FC of T v FRANKLIN MINT PTY LTD

Judges:
Sweeney ACJ
Jenkinson J
Gummow J

Court:
Full Federal Court

Judgment date: Judgment handed down 16 August 1993

Sweeney ACJ, Jenkinson and Gummow JJ

The Commissioner of Taxation appeals, by leave, against so much of the judgment of a Judge of the Court given on 11 February 1993 as allowed the appeal of Franklin Mint Pty Ltd (``the taxpayer'') against the Commissioner's decision disallowing its objection to an assessment of sales tax for goods sold during the period between 10 May 1985 and 31 December 1986. The judgment is reported:
Franklin Mint Pty Ltd v FC of T 93 ATC 4062.

The essential issue before the primary Judge was described by him as being whether the taxpayer [at pp 4063-4064]:

``is liable to pay sales tax under the Sales Tax Act (No 10B) 1985 (the Ratings Act (No 10B)) on amounts of royalty paid in respect of goods. The long title to that Act is `An Act to impose a tax, being a duty of customs, on the sale value of certain goods'. Section 5 imposes sales tax upon the sale value of goods in Australia `deemed by virtue of section 6 to be sold by a taxpayer' on or after 10 May 1985. Section 6 is set out in full:

`6(1) Where at any time-

(a) tax is paid or payable, or might reasonably be expected to become payable, by a person upon the sale value of goods under an Act providing for the assessment of sales tax; and

(b) an amount of royalty is paid in respect of the goods by any person,

then, for the purposes of this Act and the Assessment Act, but for no other purpose, the person referred to in paragraph (b) shall be deemed to sell the goods at that time.

(2) A person is deemed to sell goods at a particular time-

(a) whether or not an actual sale of the goods is or has been made by that person; and

(b) irrespective of the time at which any such actual sale is or has been made.'

The Sales Tax Assessment Act (No 10) 1985 (the Assessment Act (No 10)) is incorporated in and is to be read as one with the Ratings Act (No 10B).''

The application came before the Court at first instance under paragraph 41(b) of the Sales Tax Assessment Act (No 1) 1930 (``the Assessment Act (No 1)'') pursuant to a request by the taxpayer. The Commissioner had disallowed an objection against an assessment to sales tax pursuant to sub-s. 10(2) of the Assessment Act (No 10). The taxpayer and the Commissioner reached agreement with respect to a number of the taxpayer's objections but the issue described above fell to be determined by the Court.

ATC 4639

The relevant facts were set out by his Honour as follows [at pp 4064-4065]:

``The taxpayer is incorporated in Victoria, but is controlled by the Franklin Mint Company, a partnership with its headquarters in Franklin Centre in the State of Pennsylvania in the United States of America. The forebears of the partnership commenced business in 1964 as the creator and marketer of commemorative medallions and coins. The business was extended and in 1985 the business was creating and marketing what are generally known as collectibles including objets d'art as well as luxury and pleasure products. Its products were all created to a very high standard, were of high quality and were directed to a discerning and wealthy market. It conducted its operations worldwide in 18 countries, including Australia, through a group of organizations described as the Franklin Mint Group. The Group had manufacturing entities in three countries and procurement branches in five countries. The Franklin Mint Group comprised companies in the 18 countries, including Australia, and the taxpayer was the Group's company in Australia. The Group, including the taxpayer in Australia, conducted its merchandising in those countries through mail orders. The taxpayer commenced its operations in Australia in 1975. In Australia, sales were and are promoted by media advertising and by direct mail addressed to persons who are on a mailing list maintained by the taxpayer. The media advertising is conducted in high class magazines either by advertisements in the magazine itself or by way of a loose sheet inserted into the magazine. The loose sheets are called flyers.

Products sold by the Franklin Mint Group are manufactured by its own subsidiaries or acquired from other manufacturers in a number of countries, including Australia. The taxpayer does not manufacture products. Products obtained from persons unrelated to the Group are located and obtained by buying agents. The taxpayer imports manufactured goods from manufacturers both related and unrelated to itself and from vendors both related and unrelated to itself. The taxpayer does not import or purchase products from or through wholesalers. The Group assists manufacturers with the manufacturing of products free of charge. The costs of this service are spread between the various subsidiaries of the partnership.

In 1984, the Franklin Mint Group was conducted by the Franklin Mint Corporation. During that year, negotiations commenced for the purchase of the business of the Group from Franklin Mint Group by two other companies API Acquisition Company Inc (API) and Warner Communications Inc (Warner). In December 1984, the Franklin Mint Company partnership was formed, the partners being API and Warner. The partnership acquired the businesses and assets of the Group. Following this, a restructuring of the Group was undertaken. Under the restructuring, each subsidiary would bear its own costs. To give effect to this the subsidiaries were to be licensed to use the trade marks and get up of the Franklin Mint Group products and to pay a fee to the partnership for the use of those marks and get up. A trade mark licence agreement was entered into between the taxpayer and the partnership. The important feature of that agreement, for the purpose of this application, was that the licence fee was to be a flat fee to be paid annually irrespective of the quantity or value of products sold or the use made of the marks and get up. The annual fee was $US450,000 for each year ending 31 December, but, since the first period was less than 12 months, an amount of $US350,000 was to be paid for the period ending 31 December 1985. The annual fee was to be paid in two parts namely within 30 days after the expiration of each six months period. It was not disputed that the agreement was entered into at arm's length.

The trade mark licensing agreement is dated 18 December 1985 but came into force as of 26 March 1985 and was to remain in force indefinitely until terminated in conformity with the terms of the agreement. The partnership and the taxpayer were the parties to the agreement. It is recited that the partnership was the registered proprietor of the Australian Trade Marks listed in the schedule to the agreement and the owner of certain get up, that the taxpayer wished to obtain a licence to use the trade marks and get up and that the partnership had agreed to

ATC 4640
grant such a licence to the taxpayer. Under the agreement the partnership granted to the taxpayer, which accepted, `an exclusive right and licence to use the Trade Marks and Get up' in Australia. Provision was made for the use of additional trade marks and for general conditions of use. The agreement could be terminated on a breach of condition or upon notice.

The evidence establishes, and it is not disputed, that the licence fee was paid by the taxpayer to the partnership in conformity with the trade mark licensing agreement during the period 18 December 1985 to 31 December 1986, being the period of the assessment the subject of this review. It is clear also that the amount of the licence fee paid remained the same irrespective of the quantity or value of products sold by the taxpayer in Australia. The evidence shows a wide fluctuation in the value of sales during the period 1983 to 1987 but the amount of the trade mark licence fee remained constant at the amount specified in the contract. Further the products sold were sold in connection with one or other of the trade marks referred to in the agreement or in accordance with the get up referred to therein.

In purported conformity with the provisions of the Sales Tax legislation, pursuant to s 10 of the Assessment Act (No 10) the Commissioner determined the amount of sales tax to be paid by the taxpayer in the sum of $191,389.90 and made and issued an assessment requiring payment as follows:

`Calculation of sale value for the period 18 December 1985 - 31 December 1986 inclusive.

Total Royalty payments to Franklin Mint Corporation $1,144,128.00
     TAX      CALCULATION              SALE          TAX DUE
     RATE                              VALUE

     10%      $1,144,128.00 x 14.86%   $170,017.00   $ 17,001.70
     20%      $1,144,128.00 x 66.88%   $765,192.00   $153,038.40
     30%      $1,144,128.00 x 6.22%    $71,166.00    $ 21,349.80
                                                     -----------
                                                     $191,389.90'
              
The variation in the tax calculation rate depended upon the nature of the products sold by the taxpayer, different rates applying to different categories of products. The `Total Royalty payments' refer to the amount of the licence fee paid by the taxpayer to the partnership pursuant to the trade mark licensing fee for the period 18 December 1985 to 31 December 1986 converted into Australian currency.

In addition to the assessment for sales tax, the Commissioner required the taxpayer to pay additional tax by way of penalty under s 45 of the Assessment Act (No 1).''

The primary Judge then referred to the relevant statutes, observing [at 4066]:

``The Assessment Act (No 10) imposes a liability to taxation. In this Act, a reference to a `Taxing Act' includes a reference to the Ratings Act (No 10B). By sub-sec 3(2), in the Assessment Act (No 10) a reference to `goods deemed to be sold' is a reference to goods that are, by virtue of s 6 of the Ratings Act (No 10B), deemed to be sold. For the purposes of this review, the relevant parts of sections 5 and 6 of the Assessment Act (No 10) are set out:

`5(1) The sale value of goods deemed to be sold by a taxpayer is the amount that, in the opinion of the Commissioner, is the value of the amount of royalty paid by the taxpayer in respect of the goods,...'

`6 Sales tax upon the sale value of goods shall be paid by the person by whom the goods are deemed to be sold.'

In order to construe the relevant provisions of the Assessment Act (No 10) and the Ratings Act (No 10B), it is necessary to turn to s 3A of the Assessment Act (No 1). Section 3A was inserted into the Assessment Act (No 1) by Act No 47 of 1985 and came into operation on 10 May 1985, the same date as the Assessment Act (No 10) and the Ratings Act (No 10B) came into operation. Essentially s 3A contains definitions and, for

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the purposes of this review, sub-sections 3A(1), (3) and (5) contain the relevant provisions.''

The primary Judge then set out those provisions; we will do so shortly.

His Honour later said [at p 4067]:

``Section 5 of the Ratings Act (No 10B) imposes sales tax `upon the sale value of goods in Australia deemed by virtue of section 6 to be sold by a taxpayer'. Sub- section 6(1) specifies two conditions which, when congruous, create a deemed sale of goods. For present purposes, the relevant parts of the sub-section are:

`6(1) Where at any time-

(a) tax is paid or payable, or might reasonably be expected to become payable, by a person upon the sale value of goods... and

(b) an amount of royalty is paid in respect of the goods by any person,

then,... the person referred to in paragraph (b) shall be deemed to sell the goods at that time.'''

The case at first instance turned upon the proper construction of sub-s. 3A of the Assessment Act No 1 and in particular upon sub-s. 3A(5). It is necessary to set out the section in full:

``3A(1) Subject to sub-section (2), a reference in this Act to payment of a royalty, in relation to goods, is a reference to payment of an amount of royalty in respect of goods that occurs at a time when the goods are neither excluded goods nor exempt goods.

3A(2) Where-

(a) a person pays an amount of royalty in respect of goods at a time when the goods are excluded goods or exempt goods; and

(b) the payment is made in connection with a scheme entered into or carried out for the purpose of enabling any person to avoid liability to pay an amount of sales tax that would have been, or might reasonably be expected to have been, payable in respect of the goods,

the payment shall be deemed, for the purposes of this Act, to have been made at a time when the goods were neither excluded goods nor exempt goods.

3A(3) For the purposes of sub-sections (1) and (2), an amount of royalty that is paid in respect of goods and another matter shall, to the extent to which it is attributable to the goods, be deemed to be paid in respect of the goods.

3A(4) For the purposes of this Act, where a non-resident pays an amount of royalty in respect of goods at the request of, or under an arrangement with, a resident, then, unless the Commissioner otherwise directs, the resident shall be deemed to pay, and the non-resident shall be deemed not to pay, the amount of royalty.

3A(5) A reference in this section to royalty is a reference to an amount, however described or computed, that is paid by a person (whether the payment is periodical or not) to the extent to which the amount is paid by way of royalty (or like payment) as consideration for-

(a) the doing of, or the right to do, any act that would constitute an infringement of copyright if done without the licence of the owner of the copyright, other than an act consisting of-

(i) performing work;

(ii) broadcasting a work, sound recording or cinematograph film;

(iii) causing a cinematograph film, a work, or a television program that includes a work, to be transmitted to subscribers to a diffusion service;

(iv) causing a sound recording to be heard in public;

(v) causing a cinematograph film to be seen in public; or

(vi) exhibiting an article in public;

(b) the making, use, exercise or vending of an invention or the right to make, use, exercise or vend an invention;

(c) the use of, or the right to use-

(i) a design or trade mark;

(ii) confidential information; or

(iii) machinery, implements, apparatus or other equipment;

(d) the supply of scientific, technical, industrial, commercial or other knowledge or information;

ATC 4642

(e) the supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any matter falling within any of the foregoing paragraphs; or

(f) a total or partial forbearance in respect of any matter falling within any of the foregoing paragraphs (including paragraph (e)).

3A(6) Where goods are manufactured or sold subject to the payment of a royalty, a reference in this Act, in relation to the ascertainment of the sale value of the goods, to-

(a) the amount for which the goods are sold or purchased;

(b) the amount for which the goods could reasonably be expected to have been sold or purchased;

(c) the amount for which identical goods could reasonably be expected to have been sold or purchased;

(d) the amount charged to a person by another person in respect of the goods;

(e) a particular value of the goods;

(f) the amount of wages paid in respect of the manufacture of the goods; or

(g) the amount payable in respect of the manufacture of the goods,

shall be read as including a reference to-

(h) except where paragraph (j) or (k) applies - such amount as, in the opinion of the Commissioner, is the value of the royalty;

(j) in the case of a reference to the amount of wages paid in respect of the manufacture of the goods-

(i) where the reference occurs in the first proviso to sub-section 18(2) - 57%; or

(ii) where the reference occurs in the proviso to sub-section 18(3) - 83%,

of the amount that, in the opinion of the Commissioner, is the value of the royalty; or

(k) in the case of a reference to the amount payable in respect of the manufacture of the goods - 75% of the amount that, in the opinion of the Commissioner, is the value of the royalty.

3A(7) For the purposes of this section-

(a) an expression used in paragraph (5)(a) has the same meaning in that paragraph as in the Copyright Act 1968, but `cinematograph film', in addition to the meaning given by that Act, includes a video tape or video disc;

(b) an expression used in paragraph (5)(b) has the same meaning in that paragraph as in the Patents Act 1990;

(c) `design' means a design of a kind capable of being registered under the Designs Act 1906, whether or not it is registered under that Act or any other law; and

(d) `trade mark' means a mark of a kind capable of registration under the Trade Marks Act 1955, whether or not it is registered under that Act or any other law, but does not include a mark that relates to a service.

3A(8) In this section-

`excluded goods' means goods, including commodities, of a kind referred to in paragraph (a) or (b) of the definition of `goods' in sub-section 3(1);

`exempt goods' means goods the sale value of which is exempt from sales tax by virtue of the Sales Tax (Exemptions and Classifications) Act 1935;

`payment' , in relation to an amount, includes the incurring of a liability to pay, and the crediting of, the amount;

`resident' means-

(a) a natural person who is a resident of Australia;

(b) a natural person whose domicile is in Australia, except where the Commissioner is satisfied that the person's permanent place of abode is outside Australia; or

(c) a company that is incorporated in Australia, or, not being incorporated in Australia, carries on business or holds property in Australia;

`scheme' means-

(a) an agreement, arrangement, understanding, promise or undertaking, whether formal or

ATC 4643
informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; or

(b) a scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

3A(9) For the purposes of this section, a scheme shall be taken to be entered into or carried out for a particular purpose if the person who has, or one or more of the persons who have, entered into or carried out the scheme or a part of the scheme did so for that purpose or for purposes including that purpose.''

[Emphasis supplied]

His Honour first considered the meaning to be given to the word ``royalty'' under the general law and High Court authorities on that question, including
McCauley v FC of T (1944) 7 ATD 427 at 431, 429; (1944) 69 C.L.R. 235 at 243-244, 240-241 and
Stanton v FC of T (1955) 11 ATD 1 at 2-4; (1955) 92 C.L.R. 630 at 639-642. It will be recalled that in those cases, the High Court was considering the expression ``as or by way of royalty'' which appeared in para. 26(f) of the Income Tax Assessment Act 1936. The term ``royalty'' was not then defined by that statute.

In Stanton at ATD 4; CLR 641, Dixon C.J., Williams, Webb, Fullagar and Kitto JJ. said that the modern application of the term ``royalty'' seemed to fall under two heads. These were payments which were received by the grantees of monopolies such as patents and copyrights under licences, and payments obtained by the owner of the soil in respect of the taking of some special thing forming part of the soil or attached to it and which the owner suffered to be taken from the soil. Their Honours also said, at ATD 4; CLR 642, that it was inherent in the conception expressed by the word ``royalty'' that the payments should be calculated ``either in respect of the quantity or value taken or the occasions upon which the right is exercised''.

In
FC of T v Sherritt Gordon Mines Limited 77 ATC 4365; (1977) 137 C.L.R. 612, the High Court construed the term ``royalties'' as it appeared in a double taxation agreement between Australia and Canada. The term was not defined in the agreement. By a majority, the High Court held that payments for the provision of technical assistance and information which the recipient was entitled to use once it was supplied, were not royalties.

The primary Judge set out the rival submissions on the meaning to be given to ``royalty'' in sub-s. 3A(5). He concluded that, in the present context [at 4072],

``there is not sufficient reason to support the view that when using the word `royalty' in s 3A the legislature intended to depart from the normal meaning of that word except where clearly stated, such as in paragraphs 3A(5)(d) and (f). In s 3A and in the Assessment Act (No 10) and the Ratings Act (No 10B), the word `royalty' connotes, at least, the essential requirements that the amount `be calculated either in respect of the quantity or value taken or the occasions upon which the right is exercised'. The submissions put on behalf of the Commissioner are rejected.''

It will be recalled that an important feature of the agreement in question was that the licence fee was a flat fee paid annually irrespective of the quantity or value of the product sold or the use made of the marks and get-up.

His Honour continued [at pp 4072-4073]:

``Counsel for the Commissioner sought support from views expressed in
Cooper Brookes (Wollongong) Pty Ltd v FC of T 81 ATC 4292; (1980-1981) 147 CLR 297. Their contention was that unless their submission was accepted the definition would be meaningless, that the legislation had achieved nothing and that a Court should be slow to come to such a conclusion. Counsel quoted from Halsbury, Laws of England, 4th Ed Vol 44 paragraph 862:

`There is a strong presumption that Parliament does not make mistakes. If blunders are found in legislation, they must be corrected by the legislature, and it is not the function of the court to repair them. Thus, while terms can be introduced into a statute to give effect to its clear intention by remedying mere defects of language and to rectify obvious misprints or misnomers, or obvious mistranslations of an international convention, no provision which is not in the statute can otherwise be implied to remedy an omission, even if it is evidently unintentional.

ATC 4644

However, if particular words of a statute are so obscure or doubtful in their meaning that they are not capable of a grammatical construction, but the intention of the legislature is plain on the construction of the statute as a whole, it is permissible, in order to give effect to the statute and avoid manifest absurdity or injustice, (1) to reject words or phrases as surplusage, if no sensible meaning can be given to them; (2) to supply omitted words or expressions; (3) to transpose, interpolate or otherwise alter words; (4) to read negative words as affirmative, or affirmative as negative, disjunctive as conjunctive, or conjunctive as disjunctive; (5) to put upon words a sense possible but not usually attributable to them; (6) to expand their literal meaning.'

Counsel submitted that applying those principles, the Court should read sub-sec 3A(5) as if the words `by way of royalty (or like payment)' in the opening part of the sub-section read `a reference in this section to royalty is a reference to an amount, however described or computed, that is paid by a person (whether the payment is periodical or not) to the extent to which the amount is paid as consideration for...'. Counsel referred to a number of authorities to support this contention including
Salmon v Duscombe (1886) XI AC 627 at p 634, and
Federal Steam Navigation Co Ltd & Anor v Department of Trade and Industry [1974] 2 All ER 97 per Lord Reid at p 100:

`Cases where it has properly been held that a word can be struck out of a deed or statute and another substituted can as far as I am aware be grouped under three heads: where without such substitution the provision is unintelligible or absurd or totally unreasonable; where it is unworkable; and where it is totally irreconcilable with the plain intention shewn by the rest of the deed or statute. I do not say that in all such cases it is proper to strike out a word and substitute another. What I do say is that I cannot discover or recall any case outside these three classes where such substitution would be permissible.'

Counsel then contended that if the words `by way of royalty (or like payment)' had the effect of giving to the word `royalty' in s 3A of the Assessment Act (No 1), the Assessment Act (No 10) and the Ratings Act (No 10B) a meaning that included the essential elements of the word in its ordinary meaning, then the inclusion of those words is totally irreconcilable with the clear intention of the Legislature which was to depart from the ordinary meaning of the word `royalty' by removing from it all the essential elements of the word in its ordinary meaning. In essence, what counsel was saying was that in the Sales Tax legislation, the word `royalty' did not mean `royalty' but meant any payment made as compensation for the enumerated matters. Counsel contended that this approach had been adopted by the High Court in relation to a revenue statute in Cooper Brookes (Wollongong) Pty Ltd v FC of T 81 ATC 4292; (1980-1981) 147 CLR 297 especially per Gibbs CJ at ATC pp 4294-4295; CLR pp 302-303 and at ATC pp 4295-4297; CLR pp 304-306, per Stephen J at ATC p 4299; CLR pp 310-311, and per Mason and Wilson JJ at ATC p 4305; CLR pp 319-320. There, the essence of the basis for the Court's judgment is illustrated by the following passage from the reasons of Stephen J at ATC p 4300; CLR p 311:

`Just as in
Curtis v Stovin [(1889) 22 QBD 513] it was possible for the Court both to recognize the nature of the draftsman's error and to identify it as error - per Lord Esher M.R. at p. 517, so here it is possible to trace the process by which sec. 80C(3) has become the anachronism which it now is.'

The Court declines to accept this submission. The essential features of an amount of royalty are well known and understood. They have been the subject of a number of authorities in Australia. The legislature has taken the word `royalty' as the essential feature of the new Sales Tax legislation introduced in 1985. The whole of that legislation, including s 3A of the Assessment Act (No 1), the Assessment Act (No 10) and the Ratings Act (No 10B) are based upon the word `royalty'. To hold that, despite all this, the Court should hold that the word `royalty' does not mean `royalty' would make a mockery of the meaning of

ATC 4645
words. So to do would make the Mad Hatter's Tea Party look sane.''

His Honour then turned to consider the words ``or like payment'' appearing in sub-sec. 3A(5)(1). In a crucial passage, the primary Judge held as follows [at p 4073]:

``... the word `like' means similar, and in my opinion a like payment must contain the essential elements of a royalty unless expressly stated. Thus, payments made as consideration of the matters referred to in paragraphs 3A(5)(d) and (f) are payments by way of royalty since those paragraphs remove the essential features of royalty referred to in Sherritt Gordon and Volvo. Thus, by statute, those payments are like payments by way of royalty.

For these reasons, the taxpayer succeeds.''

During the course of the hearing, the taxpayer had sought to raise before the primary Judge an issue as to whether the total amount paid by it to the partnership had been paid in respect of the sale value of goods. The contention was that part of the money was paid in respect of other matters, such as advertising. The parties agreed that the better course to adopt was to decide as a preliminary issue whether the taxpayer was liable to pay sales tax under the Ratings Act (No. 10B) and to defer the further issue until after a decision on the main issue. The primary Judge having decided the preliminary, but discrete, issue adversely to the Commissioner, the second issue did not arise. If the present appeal succeeds, it will be necessary to return the matter for determination of the second issue.

The appeal gives rise to a number of questions. Is the separate construction of the word ``royalty'' in sub-section 3A(5) followed by the later consideration of the words ``(or like payment)'' likely to have led to error? It may have been necessary to construe sub-section 3A(5) as a whole.

If his Honour's view be accepted as correct, are the words

``however described or computed''

``whether the payment is periodical or not''

``(or like payment)''

to be regarded as mere surplusage? Should they be construed as giving the definition a wider meaning than that which commended itself to the primary Judge? Is that meaning wide enough to embrace the transactions here in question?

The dictionary meanings of ``like'' include ``having the same characteristics of some or other person or thing, similar, resembling, analogous''. If one reads ``like'' in the sub- section as ``similar'', ``resembling'' or ``analogous'' the provision may need to be given a wider meaning than that which commended itself to his Honour.

It is necessary to commence consideration of the proper construction of sub-s. 3A(5) by referring again to the general law position. The High Court authorities, to which we have referred, direct particular attention to two elements in the ordinary meaning of ``royalty''. The first concerns the method of computation of the payment, the second the nature of the right or permission the exercise of which attracts the obligation to make the payment.

As to the first, the royalty is to be calculated in respect of either the quantity or value of the user, or the occasions upon which the right or permission is exercised. Hence, in the present case, the flat fee would not satisfy this criterion. Secondly, the subject matter of the royalty should be either the exercise of monopoly rights, such as those granted by statute under the patents, copyright and trade marks laws, or the taking of metals, timber and the like from the soil.

In Sherritt Gordon Mines, supra, the majority of the High Court (Gibbs and Mason JJ.) held that the provision of technical assistance and information, outright, in exchange for a payment expressed as a percentage of the aggregate of the sales of products produced in whole or part by use of the technical ``know- how'' did not give rise to an obligation to pay a royalty. The dissentient, Jacobs J., held, supra at 630, that the benefit or advantage which the payee provides need not necessarily be something ``in which the payee has rights against the whole world, rights of property'', and that it was sufficient if something is provided ``which is regarded as valuable to the payer and which he becomes entitled as between himself and the payee to put to use''. Hence, a payment in respect of use of ``know- how'' might answer the description of a ``royalty''.

Further, in
Aktiebolaget Volvo v FC of T 78 ATC 4316; (1978) 36 F.L.R. 334, Jenkinson J. held that an agreement by a Swedish parent

ATC 4646

company not to supply its products to anyone in Australia other than its subsidiary in consideration for the payment to it by the subsidiary of an annual fee equal to 4% of the estimated value of annual sales by the subsidiary of the parent's products, did not involve the payment of royalties in the ordinary sense. The payments could not be said to be made in consideration of the grant by the parent to the subsidiary of a right to sell the products of the parent in Australia. The payment, in essence, was in exchange for a negative covenant given by the parent to the subsidiary.

Sub-section 3A(5) is to be read against this background. Plainly, it expands what otherwise would be the ordinary concept of ``royalty'' as revealed in these decisions. For example, a negative covenant may fall within para. (f) as a total or partial forbearance in respect of the use of a design or trade mark within the meaning of para. (c). The status of a provision for the supply of scientific, technical, industrial, commercial or other knowledge or information, the subject of the disagreement in Sherritt Gordon Mines, is expressly dealt with in para. (d). It follows that when sub-s. 3A(5) uses the expression ``paid by way of royalty (or like payment)'' what is embraced includes, but is more than, royalties in the ordinary sense of the term.

The width of the expressions in paras. (a)-(f) has another relevant consequence for the construction of the sub-section. A lump sum paid for the acquisition, on assignment, of a patent, design or trade mark, would answer the description of a payment as consideration for the right to use an invention, design or trade mark, within the terms of sub-paras. (b) and (c). But a payment of that description would not ordinarily be described as paid ``by way of royalty (or like payment)''. These introductory phrases thus serve to limit what otherwise would be the width of the operation of the succeeding paragraphs.

Further, the one amount may be paid only partly by way of royalty. Hence, the limitation in the opening words of sub-s. 3A(5) to amounts only ``to the extent to which'' they are paid by way of royalty or like payment. The issue of apportionment is dealt with at a further level in sub-s. 3A(3). This operates where an amount of royalty is paid ``in respect of goods and another matter''. Then the amount of royalty shall be deemed to be paid in respect of the goods ``to the extent to which it is attributable to the goods''.

The scope of the operation of sub-s. 3A(5) may be seen from the following examples:

(i) there will be included amounts which are royalties as understood at general law, having regard both to (a) the method of calculation and (b) the nature of the rights exploited in exchange for the payment.
(ii) also included will be amounts which would not be royalties at general law because, whilst the method of calculation would suffice, the nature of the rights concerned (e.g. a negative covenant) would not; the deficiency which exists at general law is supplied for the purposes of the statute if the case falls within one or more of the paras. (a)-(f) of sub-s. 3A(5).
(iii) amounts which are paid for the exploitation of monopoly rights as discussed in Stanton and the other authorities, but not by reference to quantum or frequency of user, may be included; these will be royalties in the statutory sense if paid by way of like payment to a royalty.

In our view, a payment, by way of lump sum, will be sufficiently similar and analogous to and will sufficiently resemble a royalty, so as to be a ``like payment'' within the meaning of the sub-section, if paid in consideration for the right by way of licence to exploit trade marks and get-up for a particular period. An amount may be a ``like payment'' even though it does not contain all the essential elements of that which it resembles or to which it is analogous. It is sufficient if the payment is of a broadly similar nature to a royalty; cf
Capper Pass Ltd v Lawton [1977] Q.B. 852 at 856. The sub- section itself, by use of the phrase ``whether the payment is periodical or not'', provides further support for that view.

An amount may answer the description in sub-s. 3A(5) of royalty, howsoever described or computed and whether paid periodically or not, provided that it is royalty as understood at general law, or a ``like payment''. Thus, a sum for the use of trade marks for a particular period may be paid by way of like payment to a royalty, within the meaning of the sub-section, even though it is described in the relevant agreement as a fee rather than a royalty, and it is paid not periodically but in one lump sum. The payment is made as consideration for the

ATC 4647

use or right to use a trade mark within the meaning of sub-s. 3A(5)(c), in conjunction with the meaning of ``trade mark'' given by para. 3A(7).

In our view there is no surplusage in the second use of the term ``royalty'' in the opening words of sub-s. 3A(5). An amount which answers the description of a royalty as established by the High Court decisions will fall within the operation of the sub-section. Further, an amount will be a ``like payment'' and therefore a ``royalty'' within the meaning of the sub-section, to the extent to which it is paid as consideration for any of the matters described in sub-paras. (a)-(f). This will be so even though, for example, it would not be a royalty as ordinarily understood because it was paid by way of total or partial forbearance of user of a patent design or trade mark. If the amount otherwise answers the expanded description of a like payment, it is no answer that the payment is not periodical.

If the provision is construed in the manner we have described, then it follows that the licence fee payment in question fell within the operation of the provision.

Our conclusion is that the appeal should be allowed on the footing that the amounts in question here were paid by way of like payment to a royalty within the meaning of sub-s. 3A(5). The respondent should pay the costs both of the appeal and of the determination below of the issue the subject of the appeal. The matter will then be restored to the list for determination of the remaining issue.

THE COURT ORDERS THAT:

(1) The appeal be allowed.

(2) Orders (1) and (2) made by Northrop J. on 11 February 1993 be set aside.

(3) The respondent pay the costs of the appellant both of the appeal and of the determination by the primary Judge of the issue the subject of the appeal.

(4) The proceeding be listed before a Judge of the Court upon a date to be fixed for directions as to the determination of the remaining issues.

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