THE COMMONWEALTH OF AUSTRALIA & ANOR v GENEX CORPORATION PTY LIMITED & ORS

Judges:
Mason CJ
Brennan J
Deane J
Dawson J
Toohey J
Gaudron J
McHugh J

Court:
Full High Court

Judgment date: Judgment handed down 8 December 1992

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Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ

These appeals concern the construction of the Sales Tax Assessment Act (No. 1) 1930 (Cth) (``the Act''). There are four appeals in all. The Commonwealth of Australia and the Commissioner of Taxation appeal against a decision of the Full Court of the Federal Court which answered in favour of the respondent companies the questions stated in a special case concerning the respondents' liability to sales tax.<sup>[1]</sup> Genex Corporation Pty. Limited & Ors v. The Commonwealth of Australia & Anor 91 ATC 4564 ; (1991) 101 A.L.R. 161 (Hill J., with whose reasons Beaumont and Burchett JJ. agreed). The proceedings were commenced in this Court by the respondent companies seeking declarations as to their liability to sales tax. The proceedings were by consent remitted to the Federal Court. Burchett J. stated a special case for the Full Court of the Federal Court. Kodak (Australasia) Pty. Ltd. (``Kodak'') brings three appeals against decisions of the New South Wales Court of Appeal which held that the Commissioner of Taxation was entitled to sales tax which Kodak had paid under protest.^[2] Kodak (Australasia) Pty. Ltd. v. The Commonwealth of Australia & Anor 90 ATC 5073 ; (1990) 21 N.S.W.L.R. 402 (Mahoney J.A., with whose reasons Clarke and Meagher JJ.A. agreed). The Court of Appeal dismissed appeals against a decision of McInerney J., who found in favour of the Commissioner of Taxation in proceedings commenced in the Supreme Court of New South Wales by Kodak to recover moneys paid under protest by way of sales tax. We shall refer when appropriate to the several respondents in the first matter and Kodak compendiously as ``the taxpayers'' and to the Commonwealth of Australia and the

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ATC 4766

Commissioner of Taxation without differentiation as ``the Commissioner''.

The facts in all four appeals are, so far as they are relevant, identical. The taxpayers carry on the business of developing exposed photographic film and printing photographs. The Commissioner claims that sales tax is payable on the negatives produced in the development process.

Background facts

It is necessary to set out in some detail the steps taken in the development process. The following account is taken largely from the judgment of Hill J.^[3] Genex 91 ATC 4564, at pp. 4566-4567; (1991) 101 A.L.R. 161, at pp. 163-165. and reflects the agreed facts in that matter.

The taxpayers in the first matter operate through what are termed ``mini-labs'' placed on site in retail complexes. A mini-lab store consists of a retail shop at which developing machines for the development of exposed films are operated. Separate machines are used in the printing of photographs from the developed negatives. The only difference in the Kodak appeals appears to be that the development process takes place on a larger scale at Kodak's factory premises.

The majority of customers request that their films, which have been exposed, be developed and that prints be made. Some customers present negatives for the purpose of having prints made from them. There are very few requests for the development of film without prints. A customer is charged according to the service performed.

There are two main types of film in general use, cassette film (110mm or 126mm) and 35mm film. Of these two kinds, 35mm film is the more popular. In the case of cassette film, the cassette is broken on a cracking bench in a light-proof box and the film is fed into a special container, with the start of the film or the ``tongue'' projecting. In the case of 35mm film, the start of the film or the tongue must be located and pulled out by special tongue pullers. Both types of film are then put onto a ``leader'' which drags the film through the developing machine. The processes involved in development occur in the machine, which is light proof. There are six processes in all carried out in the machine, and the time taken ranges from 12 to 23 minutes depending on the chemistry or the type of developing machine. Further films can be fed into the loading box once the film has travelled part of the way into the developing machine.

A colour film is made up of a number of different layers. These layers consist of:

• (a) a plastic film base;
• (b) a stubbing layer which allows emulsions to stick to the plastic film base;
• (c) layers of light-sensitive emulsions;
• (d) an ultra-violet filter layer and a yellow filter layer; and
• (e) a protective layer.

The light-sensitive emulsions include a blue sensitive layer, a blue/green sensitive layer and a blue/red sensitive layer. The number of layers of light-sensitive emulsions varies according to the type of film. Each layer of light-sensitive emulsions is made up of silver halide crystals (which are sensitive to light) together with chemical compounds known as ``couplers''.

When a photograph is taken, the film is exposed to light through the camera lens. The light affects the silver halide crystals on the film, creating a latent image. The process of developing converts that latent image into a stable negative one. The film is first placed in a chemical developer solution which converts any silver halide crystals affected by light to black silver. The black silver, in turn, affects the couplers, converting them to a coloured dye. This dye acts as a colour filter in the film during the printing process. The film is then placed in a chemical called ``bleach'' which converts the black silver back to silver halide. Next, the film is transported into a wash tank where the bleach is washed out of the film. The film is then transported into a chemical tank containing fixer where all the silver halide crystals are removed from the film. Thereafter the film is insensitive to light. It is transported into a wash tank where the fixer is washed out. The final chemical treatment is with a stabilizer which stabilizes the dye so as to reduce the tendency to fade. The film is then dried in a drier which is attached to the developing machine. Next, the leader and the dry film come out of the developing machine and drop into a holding bin. The film is then cut off the leader. Each frame of the film is at this stage commonly referred to as a negative.

Printing is carried out in a printing machine. Some machines have an automatic feed; in others the negatives must be pulled through manually. The negatives are put through

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ATC 4767

brushes to remove dust and then fed into the printing machine. The operator views each frame of the negative film through a viewfinder to determine the density at which each print should be printed. The printing machine has a keyboard to control the colour and density of the print, and the operator pushes a button to make the appropriate exposure. A shutter within the printing machine opens and the negative is exposed onto photographic paper within the machine. The paper advances automatically after each exposure. The paper is light sensitive and forms a latent image. The exposed paper is then fed into a developer solution where all silver halide crystals affected by light will be converted to black silver upon contact with the solution. The black silver in turn affects couplers in the paper's emulsion coating. The black silver converts the surrounding couplers to dye. The paper is next placed in a chemical called ``bleach/fix'' which converts the black silver back to silver halide and removes the silver halide crystals. Thereafter the paper is insensitive to light. The paper then goes into a wash to remove all traces of the bleach/fix.

As the prints are made, a small hole is inserted into the roll of paper by the printing machine. Sensors within the machine pick up this hole and cut the individual prints accordingly. The printing process for each individual print takes 5 to 18 minutes from the time the operator has pushed the print button in respect of the frame from which that print is produced. Should something go wrong in the printing process, any individual print or prints with imperfections may be redone. If everything is satisfactory, an employee of one of the taxpayers will take the processed exposed film and cut it up on a negative cutter into ``slices'' of negatives. At the same time the negative cutter inserts the slices of negatives into protective plastic sleeves which, together with the prints (where prints have been ordered), are placed in a photographic folder for delivery to the customer.

The legislation

The sales tax legislation consists of twenty- seven separate Acts: eleven Assessment Acts; fourteen Acts which impose the various taxes; an Act dealing with exemptions and classification of goods; and an Act dealing with procedural matters. Section 17(1) of the Act provides:

``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.''

The Commissioner claims that the taxpayers are liable to sales tax on the manufacture of negatives in the development process as assessed by this provision and imposed by the Sales Tax Act (No. 1) 1930 (Cth).

Under s. 17, liability to sales tax depends on the negatives being found to fall within the statutory concept of ``goods manufactured'' and being found to cross one of the three taxing points: sale; treatment as stock for sale by retail; or application to own use by the taxpayer. Three comments may immediately be made. First, s. 3(1) of the Act has, since 1986, defined ``manufacture'' to include:

``(d) the processing or treatment of exposed photographic or cinematographic film to produce a negative, transparency or film strip.''

Therefore, the negatives satisfy the requirement in s. 17 that they be ``manufactured''. It remains to be considered whether they are ``goods'' so that both limbs of the concept of ``goods manufactured'' are satisfied. Secondly, the Commissioner does not contend that the negatives are ``sold'' in the ordinary sense. The film is, and remains at all times, the property of the customer. Accordingly, the ``sale'' taxing point is crossed, if at all, by reason of a deemed sale under the Act. Thirdly, the Commissioner does not contend that the negatives are treated as stock for sale by retail. Therefore, the only taxing points that need be considered are deemed sale and application to own use.

Are negatives (developed photographic film) ``goods''?

The statutory definition of ``goods'' in s. 3(1) of the Act excludes ``goods which have... gone into use or consumption in Australia''. It is common ground that the rolls of exposed photographic film received by the taxpayers from their customers have already gone into use or consumption in Australia and are accordingly not within the statutory definition of ``goods'' for the purposes of the Act. The question then is, does the photographic film, once it has undergone the process of development, fall

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ATC 4768

within the statutory concept of goods? We turn first to a related question.

Both the Court of Appeal and the Full Court of the Federal Court considered that, absent par. (d) of the definition of ``manufacture'', the process of production of negatives from exposed film is not manufacture. Mahoney J.A. said:^[4] Kodak 90 ATC 5073, at p. 5078; (1990) 21 N.S.W.L.R. 402, at pp. 408-409.

``The description of the goods when purchased was `photographic film': it was not, I think, `unexposed photographic film'. The goods remain, I think, photographic film, whether they be unexposed, exposed, or so treated that the chemicals upon them disclose in negative form the images to which they were exposed.''

Hill J. said^[5] Genex 91 ATC 4564, at p. 4574; (1991) 101 A.L.R. 161, at p. 173. that development:

``does not amount to the bringing into existence of new goods. It is a service which involves a modification of existing goods, from a film which is still light-sensitive to one where the latent image has been brought out and stabilised. To say that a modification is involved is not determinative of the issue of manufacture, for matters of fact and degree may be involved.''

He did not find it necessary to determine finally the issue but said that his view, as then advised, was that the process was not manufacture.

We agree with that view. Little assistance is provided by the decided cases. Decisions of this Court establish that the compound process of the production of prints from exposed film is manufacture but do not examine the question in relation to the intermediate step relevant in this case.^[6] FC of T v. Riley (1935) 3 ATD 183 ; (1935) 53 C.L.R. 69 ; FC of T v. Butcher (1935) 3 ATD 192 ; (1935) 53 C.L.R. 82 . In WEA Records Pty. Ltd. v. FC of T,^[7] WEA Records Pty Ltd v FC of T 90 ATC 4779 ; (1990) 96 A.L.R. 365 . Davies J. held that the duplication of master video tapes onto video cassettes was manufacture within the meaning of the Act. He said:^[8] ibid., at ATC p. 4784; C.L.R. p. 370.

``[T]he duplication process... brought into being a commodity which was different from the blank cassettes on which the videos were recorded. A cassette adapted to take a video recording is one thing. A cassette containing a video recording is another... The commodities are different because the video recording, which is the predominant feature of the one, is absent from the other. The process whereby this occurs is not mere treatment but production and, to my mind, manufacture, using that term in its ordinary sense.''

It is clear, however, that an exposed film is not a different commodity from a developed negative in this sense.

The definition of ``manufacture'' in s. 3(1) of the Act is inclusive, and there is nothing to displace the propriety of applying the word as it is ``ordinarily applied in English speech''.^[9] FC of T v. Rochester (1934) 2 ATD 466 ; (1934) 50 C.L.R. 225 , per Dixon J. at ATD p. 467; C.L.R. p. 227 . See also Irving v. Munro & Sons Ltd. (1931) 46 C.L.R. 279 ; DFC of T (Adams) v. Rau (1931) 1 ATD 302 , at pp. 304-305; (1931) 46 C.L.R. 572 , at pp. 577-578 ; FC of T v. Jax Tyres Pty. Ltd. 85 ATC 4001 , at p. 4003; (1984) 58 A.L.R. 138 , at p. 140 . It has long been accepted that one is required to ask whether that which is made is ``a different thing'' from that out of which it is made.^[10] McNicol v. Pinch [1906] 2 K.B. 352 , at p. 361 ; FC of T v. Jack Zinader Pty. Ltd. (1949) 9 ATD 46 , at pp. 47, 51; (1949) 78 C.L.R. 336 , at pp. 343, 350 ; M.P. Metals Pty. Ltd. v. FC of T (1967) 14 ATD 407 , at pp. 410-411; (1967-1968) 117 C.L.R. 631 , at pp. 637-638 . And, equally, it is no novel proposition to say that this question is on occasion difficult to answer.^[11] e.g., M.P. Metals Pty. Ltd. (1967) 14 ATD 407 at p. 411; (1967-1968) 117 C.L.R. 631, at p. 638.

However, notwithstanding the emphasis Davies J. placed on the difference as items of commerce between blank and recorded tapes and the relevance of ``differences in... utility for some purpose''<sup>[12]</sup> WEA Records Pty. Ltd. 90 ATC 4779, at p. 4783; (1990) 96 A.L.R. 365, at pp. 369-370. See par. (b) of the definition of ``manufacture'', and also Jack Zinader Pty. Ltd. (1949) 9 ATD 46, at p. 51; (1949) 78 C.L.R. 336, at p. 350. in answering the question, we consider that, absent par. (d), negatives are not relevantly different things from the exposed film from which they are produced and that development is therefore not ``manufacture''. The modification effected by development is more aptly described as treatment. In particular, the plastic film base remains unaffected by the chemical processes which make visible and stabilize the latent image. And the chemical compounds which are removed from the exposed film during these processes represent only 4 per cent to 5 per cent of the overall weight of the film. The negatives remain in the relevant sense the same goods as the unexposed film which went into use or consumption on sale to and use by the purchaser.

But the principal question is, are negatives, that is, developed photographic film, ``goods''? Section 3(1) of the Act defines ``goods'' as follows:

``` Goods ' includes commodities, but does not include-

• (a) goods which have, either through a process of retailing or otherwise, gone into use or consumption in Australia; or
• (b) goods which are sold as second-hand goods and are manufactured exclusively or principally from goods which-
  • (i) have, whether alone or as parts of other goods, gone into use or consumption in Australia; and
  • (ii) in the opinion of the Commissioner, in their condition as parts of the goods so manufactured, retain their character as goods or parts

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    ATC 4769

    of goods which have gone into use or consumption in Australia.''

<sup>[13]</sup> The definition goes on to deal with containers for goods. That part of the definition is not presently relevant and has been omitted.

``Goods'' therefore bears its ordinary English meaning, subject to the express exclusions in s. 3(1) of the Act and those implications which can be drawn from its application in the Act. One such implication is that the word ``goods'' bears a meaning which includes the product of that which the Act defines as manufacture.<sup>[14]</sup> Genex 91 ATC 4564, at pp. 4574-4575; (1991) 101 A.L.R. 161, at p. 174. The correlation in the Act between ``manufacture'' and ``goods'' cannot be gainsaid. Section 3(1) of the Act defines ``manufacturer'' as follows:

```Manufacturer' means a person who engages, whether exclusively or not, in the manufacture of goods, and includes a printer, publisher, lithographer or engraver, and a person (not being an employee) who manufactures goods, whether or not the materials out of which the goods are manufactured are owned by him, but, where one person manufactures goods for another, wholly or in part out of materials supplied by that other, and the goods are not for the use of, but are for sale by, that other, the person supplying the materials shall be deemed to be the manufacturer, and the person who so manufactures the goods shall be deemed not to be the manufacturer;''

Similar indications of the correlation can be found in the definitions of ``goods'' and ``manufacture'' and in ss. 17 and 19 of the Act. Indeed, Williams J. accepted in Jack Zinader Pty. Ltd.<sup>[15]</sup> (1949) 9 ATD 46, at p. 50; (1949) 78 C.L.R. 336, at p. 349. that an amendment to the definition of ``manufacture'', such as the insertion of par. (d), could effect a change in the statutory concept of goods without express amendment of the definition of goods. It follows that, since the definition of manufacture now contains par. (d), the negatives are goods. This is so notwithstanding our conclusion that, absent par. (d), the process of development is not manufacture and the result of that process is not manufactured goods.

The taxpayers sought to rely on FC of T v. Comber.<sup>[16]</sup> FC of T v Comber 86 ATC 4171 ; (1986) 64 A.L.R. 451 . In that case, s. 109 of the Income Tax Assessment Act 1936 (Cth) deemed a payment received from a company by a taxpayer to be a dividend. Section 44(1) of that Act provided, so far as is relevant:

``The assessable income of a shareholder in a company... shall...

• (a)... include dividends paid to him by the company out of profits derived by it from any source.''

The Commissioner sought to recover tax on the deemed dividend under this section. The taxpayer was not, however, a shareholder in the company. Fisher J. said:<sup>[17]</sup> ibid., at ATC p. 4177; ALR p. 458.

``If the contention of the Commissioner were correct, it would mean that by the use of the statutory fiction the section would go beyond the express deeming of the excess to be a dividend. It would in addition imply deeming the person in receipt of the excess to be receiving it as a shareholder and also that the deemed dividend was paid out of the profits of the company. Paragraph 44(1)(a) would not be applicable unless such additional deemings are implied.

I find the Commissioner's construction unacceptable. In my opinion deeming provisions are required by their nature to be construed strictly and only for the purpose for which they are resorted to.<sup>[18]</sup> In re Levy; Ex parte Walton (1881) 17 Ch.D. 746 , per James L.J. at p. 756 . It is improper in my view to extend by implication the express application of such a statutory fiction. It is even more improper so to do if such an extension is unnecessary, the express provision being capable by itself of sensible and rational application.''

Accordingly, he rejected the claim of the Commissioner. The judgments of Bowen C.J. and Lockhart J. were to like effect.

In our view, the principle expressed in Comber does not assist the taxpayers in the present appeals. This is not a case of impermissibly extending the scope of deemed manufacture.<sup>[19]</sup> See, in a different context, Mutual Pools and Staff Pty. Ltd. v. FC of T 92 ATC 4016 , at pp. 4024-4025; (1992) 173 C.L.R. 450 , at pp. 468-469 . The statutory notion of goods is wide enough to catch the product of that which the statute defines as manufacture.

Nor is this a case of legislative mistake in the sense considered in Cooper Brookes (Wollongong) Pty. Ltd. v. FC of T.<sup>[20]</sup> Cooper Brookes (Wollongong) Pty Ltd v FC of T 81 ATC 4292 ; (1980-1981) 147 C.L.R. 297 ; see also Mills v. Meeking & Anor (1989-1990) 169 C.L.R. 214 . The construction which we have placed on the legislation is open on the face of the statute and gives effect to the legislative intention manifested by the introduction of par. (d) of the definition of ``manufacture''. In our view, no concurrent amendment to the definition of ``goods'' or to s. 17 of the Act was necessary to effectuate that intention.

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ATC 4770

Are any taxing points crossed?

As has already been observed, the exposed film is, at all times, the property of the customer and so there is no actual sale. The ``sale'' taxing point is crossed if and only if there is a deemed sale by reason of s. 17A(1) of the Act. That sub-section provides:

``Where-

• (a) goods have been manufactured in Australia by a person for another person (in this subsection referred to as the `customer'); and
• (b) the goods were manufactured in whole or in part out of materials supplied by the customer,

the manufacturer of the goods shall, for the purposes of this Act, be deemed to have sold the goods to the customer at the time when the goods were delivered to the customer, or were delivered under an agreement with the customer to some other person, and the customer shall, for the purposes of this Act, be deemed to be the purchaser of the goods.''

The predecessor to this section was inserted in 1934 for reasons disclosed in the Minister's Second Reading Speech:<sup>[21]</sup> House of Representatives Parliamentary Debates ( Hansard ), 1 and 2 August 1934, p. 1095.

``To provide a clear basis of liability for merchants who procure the making-up of goods by other persons out of materials supplied to the merchants by their customers.''

He expanded on this in the Committee Stage of the Bill:<sup>[22]</sup> ibid.

``The purpose of this amendment is to clarify the position in regard to goods manufactured out of materials supplied by a customer to a manufacturer. In the tailoring trade, for example, a fairly common practice is that of customers supplying suit lengths to merchant tailors, who, in turn, pass on the material to manufacturing tailors to be made up. Under the existing law, doubt exists as to who is liable to pay the sales tax, the manufacturing tailor or the merchant tailor. In some cases, the man who buys the suit bears sales tax on the cost of the suit as supplied by the manufacturing tailor and, in other cases, on the cost as supplied by the merchant tailor. It is necessary to have uniformity. The law clearly intends that sales tax shall be paid on the suit as it is eventually sold to the customer by the merchant tailor, and the amendment seeks to bring that about.''

The section took substantially its present form in 1978. Its purpose was set out in the Explanatory Memorandum to the Bill which introduced it:<sup>[23]</sup> The Parliament of the Commonwealth of Australia, House of Representatives, Sales Tax Assessment (Nos 1-9) Amendment Bill 1978, Explanatory Memorandum, p. 10.

``The... new section 17A is designed to ensure that where goods are manufactured by a manufacturer out of materials supplied to the manufacturer by the customer or purchased by the customer from the manufacturer (or an associate) in a legally separate transaction, sales tax will be payable on a sale value equal to the amount for which the goods could reasonably be expected to be sold by the manufacturer by wholesale if all the materials used in the manufacture of the goods had been purchased by the manufacturer in the ordinary course of his business from a person, other than the customer, with whom he was dealing at arm's length. In practice, this will be the ordinary wholesale selling price of the manufactured goods.''

Given these historical aims, it would not be surprising if the section failed to catch the negatives.

Section 17A is merely a deeming provision; s. 17 remains the section which assesses liability to sales tax by reason of the crossing of a taxing point. Section 17 requires ``goods manufactured'' to be ``sold''. That requirement will, of course, be satisfied if the goods are deemed to have been sold. But, in order that goods should fall within the concept of s. 17A as goods which are deemed to have been sold, there must be delivery to a customer or to another person under an agreement with the customer of some article or thing which falls within the statutory concept of goods at the time of such delivery. In view of the terms of the definition of ``manufacture'', there can be no doubt that goods (negatives) are manufactured in whole or in part out of materials (exposed film) supplied by the customer. However, if, as is the usual case, photographic prints are produced for the customer, the negatives go into use or consumption in that production before they are delivered to the customer and are then no longer goods. Therefore, no ``goods'' are deemed by s. 17A to have been sold and thus to cross the taxing point. Only if the exposed photographic film is given to the taxpayer under a contract for development only and not for the

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ATC 4771

production of prints is there a deemed sale of the developed film.

With a view to avoiding the conclusion that the negatives go into use or consumption in the production of photographic prints for the customer and thereby to avoid the conclusion that there is no deemed sale of the negatives, Mr Gzell Q.C., for the Commissioner, made two submissions. First, he submitted that, on the facts, the negatives do not go into use or consumption by reason of the production of photographic prints. Reference to the facts of the process recorded above compels rejection of this submission. Secondly, he submitted that goods go into use or consumption as a matter of law only if they cross one of the s. 17 taxing points. Accordingly, he said, the production of the prints from the negatives constitutes entry of the negatives into use or consumption if and only if the production constitutes application of the negatives to the use of the taxpayer, there being no question of crossing the sale or treatment as stock for retail taxing points. He invited the conclusion that, absent the crossing of that taxing point, the negatives remain goods and there is a s. 17A deemed sale. We are content to consider this argument on the assumption that there is no such application to own use. Although the construction advanced by Mr Gzell does not appear to have been suggested in any earlier case, that construction would give effect to the statutory intention that all goods be taxed once and only once.

In response, Mr Bennett Q.C., for Kodak, pointed out that in the usual case the taxing point which is crossed and attracts the imposition of sales tax is the last wholesale sale, at which time the goods have, beyond doubt, not gone into use or consumption. Mr Bennett also made the point that such goods are not secondhand and that, although the making of a book entry was held in FC of T v. York Motors Pty. Ltd.<sup>[24]</sup> FC of T v York Motors Pty Ltd (1946) 73 C.L.R. 459 . to be a treatment as stock for sale by retail, it on no view amounted to an entry into use or consumption. These submissions, though accurate as far as they go, do not meet Mr Gzell's argument that goods go into use or consumption only if and when they cross a taxing point. On the other hand, the Act does not provide, either expressly or impliedly, that entry into use or consumption is contingent on a prior crossing of a taxing point. That will often be the case, but there remain other possibilities. There may be an entry into use or consumption without the crossing of a taxing point if, to take the examples presented by Mr Bennett, the goods are stolen or given in pure benefaction. We therefore reject Mr Gzell's submission that, as a matter of law, goods go into use or consumption only after they have crossed one of the taxing points. In the present case, on the assumption that there is no application to own use, the negatives enter into use or consumption without crossing a taxing point.

It remains to consider whether this assumption is correct. We are of the view that it is for the reasons given by Hill J. As his Honour said:<sup>[25]</sup> Genex 91 ATC 4564 at pp. 4575-4576; (1991) 101 A.L.R. 161, at pp. 175-176.

``The legislation has always been, at least in concept, a tax on sales. It is a necessary prerequisite of a sale that title to the goods sold passes to another person, that is to say that the title is, at the moment before sale, in the person who sells it. Difficult cases where no title then existed but where there is a `feeding of the estoppel'<sup>[26]</sup> cf. Spencer Bower and Turner, The Law Relating to Estoppel by Representation , 2nd ed. (1966), par. 207. may be put to one side. The case of goods treated by the manufacturer as stock for sale by retail, another taxing point in the case of manufacturers, equally requires title in the goods to be in the manufacturer who is proposing to sell them by retail. The sale deemed to occur by s. 3(4) again must be one where title in the goods passes, albeit other than under a contract for the sale of goods. As the earlier discussion of the scheme of the legislation makes clear, it was necessary in ensuring that the taxation base was not eroded to provide that a liability for sales tax would arise where goods were not sold, but were applied by the manufacturer or wholesale merchant to his own business use. In other words, the plain legislative purpose of dealing with application to own use was to deal with the case where, although title to the goods was held by the taxpayer, he had not subjected those goods to a transaction involving the transfer of title (sale or deemed sale) or prospective sale by treating them as retail stock.''

We accept, notwithstanding the difficulty presented by the language, that there is an employment of the negatives for the taxpayers' own purposes and that, therefore, the literal words of the section could be satisfied.<sup>[27]</sup> Max Factor & Co. (Inc. in USA) v. FC of T 71 ATC 4136 , at p. 4138; (1971) 124 C.L.R. 353 , at p. 362 . Nonetheless, the passage quoted from the judgment of Hill J. demonstrates the

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ATC 4772

insuperable difficulty in the way of holding that this taxing point is crossed, in that the negatives are at all times the property of the customer.

If, contrary to the view we have taken, the negatives are ``applied to [the taxpayers'] own use'', the question arises as to whether or not they are so applied as ``aids to manufacture'', in the sense that that phrase is used in items 113B and 113C of Sched. 1 to the Sales Tax (Exemptions and Classifications) Act 1935 (Cth). Section 5(1) of that Act and those items provide an exemption from liability to sales tax for:

``113B Goods manufactured by any person and applied by him to his own use as aids to manufacture or as auxiliaries to aids to manufacture

113C Goods applied by a registered person to his own use as aids to manufacture (as defined by regulations made under the Sales Tax Assessment Acts) or as auxiliaries to aids to manufacture (as so defined).''

The relevant definition of the expression ``aids to manufacture'' for the purposes of items 113B and 113C is identical<sup>[28]</sup> See Genex 91 ATC 4564, at p. 4571; (1991) 101 A.L.R. 161, at pp. 169-170. and is as follows:<sup>[29]</sup> Sales Tax (Exemptions and Classifications) Act , Sched. 1, cl. 1.

```aids to manufacture' means goods for use by a manufacturer in the course of carrying on a business (where that use is exclusively, or primarily and principally, for the purposes of that business), being-

• (a) machinery, implements and apparatus for use exclusively, or primarily and principally-
  • (i) in the actual processing or treatment of goods to be used in, wrought into or attached to goods to be manufactured by him;
  • (ii) in any processing or treatment by which the goods to which that processing or treatment is applied are used in, wrought into or attached to goods to be manufactured by him;
  • ...
• (d) goods (other than those specified in paragraph (a) or (b) or those excluded from this definition by paragraph (f) or (k)) for use as specified in paragraph (a).

but does not include the following goods...:

• ...
• (k) goods for use in connection with the manufacture for sale of goods, if the first-mentioned goods are to be sold to the purchaser of the goods to be so manufactured, except where the goods to be so manufactured
  • (i) are covered by an item in this Schedule; or
  • (ii) are to be sold by the manufacturer to a person who quotes his certificate of registration in respect of the purchase of those goods and who furnishes to the manufacturer a certificate in writing that the first- mentioned goods are not for resale to a person to whom the goods to be so manufactured are also to be sold.''

In essence, the question is, in the terms of par. (k), whether the negatives are ``goods [which] are to be sold'' to the purchaser of goods in connection with the manufacture of which the negatives are used. We have already indicated that, in our view, there is no deemed sale within s. 17A of the Act and there is clearly no other sale. Hence, even if the reference to ``sale'' in the definition of ``aids to manufacture'' is to be read as including a deemed sale under s. 17A, which we are not to be taken as accepting, the negatives do not fall within the exception to the exemption and, if there is an application to own use, the negatives are exempt. However, it is not necessary for us finally to decide this question as, in our opinion, the negatives are not ``applied to [the taxpayers'] own use''.

Conclusion

In summary, films lodged with the taxpayers by their customers, which have been exposed by the customers and are processed by the taxpayers, are, after the point of processing (but not before), ``goods'' within the meaning of and for the purposes of the Act. The processed films or negatives go into use or consumption in Australia when they are used by the taxpayers to produce photographic prints and thereupon cease to be ``goods'' within the meaning and for the purposes of the Act. They are neither sold nor deemed by s. 17A(1) of the Act to be sold by the taxpayers to their customers. Therefore, on the facts stated or agreed, the taxpayers are liable to pay sales tax in respect of negatives processed by the taxpayers for their customers only where, pursuant to the contract between the taxpayers and their customers, the negatives are not employed for the production of photographic prints.

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ATC 4773

Since we have concluded that the negatives are not ``applied to [the taxpayers'] own use'', we do not find it necessary to decide whether the negatives are ``aids to manufacture'' within the meaning of the relevant provisions of the Sales Tax (Exemptions and Classifications) Act. And, as the negatives are not ``applied to [the taxpayers'] own use'', the exemption from liability provided for by s. 5(1) and items 113B and 113C of Sched. 1 of the Sales Tax (Exemptions and Classifications) Act is not attracted.

At the hearing of these appeals, Mr Bennett indicated that, if the Court held that the taxpayers were liable to pay sales tax in respect of negatives only by reason of a deemed manufacture and a deemed sale, he would seek to have remitted to the Federal Court that part of the Kodak matters which concerned the question as to whether the result was that such liability was not in the nature of an excise. He indicated that, if it were so remitted, he wished to argue that the provisions imposing the liability would be invalid by reason of a contravention of s. 55 of the Constitution. Leave was granted on the hearing of the appeals to amend the notice of appeal in each of the Kodak matters so as to include this issue. It was an issue raised and reserved in the Genex matter in the court below. As appears from these reasons, in our opinion, the liability to sales tax in respect of negatives not employed for the production of photographic prints does arise by reason of a deemed manufacture and a deemed sale. Whether, in the circumstances of the two cases, the excise question remains a live practical issue is a matter for the parties to decide. It is therefore appropriate to grant liberty to apply in respect of this issue.

We propose the following orders:

The Commonwealth of Australia & Anor v. Genex Corporation Pty. Ltd. & Ors

Appeal dismissed with costs.

Kodak (Australasia) Pty. Limited v. The Commonwealth of Australia & Anor (3 matters)

Appeals allowed with costs.

Set aside the orders of the Court of Appeal of New South Wales. In lieu thereof:

• (i) declare that photographic negatives used by the appellant in the production of photographic prints are not assessable to sales tax under the Sales Tax Assessment Act (No. 1) 1930 (Cth), as amended;
• (ii) remit the balance of the proceedings to the Supreme Court of New South Wales for determination of the appellant's claims for refund or repayment of moneys paid as and for sales tax; and
• (iii) order that the respondents pay the appellant's costs of the proceedings in the Supreme Court of New South Wales to date and in the Court of Appeal.

Liberty to apply.