Fiduciary Ltd & Ors v Morningstar Research Pty Ltd & Ors

IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

13097/03 FIDUCIARY LTD & ANOR v MORNINGSTAR RESEARCH PTY LTD & ORS

JUDGMENT 1 There are exceptions to the liability for goods and services tax. This case concerns the exception for GST-free exports. 2 The first defendant, Morningstar Research Pty Ltd, was a joint venture vehicle in which the second defendant, Morningstar Inc, a United States of America corporation, held a majority interest. The minority interest was held by the first plaintiff, Fiduciary Ltd, a company owned and controlled by the second plaintiff, Graham John Rich. Morningstar Inc was entitled to appoint four members of the board of Morningstar Research, they being the third to sixth defendants. Mr Rich and his nominee were the other members of the board. 3 The plaintiffs sought substantive relief by reason of the conduct of the Morningstar Inc which was alleged to be oppressive within the Corporations Act 2001 (Cth), s 232. 4 Interlocutory process was brought before Barrett J (Fiduciary Ltd v Morningstar Research Pty Ltd (2003) 55 NSWLR 1) in which the plaintiffs sought an injunction restraining Morningstar Research from issuing shares to Morningstar Inc or otherwise and an injunction restraining the defendants from being party to actions seeking to dismiss Mr Rich as managing director of Morningstar Research and appointing a Mr Reynolds, an employee of Morningstar Research, in his place. For the purpose of those proceedings, Mr Reynolds and two of the United States resident directors, Tao Huang, the fourth defendant, and Bevin Desmond, the sixth defendant, were in Australia. 5 The plaintiffs' interlocutory process failed and they were ordered to pay the defendants' costs. The defendants' solicitors rendered bills to Morningstar Inc that included GST. 6 The Legal Profession Act 1987, s 202(1) provided that a person who was entitled to receive costs as a result of an order for the payment of an unspecified amount of costs, might apply for an assessment of those costs. The defendants applied for such an assessment. The assessor determined that the costs should be GST-free for the following reason: "The Costs Applicants' costs should be GST free under Section 38-190(1) of the New Tax Act as work was carried out primarily for Morning Star Inc, an overseas entity, and no claim was allowed for GST. Alternatively, the principal Defendants would be entitled to an input tax credit in respect of any GST." 7 The Legal Profession Act 1987, s 208KA(1) provided that a party to an assessment who was dissatisfied with the determination of a costs assessor might apply for a review of the determination. The plaintiffs sought such a review. The review panel determined that the supply of services was not GST-free because the presence of Messrs Reynolds, Desmond and Huang in Australia meant that Morningstar Inc was in Australia at the time. 8 The Legal Profession Act 1987, s 208L(1) provided that a party dissatisfied with a decision of a costs assessor as to a matter of law, might appeal to this court. Section 208KI(1) provided that that provision applied to a decision of a review panel as if the reference therein to a costs assessor was a reference to the panel. The plaintiffs submitted that the review panel erred in law in concluding that the supplies of the solicitors' services to Morningstar Inc were not GST-free. 9 Under A New Tax System (Good and Services Tax) Act 1999 (Cth), s7-1(1), GST was payable on taxable supplies. A taxable supply was defined in s 9-5 to mean a supply for consideration made in the course or furtherance of an enterprise that was connected with Australia and was made by a person who was registered or required to be registered. The provision went on to state an exception: a supply was not a taxable supply to the extent that it was GST-free. 10 A New Tax System (Good and Services Tax) Act 1999 (Cth), s 9-30(1)(a) provided that a supply was GST-free if it was within Div 38. Section 38-190(1) within that Division provided that the third column of its table set out supplies that were GST-free, except to the extent that they were supplies of goods or real property. Item 2 within the table was the supply to a non-resident outside Australia. The third column provided: "A supply that is made to a non-resident who is not in Australia when the thing supplied is done, and: (a) the supply is neither a supply of work physically performed on goods situated in Australia when the work is done nor a supply directly connected with real property situated in Australia; or (b) the non-resident acquires the thing in carrying on the non-resident's enterprise, but is not registered or required to be registered."

Section 38-190 contained further restrictions, irrelevant for present purposes. 11 It was common ground that the defendants' solicitors made a supply of services to a non-resident. The supply was neither performed on goods nor connected with real property and Morningstar Inc acquired the services in carrying on its enterprise but it was not registered nor required to be registered. The single issue in the case was whether Morningstar Inc was or was not in Australia when the services were supplied. 12 The only evidence of Morningstar Inc's presence in Australia was that relating to the three individuals who were in Australia for the purpose of the interlocutory proceedings. There was no evidence of what they did nor was there evidence of their ability to bind Morningstar Inc to any action taken by them. All that was known was that two were directors of Morningstar Research and one was an employee of it who might have become managing director. Apart from Morningstar Inc's nomination of the directors, there was no evidence of any relationship between the individuals and Morningstar Inc. 13 When I asked what would happen if further facts emerged that put a different complexion on the matter, I was informed from the bar table, without contradiction, that the defendants had been invited to seek a private binding ruling from the Australian Taxation Office but had declined to do so and the Australian Taxation Office had been informed of this hearing and did not attend. 14 The Australian Taxation Office issued Goods and Services Tax Ruling GSTR 2000/31 in which at par 68 it was said that the pre-condition that the recipient was not in Australia at the relevant time required that neither the recipient, nor a representative acting on behalf of the recipient if the recipient was a company, was in Australia in relation to the supply. It was, no doubt, upon the basis of this statement that the defendants chose to conduct their case on the limited evidence indicated above. 15 However, while a ruling may have implications if subsequently altered by the Commissioner of Taxation under the Taxation Administration Act 1953 (Cth), s 37, the ruling is merely the expression of opinion of the way in which a law operates. It is not a substitute for the law. The review panel acted upon the ruling regarding it as in force and disregarded Draft Goods and Services Tax Ruling GSTR 2002/D8 and Draft Goods and Services Tax Ruling GSTR 2003/D9 in which the Australian Taxation Office expressed a different view. The review panel said: "In reaching the opinion expressed in paragraph 4.6 we considered that the ruling from the Australian Taxation Office (GSTR 2000/31) in force at the time the work was done and the accounts were rendered for that work was to be applied rather than the draft ruling GSTR 2002/D8 that was later issued and which has still not being adopted by the Australian Taxation Office." 16 The status accorded to GSTR 2000/31 by the review panel constituted an error of law. In Income Tax Ruling IT 1 the Australian Taxation Office said: "In using Taxation Rulings it should be recognised that they cannot supplant the terms of the law. It is now well established that statements or declarations by the Commissioner of Taxation or his officers do not have the effect of an estoppel against the operation of the taxation law." 17 The concept of a non-resident not being in Australia is not defined in A New Tax System (Goods and Services Tax) Act 1999 (Cth). 18 In another context, however, presence is that which grounds the jurisdiction of the courts at common law in actions in personam. In John Russell & Co Ltd v Cayzer, Irvine & Co Ltd [1916] 2 AC 298 at 302 Viscount Haldane explained: "The root principle of the English law about jurisdiction is that the judges stand in the place of the Sovereign in whose name they administer justice, and that therefore whoever is served with the King's writ, and can be compelled consequently to submit to the decree made, is a person over whom the Courts have jurisdiction." 19 In Laurie v Carroll (1957-1958) 98 CLR 310 at 323 the High Court endorsed this proposition and went on to say that the defendant must be amenable or answerable to the command of the writ and that amenability depended upon nothing but presence within the jurisdiction. 20 A corporation cannot, physically, be present within the jurisdiction. It is an abstraction. It must act through agents. A body of law has developed determining those situations in which the activities of an agent of a corporation are sufficient to render the corporation to be present in the jurisdiction. 21 In Dunlop Pneumatic Tyre Co v Actien-Gesellschaft Fur Motor Und Motorfahrzeugbau Vorm Cudell & Co [1902] 1 KB 342 the defendant, a foreign corporation that manufactured motor vehicles, hired a stand at the Crystal Palace that was manned by a representative of the corporation whose duty was to explain the working of articles exhibited, to take orders and to encourage the sale of the defendant's goods. The exhibition lasted for nine days. The defendant displayed a motor vehicle fitted with tyres that the plaintiff alleged infringed its patent. It was held that the defendant was carrying on business in the jurisdiction and was thereby resident within it and the application to set aside service of the writ was refused. At 346-347, Collins MR said: "In order to see whether they were liable to be so served, it is necessary to consider whether, upon the facts, they can be said to have been resident in England when the service was effected. It has been held in a number of cases, beginning with Newby v Van Oppen (1872) LR 7 QB 293 and ending with the case of La Bourgogne [1899] AC 431, that the true test in such cases is whether the foreign corporation is conducting its own business at some fixed place within the jurisdiction, that being the only way in which a corporation can reside in this country. It can only so reside through its agent, not being a concrete entity itself; but, if it so resides by its agent, it must be considered for this purpose as itself residing within the jurisdiction."

The Master of the Rolls went on to point out that in a number of cases the difficulty was to determine whether the business carried on by an agent at a certain place within the jurisdiction was the business of the company itself carried on by that agent as representing them, or was really the business of the agent. 22 In Actiesselskabet Dampskib "Hercules" v Grand Trunk Pacific Railway Co [1912] 1 KB 222 the defendant was a Canadian company incorporated by statute to construct and work railways in that country. A committee of directors resident in England had conferred upon them by the company's constitution, power to raise loan capital. Service of a writ of demurrage in England was held to be good, the raising of loan funds being considered to be part of the business of the corporation. At 227, Buckley LJ discussed the question: "The defendants are "here" (that is, are found within the jurisdiction) for the purpose of the service of a writ, and their appeal fails. In Order IX r 8, which relates to service upon corporations, there is no such expression as "reside" or "carry on business." Those are expressions found in judgments which have dealt with this subject. We have only to see whether the corporation is "here"; if it is, it can be served. There are authorities as to the circumstances in which a foreign corporation can and cannot be said to be "here"; the best test is to ascertain whether the business is carried on here and at a defined place." 23 Buckley LJ repeated this understanding of the word "here" in Okura & Co Ltd v Forsbacka Jernverks Aktiebolag [1914] 1 KB 715 at 718. In that case the defendants carried on a manufacturing business in Sweden. In England they retained as their agents a firm who also acted as agents for other firms and carried on business on their own account. The agents had no general authority to enter into contracts on behalf of the defendants. They obtained orders and submitted them to the defendants for their approval. On notification by the defendants that an order was accepted, the agents signed contracts with the purchasers, the goods were shipped direct from Sweden and payments received in London by the agents were remitted to Sweden less their commission. It was held that the defendants were not carrying on business in England. Buckley LJ pointed to three conditions to constitute the presence of a corporation in England: the acts relied on must have continued for a sufficiently substantial period of time; the acts must have been done at some fixed place of business; and the corporation must have been "here" by a person who carried on business for the corporation in England. His Lordship went on to say at 718-719 that it was not enough to show that a corporation had an agent in England. The agent must have been one who did the corporation's business for the corporation in England. At 721 his Lordship said: "In my opinion the defendants are not "here" by an alter ego who does business for them here, or who is competent to bind them in any way. They are not doing business here by a person but through a person." 24 In Littauer Glove Corp v F W Millington (1920) Ltd (1928) 44 TLR 746 an action on a foreign judgment failed because it was held that the defendant was not amenable to the jurisdiction in which the judgment was obtained. Slater J said that the authorities indicated that there must be some carrying on of a business at a definite and, to some reasonable extent, permanent place. 25 In Sfeir & Co v National Insurance Co of New Zealand Ltd [1964] 1 Lloyd's Rep 330 a Ghanaian body with power to settle minor claims on behalf of the New Zealand corporation was held insufficient to constitute the defendant as a resident of Ghana. 26 These authorities were discussed in Vogel v Kohnstamn Ltd [1973] 1 QB 133 in which the defendant company, registered in England, sold leather skins to the plaintiff, a leather merchant in Israel, through a representative who sought customers for them and was the means of communication between them and any buyer but who had no authority to conclude any contracts on their behalf. It was held that the representative's activities did not amount to a carrying on of business by the defendants in Israel and, not being resident in Israel, the Israeli court had no jurisdiction over them. 27 In Adams v Cape Industries plc [1990] 1 Ch 433, the defendant was an English company and head of a group engaged in mining asbestos in South Africa. A wholly owned English subsidiary was the worldwide marketing body. They protested the jurisdiction of the United States Federal District Court at Tylla, Texas in a suit by victims of asbestoses. The defendants took no part in the United States proceedings and default judgments were entered against them. Actions on the judgment in England failed. The Court of Appeal, at 530, derived a number of principles from the authorities: "(1) The English courts will be likely to treat a trading corporation incorporated under the law of one country ("an overseas corporation") as present within the jurisdiction of the courts of another country only if either (i) it has established and maintained at its own expense (whether as owner or lessee) a fixed place of business of its own in the other country and for more than a minimal period of time has carried on its own business at or from such premises by its servants or agents (a "branch office" case), or (ii) a representative of the overseas corporation has for more than a minimal period of time been carrying on the overseas corporation's business in the other country at or from some fixed place of business. (2) In either of these two cases, presence can only be established if it can fairly be said, that the overseas corporation's business (whether or not together with the representative's own business) has been transacted at or from the fixed place of business. In the first case, this condition is likely to present few problems. In the second, the question whether the representative has been carrying on the overseas corporation's business or has been doing no more than carry on his own business will necessitate an investigation of the functions which he has been performing and all aspects of the relationship between him and the overseas corporation." 28 Similar views have been expressed in Australia. In National Commercial Bank v Wimborne (1979) 11 NSWLR 156, Holland J held that the appointment of a local bank as correspondent banker for a foreign bank was not sufficient to make the foreign bank present in the jurisdiction. At 165 his Honour said that for the purposes of curial jurisdiction under the general law that applies in this State, the indicia of a presence sufficient to subject a corporation to the jurisdiction of the court had been laid down by English and local authority. The test for presence within the jurisdiction was whether the foreign corporation carried on its business within the territory of New South Wales. As his Honour went on to say: "First, it must be carrying on its business here and this it can do only by an agent and will not be doing unless the agent has authority on behalf of corporation to make contracts with persons in New South Wales binding on the corporation. Secondly, the business must be carried on at some fixed and definite place within the State. Thirdly, the business must have continued for sufficiently substantial period of time."

Reference should also be made to BHP Petroleum Pty Ltd v Oil Basins Ltd [1985] VR 725, Anglo Australian Foods Ltd v Credit Suisse (1988) 1 ACSR 69, Tycoon Holdings Ltd v Trencor Jetco Inc (1992) 34 FCR 31 and Commonwealth of Australia v White [1999] 2 VR 681. As well, reference should be made to Nygh, Conflict of Laws in Australia , 6th ed, Butterworths, Sydney, 1995 at 42, 138-139, 540-542. 29 The question remains whether this line of authority with respect to jurisdiction of the courts would be applied to item 2 of the table to A New Tax System (Goods and Services Tax) Act 1999 (Cth), s 38-190(1). In my view it should. It is clear from the description of item 2 that it was intended that GST-free status should not apply to a limited class of non-resident - those that were not in Australia at the time of the supply. When it comes to determining whether a corporation is or is not in Australia, there is no reason, in my view, for the body of law discussed above not to apply in the determination of that question. 30 The concept of presence in a jurisdiction sufficient to subject a corporation to the jurisdiction of the courts has been developed by reference to activities of sufficient significance to make it appropriate that the corporation be amenable to the local jurisdiction. 31 A not dissimilar approach has been taken in the international law relating to relief from double taxation. It has been a feature of conventions for the avoidance of double taxation that business profits of an enterprise are taxable only in the country of residence unless the enterprise carries on business in the country of source through a permanent establishment. A permanent establishment is a fixed place of business through which the business of an enterprise is carried on or an agent acting on behalf of an enterprise habitually exercising in the country of source an authority to conclude contracts in the name of the enterprise. An agent of independent status acting in the ordinary course of business is excluded (Model Double Taxation Convention on Income and on Capital, OECD, Paris, 1997, art 5 and art 7 and commentaries. See, generally, Arvid A Skaar, Permanent Establishment: Erosion of a Tax Treaty Principle, Kluwer, Deventer, 1991). 32 In GSTR 2002/D8 and GSTR 2003/D9, the Commissioner of Taxation has adopted the principles applicable to the presence of a corporation in Australia for jurisdictional purposes and has, correctly in my view, applied those principles to item 2 of the table to A New Tax System (Goods and Services Tax) Act 1999 (Cth), s 38-190(1). 33 In GSTR 2002/D8 at par 31 the Commissioner expressed the view that a non-resident company was in Australia when the thing supplied was done, if, at that time, the non-resident company carried on business within Australia through a place of business of its own or through an agent acting on behalf of the company; that place of business or agent had a fixed and definite place within Australia; and the business had continued for a sufficiently substantial period of time. At par 35 the Commissioner expressed the view where the activities of a non-resident company did not amount to the carrying on of a business the test for whether the non-resident was in Australia turned on whether it was carrying on its corporate activities through a place of its own in Australia or through an agent in Australia acting on its behalf. The corporate activities must have been carried on at a fixed and definite place in Australia for a sufficiently substantial period of time. These concepts were repeated at par 121 and par 122 and in GSTR 2003/D9 at par 184 and par 185. 34 In the instant circumstances the mere presence of the three individuals in Australia is insufficient to satisfy the above tests. Presence in Australia is not established by showing that Morningstar Inc appointed local solicitors to act in legal proceedings in the jurisdiction (Wimborne at 166). There was no evidence that the three individuals carried on any business activities of Morningstar Inc while in Australia let alone through a place of business of its own. The solicitors were agents of independent status carrying on their activities in the ordinary course of business. There was no evidence that Morningstar Inc had a fixed and definite place within Australia nor that it had conducted business or any corporate activities through such a place for a sufficiently substantial period of time. 35 The defendants submitted that this interpretation of the presence of a corporation in Australia created odd results when the definition of a "non-resident" was taken into account. The term was defined in the dictionary to A New Tax System (Goods and Services Tax) Act 1999 (Cth) to mean a person who was not an "Australian resident". That term was defined in the dictionary in terms of the Income Tax Assessment Act 1936 (Cth). In s 6(1) of that Act a resident of Australia being a company was defined as one incorporated in Australia or, not being incorporated in Australia, one that carried on business in Australia and had either its central management and control in Australia or its voting power controlled by shareholders who were residents of Australia. 36 Corporate non-residents are therefore companies that do not carry on business in Australia and companies that do but have neither central management and control nor voting control voting control in Australia. 37 It was submitted that if presence in Australia demands the carrying on of a business, the first group of non-residents can never be in Australia and the second group of non-residents must always be in Australia. 38 While the first proposition is correct, the second is not. Presence in Australia requires elements additional to the carrying on of business. A simple example will suffice. A Hong Kong company carrying on a tailoring business that sends a representative to a hotel room in Australia for short periods of time to take measurements for garments and receive orders may carry on business in Australia but, in the absence of a fixed place owned or leased by it and operated for more than a minimal period of time, the company is not in Australia. 39 It was pointed out that the concept of an enterprise being carried on in Australia is defined in A New Tax System (Good ad Services Tax) Act 1999 (Cth), s 9-25(6) to mean an enterprise carried on through a permanent establishment as defined in the Income Tax Assessment Act 1936 (Cth), s 6(1) or a place that would have been a permanent establishment if par (e), par (f) or par (g) of the definition did not apply. 40 That definition was of a place at or through which a person carried on any business including the place where the person carried on business through an agent, a place where the person had, was using or was installing substantial equipment or machinery, a place where the person was engaged in a construction project and, where the person was engaged in selling goods manufactured, assembled, processed, packed or distributed by another person and either person participated in the management, control or capital of the other person or another participated in the management, control or capital of both, the place where the goods were manufactured, assembled, processed, packed or distributed. 41 The exclusion in par (e) of the definition was of a place where the person was engaged in business dealings through a bona fide commission agent or broker who, in relation to those dealings, acted in the ordinary course of business as a commission agent or broker and did not receive remuneration otherwise than at a rate customary in relation to dealings of that kind, not being a place where the person otherwise carried on business. The par (f) exclusion was of a place where the person was carrying on business through an agent who did not have or did not habitually exercise a general authority to negotiate and conclude contracts on behalf of the person or whose authority extended to filling orders on behalf of the person from a stock of goods or merchandise situated in the country but who did not regularly exercise that authority, not being a place where the person otherwise carried on business. The par (g) exclusion was of a place of business maintained by the person solely for the purpose of purchasing goods or merchandise. 42 The exclusion of the agent of independent status and the agent who did not exercise power habitually to bind the non-resident principal from the definition of a permanent establishment was much like the exclusion of such agents from constituting corporate presence in Australia of a non-resident corporation. Their possible inclusion in the definition of an enterprise carried on in Australia broadens that concept. 43 It was submitted that if "in Australia" was intended to be equated to "an enterprise carried on in Australia", Parliament would have used that phrase. 44 Parliament did not use that phrase and, in consequence, did not adopt a concept that could encompass conduct of a business through both an agent of dependent and an agent of independent status. By using the phrase "in Australia", Parliament invited adoption of the body of law dealing with that which constituted a corporate presence in Australia. That includes the conduct of business by a dependent agent but excludes the conduct of business by an independent agent. 45 In my judgment, Morningstar Inc was not in Australia when the solicitors' services were supplied and that supply was GST-free in terms of item 2 of the table to A New Tax System (Goods and Services Tax) Act 1999 (Cth), s 38-190(1). 46 In their summons, the plaintiffs sought an order that the costs of the review and of these proceedings be paid by the defendants. 47 The Legal Profession Act 1987, s 208KH(3) provided that if a review panel set aside the determination of a costs assessor, the panel was to require the applicant to pay the costs of the review if the determination of the review panel increased or deceased the total costs payable by an amount less than 15% of the total costs payable as assessed by the costs assessor. 48 The plaintiffs accepted that the review panel determination decreased the costs payable by less than 15% and, in consequence, conceded that the review panel's determination as to costs must stand. 49 The defendants submitted that if the plaintiffs succeeded, costs would be reduced by 14.5% and the plaintiffs should pay the defendants costs of the proceedings. However, the Legal Profession Act 1987, s 208KH(3) did not relate to proceedings on appeal and subdivision 4B of Pt 11 is silent on the question of costs of an appeal. 50 In my view there is no reason why costs should not follow the event and I will make an order that the defendants pay the plaintiffs' costs of the proceedings. 51 I direct the parties to bring in short minutes of orders reflecting these reasons.

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