or ``portfolios'' or ``catalogues'' of the companies which were referred to as Decca, Euram or Everest, and Capitol. In each of these cases the payment of royalties was provided for by agreements, which I shall briefly describe.Decca: The Decca Record Company Limited is incorporated in the United Kingdom. An agreement between it and the taxpayer was made on 16 November 1962, to continue for three years, which period was afterward extended. By this Decca appointed the taxpayer as the sole distributor in Australia of its records. Decca made available to the taxpayer matrices of recordings and gave the taxpayer an exclusive licence to press records from those matrices. By Cl. 8 of this agreement the taxpayer was to pay to Decca, among other amounts, ``an amount equal to the artistes' royalties (if any) and all other royalties payable in respect of records pressed by E.M.I. (Australia) from matrices leased to it... (other than royalties payable to copyright owners...''. And cl. 9 provided that ``E.M.I. (Australia) shall be responsible for the fulfilment of all copyright obligations statutory or otherwise arising from the manufacture and sale by it of records pressed by it from matrices leased by Decca''. By a supplemental agreement dated 14 July 1965 the taxpayer became entitled ``to release in Australia records pressed from Decca's matrices on the World Record Club label'' upon terms set out in the agreement. Decca records were made by the taxpayer for World Record Club. They were marked by the Club's label and sold by it to its members. Before this supplemental agreement was made, the witness Mr. Sturman, who was then the manager of the record department of the taxpayer, had conversations with Mr. Day, an officer of World Record Club who was authorised to act on its behalf.
Mr. Sturman's evidence of this was as follows under examination by counsel for the taxpayer -
``Prior to the making of the supplemental agreement had you had conversations with Mr. Day of the World Record (Australia) company in relation to the use by them of the Decca portfolio?... Yes, I had.
And had you had discussions with him as to what would be the basis as to the payment of royalties should any such access be able to be arranged?... Yes.
What did he say to you and what did you say to him?... He offered to pay any royalties that may ever come due by the nature of pressing royalties, copyright royalties, artists' royalties, should his company have access to the Decca repertoire; and I said, if I could arrange it, we would be pleased to get access to the Decca catalogue for World subject to World's payment of all royalties that were due.''
In practice the taxpayer paid such copyright royalties as were payable in respect of Decca records. When World Record Club became the seller of Decca records under its own label the taxpayer debited it with the amount that it had paid or become liable to pay as copyright royalties. Again, for the reasons I have already given, this became part of the sale value of the goods for the purposes of the Assessment Act.
Capitol: The taxpayer on 1 July 1962 entered into an agreement with this American company (Capitol Records Inc.). In general effect it was not unlike the agreement with Decca. Capitol gave a licence to the taxpayer to make and distribute records made from Capitol's matrices. There was in cl. 4(3) a provision that ``copyright, composer and lyricist royalties will be paid by licensee (scil. the taxpayer) directly to the persons entitled to receive said royalties''. Royalties did accrue due. World Record Club by Mr. Day had agreed orally that if it could get ``access to the Capitol portfolio'' it would pay all royalties. In practice World Record Club reported regularly to the taxpayer what records of songs of Capitol origin it had sold. The taxpayer discharged all royalties thereupon accruing and debited World Record Club with the amount. Here again in my opinion these sums form part of the sale value of goods sold by the taxpayer as seller to World Record Club as buyer.
Everest: What were called the Everest arrangements are complicated. ``Everest'' is a trade name, a label, for records made from matrices belonging to an American company, Euram Distributing Corporation. It on 1 June 1963 gave another company, Trans-Global Musical Co. Incorporated, a licence to make and sell ``Everest'' records. This licensee company, incorporated in America, is a subsidiary of E.M.I. (U.K.). The taxpayer through E.M.I. (U.K.) was taken to have thus become entitled to reproduce Everest records in Australia. World Record Club wanted to be able to distribute these to its customers. Mr. Day agreed on its behalf with Mr. Sturman on behalf of the taxpayer that World Record Club would pay all royalties payable, and again this was done by substantially the same accounting procedure as in other cases - the taxpayer paid the royalties and was reimbursed by World Record Club. Again I consider that the amount of these disbursements was part of the sale value of the goods sold to World Record Club.
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There were two other transactions that attracted small sums as copyright royalties in the relevant period. They were the reproduction of musical numbers and songs known respectively as ``Hymns of Childhood'' and ``Australian Christmas Carols''. The former arose from an agreement dated 6 November 1965 by which the taxpayer granted World Record Club the right to use master recordings that it owned of certain well-known hymns for the purpose of manufacturing and selling phonograph records therefrom. The agreement provided for World Record Club paying the taxpayer seven and a half per cent of the retail list price on eighty-five per cent of all records manufactured and sold under the agreement. Clauses 3 and 4 read as follows - ``the Company'' therein meaning World Record Club.
``3. The sums to be paid by the Company to EMI pursuant to clause (2) hereof are intended to include provision for all recording artists' royalties and EMI agrees without any cost or expense to the Company whatsoever to pay all royalties which may be or become due to artists and/or musicians with respect to records manufactured and sold hereunder.
4. With respect to records manufactured and sold hereunder from the said recordings the Company agrees to pay or cause to be paid directly to the proprietors of the musical copyrights or their duly authorised agents all royalties which may be or become due.''
In the case of ``Australian Christmas Carols'', the taxpayer in August 1961 made an agreement with the Australian Broadcasting Commission by which the taxpayer became entitled to make a master recording of an orchestral concert produced by the Commission. The recording was to belong to the Commission. It was to be available on hire to the taxpayer for the reproduction and sale of records ``in consideration of the payment to the Australian Broadcasting Commission of a royalty equal to 7½% of the retail selling price, less sales tax and sleeve costs, of the net sales of all copies''. The taxpayer was to ``be responsible for the discharge of copyright obligations arising by reason of the sale of copies of the recording''. The taxpayer then gave what it called a sub-licence to World Record Club. ``Such licence'', it wrote, ``is, of course, conditional upon payment by World to us of the 7½% royalty mentioned in our agreement with the ABC''. The taxpayer made records for World Record Club from its master recording of the concert. As I understand the matter, although the evidence was not I think quite explicit the taxpayer debited World Record Club with the seven and a half per cent royalty that it had had to pay the Australian Broadcasting Commission and also with amounts that it had pursuant to its agreement with the Commission paid to discharge ``copyright obligations''.
As I see it, all the copyright royalties that were in fact discharged by the taxpayer and then recovered by it from World Record Club were, for the reasons I have given, part of the sale value. I do not find it necessary to set out details of the procedure by which the royalties were, in an accountancy sense, paid and periodically recovered by the taxpayer. The result was that the burden of them fell ultimately on World Record Club as buyer. In the case of payments to J. Albert & Son Pty. Ltd. and Southern Music Publishing Co. Pty. Ltd., which companies were in some cases the copyright owners, no further question arises. In the case of other copyright owners there is an accounting difficulty because the copyright royalty was considered payable only as World Record Club sold the records to its customers. The Commissioner in his assessment therefore arbitrarily reduced the amount payable as royalties in these cases by fifteen per cent. If he be right in his main contention as to the copyright royalties debited to World Record Club - as in my opinion he is - then no challenge is made of this allowance as insufficient.
Artists' Royalties and Pressing Fees
I pass now to what were called artists' royalties and pressing fees. These differ from the copyright royalties as they were obligations that the taxpayer incurred by reason of contracts that it made quite independently of any statutory liability. The taxpayer paid them, or became liable to pay them. Then as in the case of the copyright royalties it debited World Record Club with the amounts it had paid.
By cl. 12 of the agreement of 3 April 1959 World Record Club (U.K.) gave to World Record Club (Australia) similar rights to those given it by E.M.I. (U.K.) under cl. 11 above referred to. Both clauses provided for the payment of artists' royalties and pressing royalties by World Record Club. It has from time to time exercised its rights under the agreement to obtain recordings direct from E.M.I. (U.K.) and World Record Club (U.K.) and it has paid the pressing fees and artists' royalties provided for. The Commissioner has not claimed that any sums that World Record Club has thus paid to either E.M.I. (U.K.) or to World Record Club (U.K.) as artists' royalties or pressing fees attract sales tax. The question before me arises only in respect of transactions arising, directly or indirectly, from dealings between the taxpayer and World Record Club.
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I have already referred to the contractual arrangements the taxpayer made with respect to Decca, Capitol and Everest records, ``Australian Christmas Carols'' and ``Hymns of Childhood'' in relation to percentage pressing fees and artists' royalties. As I have said, it was agreed between the taxpayer and World Record Club that World Record Club would meet these costs in respect of its purchases from the taxpayer. It did so from time to time. Their payment by World Record Club to the taxpayer was in my view indistinguishable in effect from its payment of copyright royalties. In one respect perhaps it is a little clearer. That is because the arrangements that Sturman made with Day establish, indisputably in my view, that the goods were sold by the taxpayer to World Record Club expressly ``subject to the payment of a royalty'' within the meaning of sec.3(3) of the Assessment Act. And that enabled the Commissioner to assess the sale value as he did with an allowance for goods unsold.
Conclusion
For the reasons that I have given the Commissioner was I consider correct in taking the amount of royalties into account as part of the sale value of goods.
The appeal from the decision of the Board of Review is dismissed. The taxpayer must pay the Commissioner's costs of the appeal. I make the usual order as to exhibits.
ORDER
Appeal dismissed with cost. Usual order as to exhibits.
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