PACIFIC DUNLOP LTD v FC of T

Judges:
O'Loughlin J

Court:
Federal Court

Judgment date: Judgment delivered 13 March 1998

O'Loughlin J

These proceedings were commenced in this Court by way of an application but as an appeal by Pacific Dunlop Ltd (``the taxpayer''); the taxpayer had objected against an assessment of sales tax that had earlier been made by the Commissioner of Taxation (``the Commissioner''). The Commissioner disallowed its objection and the appeal is from that disallowance. The issue that is to be determined centres upon the ``sale

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value'' of automotive batteries that were manufactured by the taxpayer and treated by it as stock for sale by retail during the period commencing 1 September 1989 and concluding 31 March 1992 (``the relevant period''). That ``sale value'' is statutorily defined as meaning ``the amount for which those goods could reasonably be expected to be sold by the [ taxpayer] by wholesale'': see subs 18(2) of the Sales Tax Assessment Act (No 1) 1930 (Cth) (``the No 1 Assessment Act''). The taxpayer had lodged its monthly returns upon the basis that the sale value would have been the standard cost of manufacture increased, originally by 27 per cent, but in later times by 20 per cent. The Commissioner however, formed the opinion that the correct mark-up would have been 63 per cent and assessed accordingly.

The trading of the taxpayer

There are presently two major Australian battery manufacturers, the taxpayer and Century Yuasa Batteries Pty Ltd. In 1980 there were five but two of them, Lucas and Besco have ceased manufacturing whilst the remaining one, Chloride, was acquired by the taxpayer in 1985.

The large group of companies (``the PDL Group'') of which the taxpayer forms part, engages in a variety of activities but this case is limited to its manufacture and sale of certain automotive batteries. A short history of this aspect of the taxpayer's business may assist. In about October 1985, the taxpayer acquired all the issued shares in a competitor, Chloride Batteries Australia Limited (``Chloride''). Chloride had a substantial manufacturing operation at Elizabeth, South Australia and, subsequent to that acquisition, the Elizabeth manufacturing site became the main manufacturing site for the taxpayer's batteries.

For several years before September 1987, the taxpayer had manufactured batteries and sold them under the brand name ``Marshall'' to a subsidiary, George L Thompson Pty Ltd (``GLT''). GLT in turn sold the batteries by wholesale to (inter alia) another subsidiary of the taxpayer, Marshall Batteries Pty Ltd. The goods purchased by Marshall Batteries Pty Ltd were sold exclusively by retail, either directly through that company's own premises or through commission agents appointed by it.

In about September 1987, the corporate structure under which batteries were manufactured and distributed by the taxpayer was reorganised, principally to accommodate the merged manufacturing and distribution activities of the taxpayer and Chloride. Under the reorganised structure, Pacific Dunlop Batteries, a division of the taxpayer, became the manufacturer of all batteries and made wholesale sales of batteries to original equipment manufacturers (``OEMs'') and to its subsidiary, Pacific Dunlop Batteries Limited (previously Chloride Batteries Australia Limited). At about this time, Pacific Dunlop Batteries also took over the retail business that had previously been conducted by Marshall Batteries Pty Ltd.

On 29 June 1990 Pacific Dunlop Batteries Limited changed its name to GNB Australia Limited and the Pacific Dunlop Batteries division of the taxpayer became known as the GNB Division. At that stage, the PDL Group's automotive group was one of five main business groups. Within the automotive group there was a further sub-group that was known as the GNB Battery Operating Group. The GNB Battery Operating Group comprised, during the balance of the relevant period, the GNB division (which was a division of the taxpayer) and the taxpayer's wholly owned subsidiary, GNB Australia Ltd.

As a result of these various changes, the taxpayer's retail sales were conducted, in the main, under the brand-name ``Marshall'' during the relevant period. Its batteries were of various sizes and specifications but, generally, those sold by retail were identical to those sold by wholesale; there was, however, one distinguishing feature in that the adhesive labels that were applied to the batteries that were sold by retail were unique. The batteries that were sold by wholesale were either unbranded or bore different labels. The taxpayer made sales of ``Marshall'' branded batteries through its wholly owned ``Marshall'' outlets. It also sold them to franchised ``Marshall'' stores and to other outlets in the motor trade. The retail selling price of these batteries was equivalent to the standard cost of manufacture increased by 123 per cent.

The taxpayer's standard cost of manufacture and its mark-up

During the relevant period, the taxpayer sold batteries to OEMs who included major car manufacturers such as Ford Motor Company of Australia Ltd, General Motors Holden's Automotive and Mitsubishi Ltd. Those sales were effected at wholesale selling prices which,

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according to the taxpayer, were equivalent to the standard cost of manufacturing those batteries increased by up to 18 per cent. The sales to those three OEMs for the year ending 30 June 1991 were:

        Customer    Units sold
        Ford           114,395
        GMH             76,451
        Mitsubishi      44,445

In 1990, the taxpayer's Battery Operating Group commenced making wholesale sales of batteries to the Australian Battery Company (``ABC'') but in September of that year, the taxpayer acquired ABC's stores in Western Australia. From then until early 1992, the taxpayer sold Marshall batteries by wholesale in Western Australia through the ABC stores. In February 1991, the trading arrangements between the taxpayer and ABC in respect of the sale of batteries elsewhere in Australia were agreed upon the basis that annual sales would be, at least, 110,000 units. The agreement between the taxpayer and ABC provided calculations for a wholesale price for the SP 350 battery, one of the taxpayer's most popular models. It showed how prices of $31.32 and $29.94 per unit as at the preceding 1 June 1990 and 1 January 1991 had been calculated and, on the same formula, it showed that the price over the succeeding few months would, depending upon world lead prices, reduce to $28.74. The price of $31.32 equated to a price of standard cost of manufacturing plus approximately 17 per cent.

Although Besco ceased operations as a manufacturer, it continued to carry on business as a distributor of batteries, including the taxpayer's batteries. Examples of wholesale prices that were offered to Besco by the taxpayer, which varied according to the volume of sales, are contained in the affidavit of Alan James Hyde and an annexure to that affidavit. They ranged from $38.20 per unit for sales of less than 5,000 down to $30.78 for sales of 20,000 units. The batteries which are here referred to, were said to be identical to the SP 350 model. Mr Hyde was formerly employed by the taxpayer as the national accounts manager of the Battery Operating Group. Mr Hyde explained that a selling price at 1 October 1991 of $30.78, would represent the standard cost of manufacturing plus 25.22 per cent.

In addition to its wholesale sales, the taxpayer's subsidiary, GNB Australia Ltd (``GNB''), marketed and sold branded batteries that had been produced by the taxpayer under different brand names - one of the better known being ``Exide''. These batteries were sold to mass merchants that included ``K-Mart'' stores, ``Big W'' stores, tyre outlets and service stations. However, the wholesale price that was charged in these transactions was equivalent to the standard cost of manufacture increased by 78 per cent.

From 17 November 1989 until late 1993 the taxpayer's automotive group also included another wholly owned subsidiary company, Aliph Pty Ltd (``Aliph''). But in late 1993 the operations of Aliph ceased and the distribution of batteries previously purchased and sold wholesale by Aliph was thereafter carried on by the taxpayer. Aliph, during the relevant period, obtained batteries from the taxpayer and sold them to battery distributors such as Besco, Bond Batteries and ABC; but in those sales the mark-up was only 23 per cent.

The taxpayer called as a witness on its behalf, John Anthony Manning, a senior executive of its only competitor, Century Yuasa Batteries. Much of Mr Manning's evidence was given in confidence because of its commercial sensitivity but it is possible to summarise the effect of his evidence appropriately without having to descend to any detail. In the first place, Mr Manning made the point that he considered that his company's volume sales to its two largest nominated customers were ``significantly different in number'' to the transactions with which these proceedings are concerned. With that qualification however, he detailed his company's largest sales and the sale prices. He identified his company's average mark-up on those of its batteries that were comparable with identified models of the Marshall batteries; that mark-up was less than that which the taxpayer had included in its monthly sales tax returns. In my opinion, competitors' prices are relevant in determining the price at which the taxpayer might reasonably be expected to sell its batteries by wholesale but, in this particular case the evidence was not sufficient for me to be satisfied that I would be comparing like with like.

In each of the three financial years that are affected by the relevant period, first, Pacific

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Dunlop Batteries and, later, the GNB division of the taxpayer made the following types of sales:

• wholesale sales to OEMs, Besco, Bond Batteries and ABC
• wholesale sales to the taxpayer's subsidiary GNB Australia Ltd
• wholesale sales to the taxpayer's subsidiary Aliph
• retail sales, 95 per cent of which were ``Marshall'' branded batteries. (Included in this classification were those retail sales that were effected through agents.) Details of the batteries that were sold by retail by the taxpayer in each of those years are as follows:

         ``Year Ended      Quantity
         30 June 1990       247,000
         30 June 1991       195,000
         30 June 1992       248,000''

Mr Allan Moore, in his affidavit sworn on 31 October 1994, deposed to arrangements that had been made between the taxpayer and the Commissioner at an earlier point of time when the taxpayer's subsidiary, Marshall Batteries Pty Ltd, had been selling batteries by retail. Mr Moore was, at the time of the swearing of his affidavit, the ``General Manager - Finance, Pacific Dunlop Industrial Foam and Fibre Group''. In par 27 of his affidavit he said that the parties reached agreement that:

``... the appropriate sale value on which to calculate sales tax as required by the indirect marketing provisions in respect of retail sales made by Marshall Batteries Pty Ltd through agents was equal to cost plus 20% for the period June 1985 to March 1986 and cost plus 30% for the period April 1986 to July 1987.''

Those arrangements preceded the restructuring of the taxpayer's battery operation in September 1987 to which reference has already been made. Mr Moore explained in his affidavit how the taxpayer went about calculating this notional wholesale price:

``Based on an analysis of wholesale sales made by the Applicant and the Applicant's experience in coming to the agreement with the Respondent referred to in paragraph 27 hereof, it was determined by the Applicant that the OEM price would be used as a benchmark price to establish a reasonable wholesale price in respect of the batteries treated by it as stock for sale by retail. At this time (i.e. shortly before September 1987), the Applicant sold batteries to OEMs at prices varying between cost plus 24.2% (in the case of GMH), cost plus 27.7% (in the case of Ford), cost plus 29.3% (in the case of Nissan) and cost plus 32.1% (in the case of Mitsubishi).

With effect from 1 September 1987 the Applicant accounted for sales tax on Marshall batteries treated by it as stock for sale by retail on an amount equal to cost plus 27%.''

Subsequently, the taxpayer dropped its mark-up from 27 per cent to 20 per cent. According to Mr Moore, the reason for doing that was as follows:

``From September 1987, the price of and gross margin on batteries sold by the Applicant to OEMs progressively declined. Rather than continually altering the sale value adopted in respect of Marshall- branded batteries to reflect the decreasing OEM price, the Applicant decided, in or about October 1988, that it would adopt a sale value for Marshall-branded batteries by reference to the OEM price at that time and hold it at that value so long as OEM prices did not increase significantly.''

On 1 January 1993, new Sales Tax legislation came into force. Under the new legislation, the sales tax was to be calculated on the ``notional wholesale selling price'' which was defined to mean:

``The price (excluding sales tax) for which the taxpayer could reasonably have been expected to sell the goods by wholesale under an arm's length transaction.''

There is a substantial similarity in the language of this definition to that contained in s 18(2) of the No 1 Assessment Act but, even so, Mr Moore has deposed in par 39 of his affidavit that the Commissioner agreed to the taxpayer adopting a notional sale value based on retail sales of batteries of an amount equal to standard cost of manufacturing increased by 20 per cent.

Counsel for the Commissioner objected to the receipt of this evidence, claiming that it was irrelevant. I disagree; as I have said there is a sufficient similarity in the language of the old and the new legislation and any evidence of comparable notional wholesale values, whether

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before or after the relevant period is relevant and material evidence for the purpose of reviewing the opinion that the Commissioner formed.

The Commissioner, as a prelude to forming an opinion under the provisions of subs 18(3A) of the No 1 Assessment Act, wrote the taxpayer on 1 May 1992, stating that the wholesale value should be standard cost of manufacture plus 63 per cent. The mark-up of 63 per cent was said to comprise the expenses that the taxpayer would reasonably have incurred if the ``Marshall'' branded batteries had been sold by wholesale; it was also said to contain a wholesale profit margin. According to the advice in this letter, that percentage had been ascertained:

``... by examining all of the costs associated with the `Marshall' operation and deducting retail expenses.''

The reasoning in this letter formed the basis for the Commissioner's ultimate opinion that the taxpayer's sale value plus 20 per cent was not a fair and reasonable one; it also formed the basis of the assessment that is the subject of the appeal in this application.

The Commissioner's conclusion is, of course, challenged by the taxpayer. It claims that there were, at the time, other sales by the taxpayer that were comparable sales and that the Commissioner was wrong in declining to treat them accordingly; the taxpayer also claims that the Commissioner erred in the methodology that he adopted.

The relevant legislation

The relevant legislative provisions are found in the No 1 Assessment Act. Sub-section 17(1) of that Act provides:

``17(1) Subject to, and in accordance with, the provisions of this Act, the sales tax imposed by the Sales Tax Act (No. 1) 1930 shall be levied and paid upon the sale value of goods manufactured in Australia by a taxpayer and sold by him or treated by him as stock for sale by retail or applied to his own use.''

There are, therefore, in respect of goods that are manufactured in Australia, three different categories and each of those categories can bring down a levy of sales tax. First, there is that category that is represented by goods that are sold by the manufacturer; secondly there are those goods that are treated by the manufacturer as stock for sale by retail, and, finally there are those goods that are applied by the manufacturer to its own use. The goods that fall into the first category are those that are sold by wholesale. Were it otherwise, they would come into the second category as they would be goods treated by the manufacturer as stock for sale by retail. These proceedings are only concerned with those batteries that come within the second of those categories: that is, batteries that were manufactured in Australia by the taxpayer and treated by it, during the relevant period, as stock for sale by retail.

A taxpayer's obligation to pay sales tax is found in par 19(b) of the No 1 Assessment Act:

``19 Sales tax shall be paid by the manufacturer of goods manufactured in Australia and-

(a) sold by the manufacturer to an unregistered person or to a registered person who has not quoted his certificate in respect of the sale;

(b) treated by the manufacturer as stock for sale by retail; or

(c) applied by the manufacturer to his own use.''

It is, therefore, the act of selling or treating or applying that brings about the liability to pay sales tax.

Sub-sections 18(1), (2) and (3) of the No 1 Assessment Act provide for the determination of the ``sale value'' of goods in various circumstances:

``18(1) Subject to sub-sections (1B), (1C) and (4A), where goods (other than goods treated by a manufacturer as stock for sale by retail) have been sold by the manufacturer to an unregistered person or to a registered person who has not quoted his certificate in respect of the sale, the sale value of the goods, for the purposes of this Act, is-

(a) if the goods were sold by wholesale - the amount for which the goods were sold; or

(b) if the goods were sold by retail - the amount for which the goods could reasonably be expected to have been sold by the manufacturer by wholesale.

18(1A) ...

18(1B) ...

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18(1C) ...

18(2) For the purposes of this Act the sale value of goods treated by the manufacturer of the goods as stock for sale by retail shall be the amount for which those goods could reasonably be expected to be sold by the manufacturer by wholesale:

...

18(3) For the purposes of this Act, the sale value of goods manufactured by any person and applied to his own use shall be the amount for which those goods could reasonably be expected to be sold by the manufacturer by wholesale:

...''

There are certain provisos to subss (2) and (3) but none is relevant to these proceedings.

Section 21 of the No 1 Assessment Act imposes on a taxpayer an obligation to furnish a return within 21 days of the close of the month in which the taxpayer sells or treats or applies any goods and s 24 requires the taxpayer, within the same period of twenty one days, to pay sales tax upon the sale value of the goods that were so sold, treated or applied. Sales tax, unlike income tax, is self assessing. Putting to one side provisions such as s 25AA which allow the taxpayer to obtain a special assessment, no assessments for sales tax issue in the ordinary course of events. Instead, taxpayers lodged their monthly returns accompanied by a cheque in an amount that represents the taxpayer's calculation of the sales tax payable. It is in that sense that the tax may be described as a self assessing tax and it is also in that sense that counsel suggested that all assessments under the Sales Tax legislation might be described as default assessments. The taxpayer duly lodged monthly sales tax returns during the relevant period in respect of those batteries that it had manufactured and treated as stock for sale by retail, paying sales tax on the value that it had adopted and set out in its returns.

There are several ways in which the Commissioner may proceed when he is dissatisfied with a return as lodged. First, there is a general power in subs 25(1) to make an assessment:

``25(1) Where the Commissioner finds in any case that tax or further tax is payable by a person, the Commissioner may make an assessment in relation to the person.''

Alternatively, the Commissioner may, in appropriate circumstances, choose to operate under subs 25(2A):

``25(2A) Where-

(a) a person makes default in furnishing a return;

(b) the Commissioner is not satisfied with a return furnished by a person; or

(c) the Commissioner has reason to believe or suspect that a person (although not having furnished a return) is liable to pay sales tax,

the Commissioner may determine an amount to be the amount upon which, in the opinion of the Commissioner, sales tax should be paid and may make an assessment in relation to the person.''

Then again, in those cases where the sale value of any goods has been altered under one or more of the statutory provisions that are identified in subs 25(2), the Commissioner is required to make an assessment in relation to those goods. That subsection provides as follows:

``25(2) Where, under sub-section 18(3A) or (4) or 18A(5) or (6), the sale value of any goods has been altered, the Commissioner shall make an assessment in relation to those goods.''

Finally, while considering the power of the Commissioner to make an assessment, it is convenient, for the sake of completeness, to refer to s 25AA. That is the statutory provision that enables a taxpayer who is seeking an assessment in respect of a particular transaction to approach the Commissioner. Provided that the taxpayer duly complies with the provisions of the section, the taxpayer is given the opportunity to request a special assessment. For practical purposes it enables a taxpayer to enjoy a measure of certainty - for when a request is made under the section the Commissioner is required to comply with the request and issue an appropriate assessment.

In the instant case, the Commissioner, having formed an opinion that the value of the goods that had been included by the taxpayer in its monthly returns was inadequate, utilised the provisions of subs 18(3A). That sub-section, so far as it is material for the purposes of these

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proceedings, has the effect of saying that where goods are treated as stock for sale by retail and:

``(a)...

(b) the amount set forth in any return required to be furnished under this Act as the sale value of the goods is less than the amount which, in the opinion of the Commissioner, is a fair and reasonable wholesale value of the goods,

the Commissioner may, whether or not the goods are of a class sold by any other person by wholesale, determine the amount which, in his opinion, is a fair and reasonable wholesale value of the goods, and, if he does so, the Commissioner shall be deemed to have altered the sale value of the goods (whether a sale value was set forth in the return or not) to the amount so determined by him, and the value as so deemed to be altered shall, notwithstanding sub-section (1), (2) or (3), as the case may be, be the sale value of those goods for the purposes of this Act.''

The assessment

Based upon his determination of the amount which, in his opinion, was a fair and reasonable wholesale value of the batteries, the Commissioner made an assessment under subs 25(2) of the No 1 Assessment Act in relation to those batteries. That assessment, which originally included an additional tax for late payment and an additional tax for false and misleading statements was as follows:

``Total Sale Value                        $25,042,777.70

Sales Tax  20%                            $ 5,008,555.54

Less Tax Previously Paid                  $ 3,687,280.15

Amount of Tax Now Payable                 $ 1,321,275.39

Additional Tax for Late Payment           $ 418,459.10
Under Section 29(1) of Sales Tax
Assessment Act (No. 1) 1930, As
amended.
(Accrued to 7 September 1992)

Additional Tax Under Section 45(2)        $ 264,255.00
of Sales Tax Assessment Act (No. 1)
1930, As Amended.
                                          --------------
Total Amount Due Under This Assessment    $ 2,003,989.49''
                                          ==============

In its monthly returns during the relevant period, the information contained therein established that the taxpayer was asserting that it considered that the batteries that it had treated as stock for sale by retail had a notional wholesale value at the time of treatment of $18,436,400. That figure can be calculated by noting that the taxpayer paid sales tax at the rate of 20 per cent totalling $3,687,280.15 in the relevant period. Upon the premise that the taxpayer had calculated the notional wholesale price as standard cost of manufacture plus 20 per cent, these figures also establish that the taxpayer had based its calculations upon the premise that standard cost of those batteries treated by it as stock for sale by retail during the relevant period was $15,363,666. On the other hand, the Commissioner, whilst content to accept the taxpayer's figure of $15,363,666 as the standard cost of manufacturing batteries during the relevant period, applied his mark-up of 63 per cent and thereby arrived at a notional wholesale value of $25,042,777.70 - that being the figure appearing in the first line of the calculations that are set out in the assessment.

Additional tax for late payment

The Commissioner no longer contends that the taxpayer is liable to pay the additional tax for late payment of $418,459.10. This decision is correct: see
Copperart Pty Ltd v FC of T 94 ATC 4259; (1994) 50 FCR 345.

In the Copperart case the taxpayer's liability to pay sales tax arose under another Act, the

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Sales Tax Assessment Act (No 6) 1930 (Cth) (``the No 6 Assessment Act''). Although expressed in different language, the No 6 Assessment Act also gave the Commissioner the power to alter the sale value of goods for various reasons. Thus subs 4(1) contains the following provision:

``... but if the Commissioner is of the opinion that the amount set forth in any return by the registered person as the sale value of any such goods is less than the amount which would be their fair market value if sold by wholesale, the Commissioner may alter the amount set forth in the return to the amount which, in his opinion, would be the fair market value of the goods if sold by wholesale, and the amount as so altered shall be the sale value of the goods for the purposes of this Act.''

Davies J, who presided in the Full Court in Copperart, explained that the taxpayer's liability to pay additional sales tax did not arise until the Commissioner made the alteration. His Honour said:

``No further tax became payable by Copperart until the Commissioner had formed an opinion as to the arm's length prices of the goods and had adjusted the sale values accordingly. Until the Commissioner exercised his discretion - and the calculation of an arm's length price involved the making of a discretionary or value judgment as to that price - the sale values of the goods as fixed by the Act were the sale values as fixed by s 4(1). On 19 April 1985, no further tax was payable.''

(at ATC 4264; FCR 351)

19 April 1985 was significant because that was the date when the Commissioner had written the taxpayer, informing the taxpayer of the opinion that the Commissioner had formed and calling on the taxpayer to lodge supplementary returns. But, significantly, the Commissioner did not adhere to the provisions of subs 4(1) of the No 6 Act in that he did not ``alter the amount set forth in the return''.

Additional tax under s 45

The Commissioner does, however, pursue the additional tax of $264,255 for the alleged false and misleading statements. Additional tax under s 45 can be as high as 200 per cent of the tax avoided (subs 45(2) of the No 1 Assessment Act) but the Commissioner, operating under subs 47(3), remitted it to 20 per cent. As to that, the taxpayer claims that it at all times acted in good faith, making full and true disclosure of all relevant information to the Commissioner. It maintains therefore that it should not be liable to pay any such additional tax, even though the Court might find in favour of the Commissioner on the substantive issue of value.

The issue of onus

Counsel for the taxpayer submitted that the first question to be determined was whether the facts of the present case permitted the Commissioner to challenge the notional wholesale value that was adopted by the taxpayer. In terms of subs 18(3A) of the No 1 Assessment Act, it was submitted that the Commissioner will only be able to take action where, relevantly:

``(b) the amount set forth in any return... as the sale value of the goods is less than the amount which, in the opinion of the Commissioner, is a fair and reasonable wholesale value of the goods.''

It need not be the fair and reasonable wholesale value but, even so, the Commissioner can only act, so it was claimed, if the amount is less than the amount which, in the opinion of the Commissioner, is a fair and reasonable value. The use of the indefinite article creates, in my opinion, a degree of flexibility that favours the Commissioner. The Commissioner is not required to nominate and maintain an inflexible sum of money as the value. When, however, the Commissioner forms this opinion, the subsection permits further action. The Commissioner can then make a determination of the amount ``which, in his opinion, is a fair and reasonable wholesale value of the goods...''. Once again, the indefinite article has been used, and again it favours the Commissioner for it is not necessary that there be a determination of the relevant value; it will be sufficient to determine a value. Thereafter the subsection sets out that upon making such a determination the Commissioner shall be deemed to have altered the sale value of the goods to the amount determined by the Commissioner and that altered value shall ``... be the sale value of those goods for the purposes of this Act''.

The case for the taxpayer is that the value adopted by it under subs 18(2) of the No 1 Assessment Act was fair and reasonable in the circumstances and, that being the case, the occasion for the exercise of a discretion through

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the formulation of an opinion and the making of a determination by the Commissioner under subs 18(3A) did not arise. Upon this premise, the taxpayer argued that the assessment should be set aside. In the alternative, the taxpayer submitted that even though it may fail to satisfy the Court that the value adopted by it in its monthly returns was a fair and reasonable value, nevertheless, mainly for the reasons advanced by its expert witness, Mr Sheldon, the manner in which the Commissioner exercised his discretion miscarried.

If the taxpayer is thereby submitting that there is an initial onus on the Commissioner to satisfy the Court that he was justified in forming an opinion that the sale value of the goods, as set forth in the return, was less than the amount which was a fair and reasonable value of the batteries, I must reject the submission. In my opinion, there is clear authority to the effect that there is no such onus on the Commissioner:
FC of T v Dalco 90 ATC 4088; (1989-1990) 168 CLR 614. Dalco's case, which dealt with the provisions of the Income Tax Assessment Act 1936 (Cth), held that for the taxpayer to succeed on appeal, he had to show that the amount of money for which tax was levied exceeded his actual substantive liability; it was not sufficient merely to show that, in some respects, the Commissioner erred in the way in which he attributed income to the taxpayer or otherwise dealt with the material that was available. Dalco's case has since been followed and applied to the Sales Tax legislation by Hill J in
Vale Press Pty Ltd v FC of T 94 ATC 4587 at p 4591. His Honour said:

``It is now well settled that, in the context of income tax assessments made under s. 167 of the Income Tax Assessment Act 1936 (Cth), a taxpayer will not succeed in showing the assessment to be excessive unless the taxpayer has shown not merely that the assessment proceeded on a wrong basis, but that the amount assessed as his taxable income in fact exceeded his real taxable income with the consequence that he has shown the extent of the excessiveness. Brennan J in Dalco was of the view that this followed from the provisions of s. 190(b) of the Income Tax Assessment Act, as it then stood (now s. 14ZZO(b) of the Taxation Administration Act) which places the burden upon the taxpayer on an appeal to show the income tax assessment to be excessive. Mason CJ, Deane, Dawson, Gaudron and McHugh JJ all agreed with the separate judgments of Brennan and Toohey JJ, Toohey J's judgment, for relevant purposes, being to the same effect as that of Brennan J.''

There is, in my opinion, no obligation on the Commissioner to justify the assessment.

Counsel for the taxpayer submitted that the decision in Dalco was distinguishable; he relied, in particular, upon a passage from the judgment of Brennan J at ATC p 4090; CLR pp 621-622 where his Honour referred to the decision in
McAndrew v FC of T (1956) 11 ATD 131; (1956) 98 CLR 263 saying [90 ATC pp 4091-4092]:

``... Thus it was held in McAndrew's case that it was open to a taxpayer on appeal to challenge the fulfilment of the conditions mentioned in sec. 170(2) governing the power of the Commissioner to impose a tax liability by amendment of an assessment: see [ATD p 134; CLR] p 271. Taylor J., in a passage on which the majority of the Full Federal Court relied in the present case, said [ at ATD p 141; CLR pp 282-283]:

`there is no reason for thinking that an assessment, made in purported but not justifiable exercise of a statutory power, may not properly be described as excessive; it purports to impose a specified liability and, upon appeal, the claim of the appellant is that he is not liable to pay any part of it. Whether the particular ground upon which he seeks to escape or reduce the liability merely touches the accuracy of the assessment or assails its validity as an assessment, he is, in the words of s. 185, ``dissatisfied with'' the assessment because it purports to impose upon him a liability in excess of that to which he may lawfully be subjected and I can see no reason why, in either case, his complaint may not be accurately described as a complaint that his assessment is excessive.'

This statement was accepted as correct by Mason and Wilson JJ. (with whom Stephen and Aickin JJ. agreed) in F.J. Bloemen Pty. Ltd. at 81 ATC p 4288; 147 CLR p 375.''

But, Brennan J went on, in Dalco's case, to explain why the passage just quoted had no

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operation in a determination of the issue then before the Court. He said:

``McAndrew's case is clearly distin- guishable from the present case. Here, it is conceded that, upon the facts of the present case, there was power in the Commissioner to make an assessment under sec. 167(b); there, the taxpayer denied the power of the Commissioner, on the facts of that case, to make an amended assessment under sec. 170(2). Here, the question is whether the amount assessed is correct; there, the question was whether the Commissioner had power to make an amended assessment.''

Although no like concession was made in the present case, it could not be suggested that the Commissioner lacked power to make the assessment that he did, in fact, make. It is for this reason that I consider that McAndrew's case is also distinguishable on the facts in this case and need not be further considered. I reject the submission that was made by counsel for the taxpayer that there were conditions precedent going to the formation of the Commissioner's opinion that is referred to in subs 18(3A) of the No 1 Assessment Act. In my examination of that subsection, I do not consider that a fair construction identifies any condition that must exist before the Commissioner can exercise his opinion. On the contrary, the Commissioner, in reviewing ``the amount set forth'' in the taxpayer's return as ``the sale value of the goods'' made a decision, by forming an opinion, that the sale value as disclosed in the return, was ``less than the amount which... [was] a fair and reasonable wholesale value of the goods''. The challenge that the taxpayer has made is to the formulation of the opinion - not to any condition preceding that formulation. In this context, the task that confronts the taxpayer is that of a party who challenges the exercise of discretionary power. As to this Hill J said in
Copperart Pty Ltd v FC of T 93 ATC 4779 at 4793:

``Where the dispute between the Commissioner and the taxpayer concerns the exercise of a discretion, there are, as is well acknowledged, significant differences in the approach of the Court and the approach of the Tribunal. If a taxpayer chooses to appeal to the Court directly where a matter of discretion is involved, the taxpayer must show that that discretion has miscarried because the Commissioner has taken into account some irrelevant matter or failed to take into account some relevant matter, or there is some error of law in the manner in which that discretion has been exercised:
Avon Downs Pty Ltd v FC of T (1949) 78 CLR 353.''

A hypothetical calculation

The combined effect of the provisions contained in subs 17(1) and subs 18(2) of the No 1 Assessment Act is that ``the sale value of goods that are treated as stock for sale by retail'' must be a hypothetical figure. A convenient paraphrase of the relevant extracts from these provisions would be as follows: sales tax is levied upon the sale value of goods that are treated by their Australian manufacturer as stock for sale by retail and the sale value is the amount for which these goods could reasonably be expected to be sold by the manufacturer by wholesale. One is called upon to speculate upon the amount for which the batteries could reasonably be expected to be sold by the taxpayer by wholesale. The first task is a question of timing: when were the goods treated as goods for sale by retail? The answer to that question may have a material effect on the question of value. The second task is directed to the value of the goods that are so treated. What factors are to be taken into account? Would rebates or discounts be offered because of the volume of the notional ``sales''. The value of the goods, as reflected by a notional wholesale price, may be affected by those and other factors, the most obvious of which would be the terms of trading.

The legislation has engaged in an exercise that does not depend on actualities. Its objective is to extract a tax on goods at their full wholesale value. The legislative policy was described by the Full High Court in
Brayson Motors Pty Ltd v FC of T 85 ATC 4125 at 4127; (1984-1985) 156 CLR 651 at 657 in the following terms:

``... That general policy was and is to levy a tax upon all goods after they are imported into or produced in Australia and before they reach the consumer. It was not intended that the retail price of goods should be increased by the incorporation in it of more than one amount of tax or that the retail sale itself should attract tax. It was, however, intended that they should be taxed at their full wholesale value. That being so, the policy of the legislation was and is that sales

ATC 4218
tax should, in the ordinary case, be a tax upon the last wholesale sale.''

That is not to say that a manufacturer would not sell the same goods by wholesale at different prices. Indeed, this case revolves very much around the fact that the taxpayer sold its Marshall batteries to different purchasers at different wholesale prices.

Goods ``treated''

The meaning of ``treating'' goods for sale by retail was authoritatively stated by the High Court in
FC of T v York Motors Pty Ltd (1946) 8 ATD 169; (1946) 73 CLR 459. In that case the taxpayer had made no attempt to separate, either physically or in its books, those of its stock of vehicles that were intended for sale by retail from those intended for sale by wholesale. It appropriated its vehicles to a wholesale or retail sale as and when a sale was made and sales tax was only paid in respect of vehicles actually sold. However, anticipating that a rise in the rate of sales tax was impending, the taxpayer decided to ``treat'' certain vehicles as stock for sale by retail. This was achieved by a variety of book entries. The rate of tax was, shortly afterwards, increased. The taxpayer, in lodging its monthly return, included the vehicles ``treated'' as stock for sale by retail at the old (lower) rate of sales tax. Latham CJ explained the operation of the legislation in these terms:

``Liability for sales tax in the case of goods manufactured in Australia depends upon one of three events taking place: (1) sale; (2) treatment of goods as stock for sale by retail; (3) application to the manufacturer's own use: See Sales Tax Assessment Act (No. 1) s. 17. When any of these events takes place and as soon as it takes place the liability to tax attaches at the rate which is applicable at that time. Thus if a manufacturer sells goods he becomes liable to pay the tax. It would be immaterial that he re-purchased the goods from the purchaser. So also, if he treats the goods as stock for sale by retail, he must pay tax, and it is immaterial that he may subsequently sell the stock or apply it to his own use. If tax is paid upon any of the three events happening, then the Act has operated fully in relation to the sale value of the goods which have been sold or `treated' or applied to a manufacturer's own use.''

(at ATD 176; CLR 476)

On the following page, ATD 176; CLR 477, the Chief Justice noted that it is the ``treatment'' that creates a liability to pay tax; because of the ``treatment'' the taxpayer becomes bound to include the stock in his monthly return and to pay sales tax. Rich J was of the same view. He said:

``... For the purpose of the returns prescribed by s. 21 of the Sales Tax Assessment Act (No. 1) 1930-1940 an option is given to the manufacturer as to the manner in which he shall proceed. When he chooses the event the tax attaches however he may afterwards deal with the goods. In this sense only is the decision, if duly evidenced, final vis-a-vis the Commissioner. The event chosen may be `treatment' followed by actual sale but the tax attaches the rate applicable to the former event and not that applicable to the sale. Dual liability is not imposed.''

(at ATD 177; CLR 479)

His Honour added that he would not attempt to give an exhaustive definition of the word ``treat'' because ``its meaning depends upon the collocation in which it is set and the facts of the particular case'' (at ATD 177; CLR 479). Starke J at ATD 178; CLR 480 adopted the language of the learned trial judge who had said that a taxpayer ``treats his manufactured stock for sale by retail when he reaches a definite decision not to sell it wholesale to another retailer but to sell it himself by retail, and he does some final and unconditional act which... indicates that he has ceased to be a wholesaler and has become a retailer in regard thereto'' (at ATD 178; CLR 480). Dixon J came to the same conclusion; he said:

``... `Treat' in the statutes covers, I think, any measure taken in the conduct of business with reference to the goods unequivocally referable to a present intention or decision that the goods shall then and there be retail stock.''

(at ATD 181; CLR 484)

Putting to one side those few cases where the taxpayer sold Marshall batteries in Western Australia by wholesale, both parties seemed to be in broad agreement that the affixing of a Marshall label was an event of significance in determining when the taxpayer decided to treat batteries as stock for sale by retail. That act of treating the batteries as stock for sale by retail must, as a matter of logic and common sense, commence at a point of time that precedes the

ATC 4219

affixing of a Marshall label; it may only be an instant in time but nevertheless, a Marshall label will not be affixed to a battery (thereby identifying it as intended for sale by retail) unless there has been a prior thought process - ie, a decision that relevant batteries are earmarked for sale by retail. The actual labelling of a battery with the brand-name ``Marshall'' then becomes the physical manifestation of the thought process and one of the concluding steps in the decision to treat the relevant batteries as stock for sale by retail. But, having made that point, I do not think that anything turns on it in this particular case. It is sufficient to say that on most, if not all, occasions with which this litigation is concerned, the taxpayer treated certain of its automotive batteries as stock for sale by retail immediately before the labelling operation. Prior to 1 September 1991 virtually all labelling was effected in Elizabeth. Thereafter, centralised warehouses were set up in the eastern States and batteries destined for those interstate markets were labelled in the new warehouses. The records of the taxpayer show that during the relevant period, batteries were labelled at the rate of 16,000 to 20,000 per month.

In the case of a taxpayer who ``treats'' his goods as stock for sale by retail, the liability to pay sales tax will arise on the date when the relevant treatment occurs; that will be a question of fact that is to be determined after having regard to the relevant facts in each case. But when is the value of the goods to be determined? Is it assessed as and when the batteries are so treated? Or does it occur at some later point in time? The contents of subs 18(2) state that the wholesale value of the goods ``shall be'' the amount for which those goods ``could reasonably be expected to be sold by wholesale''; it could have provided that the value is the amount etc. The use of the word ``shall'' tentatively suggests a direction by the legislature to look forward. As it is known that there is to be a retail sale, should the wholesale value therefore be the amount which will be appropriate at some unknown date in the future when the retail sale is effected? Despite the immediate appeal of this proposition there are, in my opinion, compelling reasons why it should be rejected. In the first place, the act of treating the batteries as stock for sale by retail is the act that brings them into the Sales Tax regime. That is well established as the taxing point and, it seems to me, to be the appropriate point of time at which the notional value is to be ascertained. Furthermore, at the time when the goods are treated for sale by retail, no one knows when they will be sold by retail; no one therefore knows whether there will be any, and if so what, future event that will or might affect the value of the batteries. If, on the other hand, the time to fix the wholesale value is conterminous with the treatment of the batteries as stock for sale by retail, the value will be fixed at the time when the goods enter the Sales Tax regime. Adopting this latter interpretation means that the words ``shall be'' are to be treated as if the word ``is'' appeared in their place; I do not think that this is an unreasonable strain on the language in the legislation. This then leads to a conclusion that subs 18(2) is to be read as meaning that the sale value is the amount for which the goods could reasonably be expected to be sold on the day when they were treated as goods for sale by retail.

In the present case, the taxpayer submits that it relevantly treated the batteries as stock for sale by retail immediately upon the conclusion of a process that is known as ``the formation process''. This process, which occurs immediately before the Marshall labels are affixed to the batteries, is an electrical process during which the batteries are wired to charger units. In the manufacture of batteries, the formation process is preceded by the assembly process. At the conclusion of the assembly process, the batteries are described as ``unformed''. Their lead components are complete as are their plastic outer coatings, but they have not then been charged by the addition of acid. From the assembly area, the batteries are moved into storage and, when ready, they are taken from storage into an area called the ``Jar Formation Area''. It is in this formation area that the batteries are filled with acid or ``charged''. The batteries are then washed, tested and passed for labelling. As I have said, it is at that point of time that, according to the taxpayer, the batteries are treated as stock for sale by retail. Consistent with being so treated, the relevant label is then affixed and the batteries are loaded onto pallets. After an audit check they are stored to await dispatch for warehousing pending distribution to the taxpayer's various retail outlets.

ATC 4220

The location of the batteries is an important element in determining when the taxpayer made the relevant decision to treat them as stock for sale by retail. Some support for this proposition may be gleaned from the remarks of Starke J in
Union Quarries (Footscray) Pty Ltd v FC of T (1938) 4 ATD 477; (1938) 59 CLR 111. That case decided that the sale price of goods included the costs of delivery. In the invoices that the taxpayer issued, no division or allocation of the amount charged for cartage appeared. In discussing an aspect that was only incidental to the main issue, Starke J commented:

``It may be, as contended, that the sale value of goods that a manufacturer treats as stock for sale by retail or applies to his own use should be ascertained at his premises. But that arises from the situation of the goods and not by reason of any uniform standard prescribed by the Act.''

(at ATD 480; CLR 119)

In Union Quarries there was, as a matter of fact, a sale of goods by retail. In that case the exercise that had to be performed was the ascertainment of the price for which those goods would have been sold if, instead of being sold by way of retail, they were sold by way of wholesale. In the present case, the circumstances are different in that there has not been any sale at all. Rather, in the present case, the taxpayer has made an internal decision that it will ``treat'' the goods as ``stock for sale by retail''. It is therefore the active treatment that creates a liability to tax and so imposes upon the taxpayer the obligation to include the ``sale value'' of that stock in the monthly sales tax return under s 21 of the No 1 Assessment Act.

The meaning of ``amount''

The words ``the amount'' were the subject of comment by Windeyer J in
E.M.I. (Australia) Ltd v FC of T 71 ATC 4112 at 4118; (1971) 2 ATR 325 at 332. His Honour said:

``... 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 the goods that he has agreed to buy.''

The determination of the amount will be a question of fact to be determined in each case. Normally the amount for which goods are actually sold would be the contracted sale price that had been arrived at between the seller and the buyer. However, subsequent rebates, discounts or allowances - even those gratuitously made - must be taken into account to adjust the actual sale price:
Queensland Independent Wholesalers Ltd v FC of T 91 ATC 4492 at 4498; (1991) 29 FCR 312 at 321. So also must those same discounts, rebates or allowances be borne in mind when calculating the hypothetical sale price for the purposes of s 18(2) of the No 1 Assessment Act.

The hypothetical purchaser

If the manufacturer is deemed to be a wholesaler, to whom has the deemed wholesale been made? Putting to one side the presence of subsidiary companies, as the taxpayer is one entity and is the ultimate retailer, is there to be a hypothetical value calculated upon the premise that there is one end purchaser? Or, because the taxpayer has retail outlets, is there to be a wholesale value that is calculated upon the premise that each outlet represents an end purchaser? It is a matter of some importance because, quite obviously, a single purchaser could command volume rebates and, therefore, a lower price. In my opinion the answer to this question can be found in the words of Dixon J in
DFC of T v Ellis & Clark Ltd (1934) 3 ATD 98 at 102; (1934) 52 CLR 85 at 92. His Honour, in the course of explaining the scope of the Sales Tax legislation said:

``The whole plan of the legislation suggests that it is concerned only with the course of commercial dealing in goods between the time they first appear in Australia, either as a result of manufacture or importation, and the time when they are retailed. It takes them at the point of importation and manufacture and provides a scheme for following them to that point at which, in the actual course of commerce in the particular articles, they go into the retail market, and then, as nearly as possible, tax is imposed either upon the antecedent sale by wholesale or upon the immediately antecedent wholesale value which they possessed.''

Those remarks were endorsed by the High Court in a joint judgment in
Brayson Motors Pty Ltd v FC of T 85 ATC 4125 at 4128; (1984-1985) 156 CLR 651 at 657.

ATC 4221

In my opinion, to adopt the words of Dixon J, the batteries ``go into the retail market'' when the taxpayer treated them as stock for sale by retail. That exercise is performed on a continuous basis; as each battery is identified, it is treated as stock for sale by retail by the taxpayer in its capacity as the retailer. But I do not consider that this therefore means that there is to be a hypothetical exercise of calculating the value of one battery, or even one pallet of batteries, on each occasion. On the contrary, I believe that the value is to be assessed by taking into account that the exercise of treating the batteries as stock for sale by retail will be a continuous exercise in respect of the same notional retailer. Nor do I consider that the use of the words ``full wholesale value'' prevent proper allowance being made for rebates or discounts because of volume. ``Full wholesale value'' does not mean ``highest wholesale value''.

The decision in
Estee Lauder Pty Limited v FC of T 88 ATC 4412; (1988) 80 ALR 314 also lends support to this conclusion. In that case the taxpayer originally sold its cosmetics by wholesale through departmental stores and similar commercial outlets. In 1982 it changed its operations; it ceased wholesaling and thereafter sold by retail through the same outlets, using its previous purchasers as selling agents. In applying the provisions of the legislation as it then existed, Burchett J identified the taxpayer as the sole retailer.

Counsel for the taxpayer in his final submissions, put forward the proposition that monthly notional sales should be converted to annual sales so that the question might be posed: what would be the expected wholesale price payable by one only purchaser who notionally purchased about 200,000 to 250,000 batteries per annum from the taxpayer? In support of that proposition he claimed that the evidence was clear that prices in the trade were negotiated on the basis of the expected annual sale volume. I accept that proposition. Although one is required to engage in a hypothetical or speculative exercise of determining an appropriate wholesale price, there is no warrant to extend the hypothesis by assuming terms and conditions of sale that are inconsistent with actual business practices; nor should it be assumed that there might be more than one notional purchaser. Insofar as the manufacturer is the retailer, the hypothesis should proceed upon the premise that the wholesale price will be fixed upon the premise that there is one only purchaser of the batteries who is a long term purchaser ready, willing and able to pay for the batteries on ordinary trading terms. In other words, I assess the hypothetical wholesale price as that which would be afforded to a most favoured purchaser.

Having regard to some conflicting submissions that were advanced by counsel, I should add that I find that this notional sale value would include an amount to cover the costs incurred in affixing a Marshall label to the batteries. I add that observation because the exercise is to ascertain the wholesale value and that value is, by definition, ``the amount for which [batteries] could reasonably be expected to be sold by the manufacturer by wholesale''. In my opinion the notional purchaser would, more likely than not, require his label to be affixed as part of the transaction. I leave out of consideration, however, the cost of freight. I do not believe that there is evidence sufficient to express an opinion on that subject. In any event, it is the task of the Commissioner in the first instance to make the decision whether to include freight as a cost of the wholesale and the Court will only interfere if, on a review, it is apparent that the Commissioner erred in law in his treatment of that subject.

Calculation of value

Counsel for the Commissioner submitted that because the legislation required monthly returns it was therefore necessary for a hypothetical exercise to be conducted in respect of each month. In other words, counsel for the Commissioner submitted that it was not sufficient to address the likely hypothetical wholesale price for the entire relevant period. That proposition cannot, in my opinion, be accepted without qualification. The object of the legislation is to ensure that the revenue is protected. Primarily, that protection comes through sales that are made by a wholesaler to an end retailer. Where, as in the present case, the manufacturer is also the wholesaler and the retailer, the hypothesis is to determine what would have been the wholesale price if the manufacturer had sold to an independent third party instead of setting aside (ie treating) the goods for sale by retail. In an examination of that hypothesis, regard must be had to the number of the units sold, the identities of the parties whose involvement might be relevant,

ATC 4222

special conditions affecting the market place and so on. But that does not necessarily mean that there must be an independent exercise performed each month. If there is consistency in the number of products sold to the same parties and if market conditions have been otherwise stable it is possible that one hypothetical exercise might achieve a notional wholesale price which would be effective throughout the entire relevant period. It is not necessary, as a matter of course, to engage, calendar monthly, in the hypothetical exercise.

The Commissioner's approach

The Commissioner, in his calculations, first addressed the taxpayer's standard cost of manufacturing the batteries. Based on information that he extrapolated from the records of the taxpayer (sometimes called ``the segment report'' and sometimes called ``the Customer Profitability report'') for the twelve months ending 30 June 1990, he arrived at a figure of $6,732,000 as the standard cost for that twelve month period. That amount was $965,000 less than the figure that had been calculated by the taxpayer for those costs. The amount in dispute was a sum that the taxpayer had identified and labelled ``productivity credit'' in respect of the 1990 financial year. That productivity credit only applied to the one financial year but I do not know that that factor was recognised in the Commissioner's calculations. To the amount of standard cost, the Commissioner then made his calculations of factory costs, operating costs, costs of distribution and an amount for operating profit before interest and tax (OPBIT), all of which were added together and then added to the amount that had been identified as the standard cost. The resultant end figure of $10,980,000 was, in the opinion of the Commissioner, a fair and reasonable wholesale value of the batteries. As the following tabulations show, the final result, based on the Commissioner's calculations, established a mark-up on standard cost of 63 per cent.

Mr Sheldon disputed the Commissioner's opening figure for standard cost; he supported the taxpayer's figure that included the productivity credit. He also disputed each of the Commissioner's other figures for the various costs save for the amount of $372,000 that had been identified as the cost for ``Warranty''. Mr Sheldon was ambivalent about freight of $653,000; he did not dispute the amount but he questioned whether it should be included as a wholesale cost. He therefore performed two competing exercises. In the first he included freight of $653,000 as a wholesale cost but he excluded it in the second. In both his exercises, even though he disputed the Commissioner's figure for standard cost, Mr Sheldon based his calculations on the Commissioner's figure so that a comparison in the figures might more readily be made. The result of his figures was that there should be a mark-up on standard cost of 22.5 per cent if freight is to be included as a cost of wholesale; if, however, freight was excluded then he calculated a mark-up of 12.8 per cent. Those mark-ups would reduce to 19.7 per cent and 11.2 per cent if standard cost was increased from $6,732,000 by $965,000 to $7,697,000. On the other hand, the Commissioner's mark-up would reduce to 55.2 per cent if the productivity credit of $965,000 was added to the standard cost. The various calculations were as follows:

``                Commissioner's     Mr Sheldon's             Mr Sheldon's
                      Mark-up          Mark-up                  Mark-up
                                 Includes Distribution   Excludes Distribution
                                       Freight                  Freight

                       $'000            $'000                    $'000

Standard Cost          6,732            6,732                    6,732
Factory Costs
Factory Result           360               --                       --
Warranty Result          372              372                      372
Trade Bill Interest      179        transferred to            transferred to
                                        OPBIT                     OPBIT
Stock Revaluation       (21)               --                       --

Operating Costs
Employee                 602              105                      105
Occupancy                 --               --                       --
Freight                   --               --                       --
Vehicle                   97               28                       28
Travel                    31                6                        6
Operating                306               40                       40

Distribution
Freight                  653              653                       --
Advertising              476               48                       48
Account & Austasia       373               19                       19
ABD Head Office          449               17                       17

OPBIT                    371              230                      230
Total Wholesale
Costs plus profit      4,248            1,518                      865
Wholesale Price       10,980            8,250                    7,597
Mark-up on
Standard Costs           63%            22.5%                    12.8%''
                         ===            =====                    =====

Mr Sheldon made it clear that, in making these calculations, he was not thereby advocating his resultant figures as the correct wholesale prices; his instructions were limited to an exercise whereby he examined and challenged the Commissioner's methodology.

Mr Sheldon did not challenge the ``cost plus'' methodology as used by the Commissioner. He acknowledged that it is an appropriate test and writings in the text-books confirm this. But that is not to say that it is the only test that can be applied: nor does it mean that the application of the ``cost plus'' method denies the application of judgmental issues such as volume rebates, customer demand and the state of the market.

Whether the Commissioner was correct in excising the productivity credit of $965,000 is a matter of material importance because the Commissioner applied the figure of 63 per cent as the appropriate mark-up in respect of the sales of all Marshall batteries throughout the relevant period. If, for example, the correct mark-up was the lesser percentage (55.2 per cent) for the 1990 financial year, the Commissioner's calculation of the total sale value in his assessment ($25,042,777.70) would have been significantly reduced.

I am not persuaded that the Commissioner erred in law in his treatment of the productivity credit. Mr Sheldon gave an explanation of this item in his report in these terms:

``The standard cost for Elizabeth used in this report represents the standard cost to produce batteries at the Elizabeth plant at July 1989. Therefore the productivity credit represents the difference between the June 1990 standard costs used in factory reporting and the July 1989 standard costs used for marketing purposes. To obtain the 1990 attainable budgeted standard cost to produce batteries at Elizabeth, the productivity credit of $965,000 must be offset against the Elizabeth standard cost of $7,265,000. Standard costs provide management with a basis for:

• pricing; and

• monitoring factory performance.''

I do not understand this observation to have been challenged but I also do not understand it to be a conclusive statement that leaves no alternative approach open.

The Commissioner's methodology

Counsel for the taxpayer claimed that it had been established that the methodology adopted by the Commissioner in arriving at ``cost plus'' 63 per cent was flawed. He submitted that the Commissioner did no more than adopt a mathematical approach, ignoring other important factors such as competitors in the market place and the volume of sales in the hypothetical exercise. This subject was addressed by Beaumont and Tamberlin JJ in
Revlon Manufacturing Ltd v FC of T 96 ATC 4031; (1995) 63 FCR 535. That case dealt with

ATC 4224

another aspect of the No 1 Assessment Act but the remarks of their Honours are nevertheless appropriate. Beaumont J said:

``But, as the Tribunal noted, the Commissioner's assessment, which was upheld by the Tribunal, was made on a `mathematical basis'. With respect, I cannot agree that, in law, this is the correct approach. The question of law to be addressed under s 18A(4), on the hypothesis there stated, is to be considered between seller and buyer in terms of what `amount' they could reasonably be expected to agree as the sale value of the goods. This is an evaluation involving a judgment, rather than a mathematical exercise of the kind undertaken here by the Commissioner and adopted as appropriate by the Tribunal.

For these reasons, subject to what follows, I would propose that the appeal be allowed; that the Tribunal's decision be set aside; and that the matter be remitted to the Tribunal for reconsideration in accordance with these reasons.''

(ATC 4045; FCR 553-554)

Tamberlin J said of the exercise required by subs 18A(4) of the No 1 Assessment Act that it called for:

``... the exercise of judgment and appraisal rather than the application of an arithmetic formula whereby deductions are made from the gross price paid. It does not follow that the deduction of freight cost or any other specified cost from the gross price will establish how much the goods could reasonably have been expected to have been sold for if the agreements had not been entered into. A buyer, for example, may not be prepared to pay an amount so arrived at in every case. The section requires an estimation of what price would be paid in the market for the goods if the agreements did not exist. This will often involve a process of negotiation and bargaining based on many and varied considerations. Market price does not automatically reflect costs incurred by the seller. Furthermore, some cost components may not be capable of precise mathematical calculation and an allowance or estimate may need to be made of such components.''

(at ATC 4054; FCR 566)

In a calculation of what would be the ``amount for which [the batteries] could reasonably be expected to be sold... by wholesale'' it is obvious that one would have regard to the standard cost to the manufacture of batteries. As Mr Sheldon said in his report, that would generally be the cost that was incurred by the factory to produce them but it would also include ``allowances for normal spoilage, achievable efficiency factors for both machinery and labour, and factory overhead costs''. To this cost there would also be added a further element representing the desired profit margin. Mr Sheldon's criticism of the methodology of the Commissioner was that the Commissioner had mathematically built up a wholesale price by using a ``cost plus basis'' but without having any, or any sufficient regard, for extraneous circumstances such as competitors' prices and customers' demands for rebates or discounts because of the volume of their purchases. The fact that the taxpayer engaged, during the relevant period, in wholesale sales at very different prices is cogent evidence of the fact that the exercise is not merely one of adding a desired profit to standard cost; market forces require there to be an objective assessment of actual trading terms and that factor is to be incorporated in the hypothetical transaction. For example, the larger the hypothetical sale, the more likely that there will be a lower wholesale price. It is at this stage, in my opinion, that the Commissioner should have had regard to actual wholesale sales that were made by the taxpayer in the relevant period. The closest, in terms of size, were the sales to the OEMs.

This conclusion is not intended to mean that the value of the batteries that are treated as stock for sale by retail is necessarily the lowest amount at which the taxpayer sells similar goods by wholesale to one or more of his customers: cf Case No D53
4 TBRD 289 at 297. Sometimes, the existence of special terms of trading will mean that a low price that was offered in a particular case is not suitable for comparative purposes. But that is just one of many factors that warrant consideration by the Commissioner when he is formulating his opinion.

Counsel for the Commissioner acknowledged in his final address that ``there is no question that there would have been the subject of some sort of volume based rebate or discount and we agree... that comes off the sale value'' (T347) but, so he claimed, there was no evidence of

ATC 4225

what that rebate or discount should be. On the other hand, it must also be noted that counsel did not point to where, in the papers, the Commissioner had made any allowance for any rebate or discount in forming his opinion. In fact, the methodology that was employed by the Commissioner (in segregating costs into wholesale and retail components) suggests that he did not make any such allowance.

Everything points to the Commissioner having erred by failing to take into account properly, or at all, the relevant consideration of actual wholesale sales that were made by the taxpayer in the relevant period. Indeed, there is material that suggests that the taxpayer's calculation of costs plus 20 per cent is a fair and reasonable price. However, it is not the task of the Court, except in exceptional circumstances, to nominate what is or what would have been the correct amount. The Court is limited to the role of reviewing the decision of the Commissioner for the purpose of seeing whether an error of significance has occurred. In my opinion there has been such an error and the matter should be returned to the Commissioner for him to reconsider the matter in terms consistent with these reasons.

The Commissioner's error

In his letter dated 1 May 1992, the Commissioner wrote the taxpayer setting out how he had come to the conclusion that the relevant notional ``sale value'' should be an amount ``equal to the standard cost of manufacture increased by 63%''. In the course of arriving at that conclusion the Commissioner discussed the taxpayer's sales to OEMs and the substantially smaller mark-ups that were applied to those sales. He said:

``While it is accepted that sales to OEMs are made at arm's length and form part of PDL's business, the sales are made under agreements which provide for certain contractual obligations on the parties which are outside the scope of an ordinary contract for the sale of goods. The view held by this office is that the special conditions attached to these sales will inevitably influence the selling price, and as a consequence, render that price inappropriate as a yardstick for the amount that the `Marshall' batteries could reasonably be expected to be sold by wholesale.''

In my opinion, this passage discloses an error on the part of the Commissioner of such substance that it justifies the interference of the Court. It might be, as the Commissioner states, that ``the special conditions'' attaching to sales to OEMs ``will inevitably influence the selling price'' but such a statement will not justify a total rejection of these sales and their prices; it is wrong to say that the price is ``inappropriate as a yardstick''. In fact, the contrary is correct; the price is appropriate as a yardstick. What assistance the Commissioner may obtain from it in the formulation of his opinion is, of course, another matter. But at the end of the day the Commissioner cannot overlook the fact that the object of the exercise was to assess a fair and reasonable wholesale value for the taxpayer's batteries and in the formulation of his opinion any evidence of any comparable sales by wholesale was relevant. No such evidence could be described as inappropriate.

Counsel for the Commissioner submitted that the sales of batteries to OEMs were not comparable sales for three reasons; first they were sales of unbranded batteries; secondly they were sales that were made on special terms and conditions; and finally, as Mr Moore acknowledged during the course of his evidence, the sales to OEMs were motivated by the taxpayer's desire to maximise its manufacturing capacity. These are appropriate submissions, but it will be for the Commissioner to evaluate whether there is substance in these matters and, if so, how they might affect his ultimate opinion about the use that can be made of these sales to OEMs. But their existence is no excuse for the Commissioner ignoring the sales to the OEMs.

The case for the taxpayer

The taxpayer complains that in forming his opinion as to what was a ``fair and reasonable wholesale value'' of the relevant Marshall batteries, the Commissioner failed to take into account and failed to give due weight to the following factors:

``(a) the comparable wholesale selling prices of batteries sold by the Applicant to OEMs;

(b) the comparable wholesale selling prices of batteries sold by Aliph Pty Ltd for sales to battery specialists;

(c) the wholesale selling price of comparable batteries sold by Century to Besco and other battery specialists;

ATC 4226

(d) the wholesale profit usually sought by battery manufacturers when selling goods by wholesale to large volume buyers;

(e) the Applicant's actual costs of manufacturing and selling the goods;

(f) volume of goods to be sold;

(g) market support required;

(h) the Applicant's available production capacity;

(i) required level of customer support;

(j) market share considerations.''

For reasons that I have already given I have already expressed my support for the matters raised in pars (a), (b) and (f). I do not consider that the evidence of the wholesale prices that are obtained by Century Yuasa are of value to the taxpayer as the evidence did not satisfy me that I would be comparing like with like; I therefore discount par (d). I would have thought that the evidence disclosed that the Commissioner had regard to the taxpayer's costs and production capacity and accordingly I disregard pars (e) and (h). As to the remaining complaints, they are to be tested on the information that was before the Commissioner as distinct from the information that is before the Court. As the matter is to go back to the Commissioner for reconsideration, they are matters that should properly be considered by him but I am not able to say on the state of the evidence that he did not consider them properly or at all when he formed his opinion with respect to the amount that was a fair and reasonable wholesale value of the batteries.

The taxpayer further complained that the Commissioner erroneously took into consideration the wholesale sales that were made by the taxpayer's subsidiary, GNB. These were the sales that were made to business houses such as K-Mart and service stations. I reject the taxpayer's proposition that these sales should not be considered; in my opinion the proper approach is to have regard to them but to have particular regard to the surrounding circumstances which relate to those sales. For example, it would be necessary to compare the volume of sales to see whether GNB's sales were significantly smaller (thereby justifying a higher price per unit). There was evidence from Mr Hyde that servicing and distribution costs of the batteries that were sold by GNB were significantly higher; he suggested that it could be at least $10 per battery. Again that would be another important factor to be borne in mind. At the end of the day, it would be a question of opinion as to the weighted value to be given to the GNB sales. However it is wrong, as was suggested during the course of final submissions by counsel for the taxpayer, to say that it was inappropriate for the Commissioner to have regard to the existence of such sales.

For the same reason, I reject the proposition that was advanced by counsel for the taxpayer that wholesale sales of Marshall batteries in Western Australia should be ignored. There was evidence that the taxpayer had acquired the business of ABC in Western Australia and there was evidence that ABC's business included both retail and wholesale sales in that State. It was submitted on behalf of the taxpayer that there were only ``a minimal number of sales'' with ``no large quantity purchases''. That may be so; nevertheless the existence of such sales is not to be ignored. It is a question of what weight is to be given to them in assessing the appropriate wholesale price.

Counsel for the taxpayer further argued that wholesale sales of Marshall branded batteries in Western Australia should be ignored for the reason that they had been ``treated'' by the taxpayer as goods for sale by retail. This proposition was advanced upon the premise that the affixing of the Marshall label had only one consequence - a sale by retail. I do not believe that the evidence supports that proposition and I reject it.

Case Z24,
92 ATC 240 is an informative example of a practical resolution to a problem similar to that presently before the court. Case Z24 dealt with the taxpayer who owned and operated a vineyard, winery and bottle plant. His wine was disposed of during the relevant period in the following fashion:

• 75 per cent was sold by wholesale to distributors
• 2 per cent was sold by wholesale to local restaurants
• 2 per cent was sold by wholesale for export
• 21 per cent was sold by retail at the cellar door.

The two contentious issues were first, the identification of the taxing point and secondly the appropriate sale value.

Because cellar door sales were restricted by law to a maximum of five cases per sale, the

ATC 4227

Commissioner argued that the taxing point was at the time of the actual retail sale, whereas the taxpayer argued that the taxing point arose when stock was transferred from the warehouse to the cellar door sales area in quantities of fifty to seventy two cases at a time.

The taxpayer was successful. It was held that the movement of stock from the warehouse to the cellar door retail storage area must be regarded as the unequivocal treatment of the goods as stock for sale by retail and accordingly the goods to be valued at the actual taxing point consisted of between fifty and seventy two cases of the taxpayer's wine. As sales by wholesale of the volume of the taxpayer's wine considered at the taxing point were only ever made at the distributors' wholesale price, that price must be the amount for which the wine could reasonably be expected to be sold by the taxpayer by wholesale. Counsel for the taxpayer submitted that Case Z24 supports the proposition that a hypothetical sale of batteries, relevantly treated in quantities of at least 200,000 per annum, does not bear a close relationship to the circumstances of a sale to business houses such as K-Mart, but that it does bear some relationship to the circumstances of a sale by the taxpayer to wholesale customers such as the OEMs, ABC and Besco.

Counsel for the Commissioner submitted that I should not follow the decision of the Tribunal in Case Z24. I do not accept that invitation. I cannot fault the finding of the Tribunal. In my opinion, it would be straining the artificiality of the situation to value the wholesale price at the time of the retail sale and in respect of the volume of the cellar door sale. I share the Tribunal's view that the movement of the stock into the retail premises was clear, unambiguous evidence of the taxpayer's intention then and thereafter to treat the stock as wine for sale by retail.

Remitting to the Commissioner

In coming to the conclusion that the Court should interfere in this matter I have been conscious of an observation made by Lockhart J in
Risby Forest Industries Pty Ltd v FC of T 88 ATC 4683 at 4698, with which I respectfully agree. His Honour said:

``... I have not examined the Commissioner's process of assessment microscopically or with an eye eager to detect error. The processes of assessment must be examined carefully in tax appeals where the exercise of discretion by the Commissioner is the subject of challenge before the Court but not overzealously or minutely. Indeed the courts must approach this task, in my view, broadly and sensibly.''

Furthermore, I have been conscious of the need, when reviewing the decision of the Commissioner, to have regard in the first instance, only to the material that was before the Commissioner;
Kolotex Hosiery (Australia) Pty Ltd v FC of T 75 ATC 4028 at 4048; (1974-1975) 132 CLR 535 at 567 per Gibbs J and ATC 4055; CLR 578 per Stephen J.

In the present case, I am of the opinion that there were two errors of substance in the Commissioner's approach. First, he did not give appropriate consideration to comparable sales by wholesale, particularly those sales to OEMs and secondly, in adopting a strictly mathematical approach he did not give any weight to market forces and, in particular, volume rebates.

Although this appeal must be allowed, it is not for this Court to supplant the Commissioner's opinion. The authorities show that the matter must be remitted to the Commissioner: see, for example,
Ferris v FC of T 88 ATC 4755. That was a case dealing with the payment of a substantial retiring allowance to the taxpayer. The relevant statutory provision that had to be considered was s 109 of the Income Tax Assessment Act 1936 (Cth) which provided, in effect, that so much of a sum paid or credited by a private company to a shareholder, director or other nominated party as exceeds an amount which, ``in the opinion of the Commissioner, is reasonable'' shall not be an allowable deduction and shall be deemed to be a dividend paid by the company. The Court came to the conclusion that the Commissioner, in forming the opinion that was required under the section, failed to take into account a relevant matter. Counsel for the taxpayer submitted that the Court should set aside the assessment without remitting the matter for reconsideration. Davies J rejected that submission saying:

``... However, the Court would so act only if it were satisfied that the result contended for was the only one to which a decision maker, properly instructed and not acting unreasonably, could come. It is not for the Court itself to exercise the discretion which is conferred upon the Commissioner. The

ATC 4228
function of the Court is a function in the nature of judicial review. Unless the Court is satisfied that there is no room for the exercise of the subject discretion, the Court must remit the matter for recon- sideration.''

(at 4766-4767)

Duggan and Ryall v FC of T 72 ATC 4239; (1972) 129 CLR 365 is authority for the same proposition. It dealt with s 99A of the Income Tax Assessment Act 1936 (Cth) which provided that a trustee was liable to pay tax at a special rate upon the income of certain trust estates where no beneficiary was presently entitled to such income. The section provided that it would not apply if the Commissioner was of the opinion that it would be unreasonable that it should apply and directed that the Commissioner, in forming his opinion, was to have regard to certain nominated matters. Stephen J came to the conclusion that the taxpayer had established that the Commissioner had misunderstood the facts and had thereby fallen into error. His Honour explained why the matter had to go back to the Commissioner. He said:

``... In dealing with legislation of this sort I should not attempt to determine for myself whether the Commissioner could or could not, on the grounds stated by him, reasonably come to the opinion expressed but should instead confine myself to an examination of those grounds; if they prove to be of the kind which the legislation appears to contemplate as relevant to the Commissioner's task, not being clearly extraneous to questions of liability to tax, that will suffice to support the opinion expressed by the Commissioner. It is for these reasons that I would not accede to the appellant's alternative submission.

However, having concluded that at least one of the errors of fact affecting the grounds upon which the Commissioner formed his opinion is so fundamental as to vitiate that opinion, it follows that the present assessments should in each case be set aside. These appeals will therefore be allowed with costs and the three assessments set aside. The Commissioner will then be free to make such further assessments in accordance with law as may be appropriate.''

(at ATC 4244-4245; CLR 373)

Section 45 penalty

Should I be wrong in concluding that the Commissioner has erred in his treatment of this matter, I set out hereunder my reasons for concluding that the Court should not interfere with the penalty that was imposed pursuant to s 45 of the No 1 Assessment Act. Subsection 45(2) of that Act provides as follows:

``45(2) Where-

(a) a taxpayer-

(i) makes a statement to a taxation officer, or to a person other than a taxation officer for a purpose in connection with the operation of a relevant sales tax law, that is false or misleading in a material particular; or

(ii) omits from a statement made to a taxation officer, or to a person other than a taxation officer for a purpose in connection with the operation of a relevant sales tax law, any matter or thing without which the statement is misleading in a material particular; and

(b) the tax properly payable by the taxpayer exceeds the tax that would have been payable by the taxpayer if it were assessed or determined on the basis that the statement were not false or misleading, as the case may be,

the taxpayer is liable to pay, by way of penalty, additional tax equal to double the amount of the excess.''

The factors that favour conclusions that there was no material omission, and that there was nothing that was false or misleading in a material particular in any statement that was made by or on behalf of the taxpayer, are as follows:

• the earlier agreements between the taxpayer and the Commissioner that included different mark-ups at different times ranging between 20 per cent and 30 per cent
• the subsequent (ie post 1993) agreement between the Commissioner and the taxpayer for the adoption of a notional sale value of costs plus 20 per cent.

Mr Moore exhibited some of the correspondence that had passed between the taxpayer and the Commissioner at the time. For example, the taxpayer's letter of 22 December

ATC 4229

1987, which accompanied its sales tax return for the preceding month of November read as follows:

``Included in our sales tax returns for the month of November are sales tax payments in respect of Marshall Batteries and Beaurepaire for tyres treated as stock for sale by retail. Please find attached a list of the relevant transactions.

The sale value used in respect of these transactions approximates a cost of production increased by 27%. You are advised that wholesale sales of identical goods are made on a regular basis to other customers at similar prices.

You are hereby requested to raise assessments under section 25AA of Sales Tax Assessment Act (No. 1) in respect of any transaction where you believe the sale value does not satisfy the requirements of section 18(2)(a) of Sales Tax Assessment Act (No. 1).''

Mr Moore deposed that a similar letter, dated 20 November 1987, had accompanied the previous month's return. The only reply from the Commissioner was a formal acknowledgment, dated 12 January 1988, to the taxpayer's letter of 20 November 1987 in which the Commissioner said:

``Receipt is acknowledged of your letter of 20 November 1987 requesting special assessments.

You will be contacted in regard to this matter in due course.''

It is the case for the taxpayer that the Commissioner was made aware at all times of the basis upon which the taxpayer was accounting for sales tax.

Mr Moore continued in his affidavit that it was ``generally'' the practice of the taxpayer for a letter to accompany monthly sales tax returns in which the sale value that had been adopted by the taxpayer was specified. He exhibited such a letter to his affidavit. It was dated 21 August 1989 and it contained the following information:

``RE: SALES TAX - 5-057-385

Included in our sales tax return for the month of June are sales tax payments in respect of Marshall Batteries treated as stock for sale by retail. Please find attached a list of the relevant transactions.

The sale value used in respect of these transactions is split between two produce lines:

Conventional: Cost of production increased by 20%, and

Pulsar: Cost of production increased by 15%

You are advised that wholesale sales of identical goods are made on a regular basis to other customers at similar prices.''

In par 31 of his affidavit Mr Moore deposed that the taxpayer understood that:

``... if a taxpayer informed the Respondent of the sale value being adopted by it with respect to particular goods and the basis for so doing, the Applicant was protected from the imposition of any additional taxes if the Respondent subsequently disputed the sale value.''

In my opinion, the taxpayer did not satisfy the requirements of sub-par 45(2)(a)(ii) in that it omitted material information about all comparable sales ``without which the statement (was) misleading in a material particular''. The taxpayer took it upon itself to fix the mark-up on standard cost, first at 27 per cent and then at 20 per cent. On neither occasion did it make a full and true disclosure of all relevant material to the Commissioner. It was not a sufficient disclosure to make a bare reference to comparable sales without particularising them.

Conclusion

For the reasons set out above I am of the opinion that the appeal should be allowed, the assessments of sales tax and additional tax should be set aside and the matter should be remitted to the Commissioner for reassessment in accordance with these reasons. The respondent is to pay the taxpayer's costs which are to be taxed in default of agreement.

THE COURT ORDERS THAT:

1. The appeal be allowed.

ATC 4230

2. The matter be remitted to the Commissioner of Taxation for an assessment in terms consistent with these reasons.

3. The respondent is to pay the taxpayer's costs which costs are to be taxed in default of agreement.

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