Industry Research & Development Board v Bridgestone Australia Limited

BACKGROUND 5 BSAL carried out research and development into the development of motor vehicle tyres. It claimed registration for the purpose of obtaining taxation concessions in relation to the expenditure it had incurred. On 13 March 1997, the Tax Concession Committee, acting as a delegate of the Board pursuant to s 22 of the Act, issued a s 39M certificate. There were two reasons given for doing so. The only one now relevant is that the results of the research were exploited otherwise than on normal commercial terms by reason of a pre-existing agreement between BSAL and a foreign company, Bridgestone Corporation (BSJ). BSAL is a wholly owned subsidiary of BSJ. The pre-existing agreement was known as the Technical Assistance and Licence Agreement (the TALA). It had been entered into in 1981. It will be necessary to return to the details of these arrangements in due course. 6 Following the Board's decision, BSAL sought a review by the AAT, pursuant to s 39T of the Act. The AAT may exercise all of the powers and discretions that are conferred by any relevant enactment on the person who made the decision: Administrative Appeals Tribunal Act 1975 (Cth) ('AAT Act') s 43(1). In this case that is deemed to be the Board, notwithstanding that the decision was in fact made by a delegate: see s 21(2) of the Act. Consequently, the AAT stood in the shoes of the Board and could exercise whatever powers the Board had. 7 The AAT determined that BSAL's research and development activities had been exploited on normal commercial terms. The Board instituted an appeal to this Court pursuant to s 44(1) of the AAT Act. The jurisdiction of this Court on such an appeal is limited to the correction of errors of law by the AAT. The primary Judge dismissed the appeal: see Industry Research and Development Board v Bridgestone Australia Ltd (2000) ATC 4834. The Board then appealed to the Full Court. 8 The Full Court allowed the appeal and remitted the matter to the AAT for further hearing: see Bridgestone No 1. The issue that was before the Full Court was whether the test applied by the AAT for the application of s 39C of the Act involved an error of law. In particular, the question was whether the AAT had erred by considering whether BSJ had in fact exercised bargaining power vis-ŕ-vis BSAL, or whether the actual negotiations between the parties could be regarded as at arm's length. The Full Court held that the AAT had erred. The leading judgment was given by Lindgren J, although Branson J made some further comments of her own. His Honour identified the correct test as follows (at 582): 'In my opinion, what is required if a taxpayer is to have the benefit of the concessionally enlarged deduction for expenditure upon particular research and development activities is that any actual contract or transaction that was entered into relating to the exploitation of the results of those activities must have been of the kind to be expected of hypothetical persons dealing with each other at arm's length and from positions of "similar" or "like" or "roughly equivalent" bargaining power.'(emphasis added) 9 His Honour made some further comments on the 'hypothetical persons' with which the parties were to be compared (at 582-583): 'Prima facie the hypothesis invoked is only one of a hypothetical person who has the actual result of the actual research and development activity in question available for exploitation, and who, apparently, is a not unwilling but not anxious exploiter: cf Spencer v The Commonwealth of Australia (1907) 5 CLR 418 … As I have already attempted to make plain, it is hypothetical persons, not actual ones, dealing with each other at arm's length and from positions of comparable bargaining power, to whom the section refers.' 10 Branson J also commented on the relevant hypothesis. Her Honour referred (at 566) to hypothetical negotiations between persons dealing with each other at arm's length and from positions of comparable bargaining power. Her Honour commented (at 568): 'In my view, what s 39C requires the Board to hypothesise is the result of negotiations between persons dealing with each other in circumstances which may rarely exist outside of economic theory, namely circumstances in which the result of their negotiations will be dictated purely by commercial or market considerations and not by their relationship one to the other or by appreciable disparities of power between them.' (emphasis added) 11 Mansfield J, the other member of the Full Court in Bridgestone No 1, agreed with the reasons of both of the other Judges. It will be necessary to consider the reasons of the Full Court later in these reasons.

THE AAT'S DECISION 12 The AAT, constituted by the President and another member, then reconsidered the matter. 13 The AAT described the TALA as follows: 'The TALA is a contract whereby BSJ undertook to provide BSAL with know-how and other technical information relevant to the production of defined "Rubber Products", including automotive tyres and tubes listed in the schedule to the agreement. As its name suggests the TALA is an agreement for the provision by BSJ to BSAL of technical information and assistance for use in connection with its business of manufacturing automotive tyres and tubes. In return BSAL was to pay royalties. The agreement also provided for technical information to be furnished by BSAL to BSJ. In both cases the agreement conferred licenses for the use of the technical information. The agreement begins with the following recitals: "WHEREAS the licensor owns approximately 60.4 percent of the shares of BRIDGESTONE HOLDINGS LIMITED (hereinafter called the "Holdings"), which owns all of the shares of the Licensee; WHEREAS the Licensee desires to be provided by the Licensor with the technical assistance for the manufacture of automotive tires and tubes; and WHEREAS the Licensor is willing to provide such technical assistance to the Licensee as long as it holds more than fifty (50) percent of the issued voting shares of the Holdings and also as long as the Holdings holds not less than seventy-five (75) percent of the issued voting shares of the Licensee." The following definitions appear in Article 1: "ARTICLE-1: DEFINITIONS: 1-1: "Rubber Products" as used in this Agreement shall mean automotive tires and tubes which are listed in Schedule-A attached hereto and made a part thereof. … 1-3: "Technical Information" as used in this Agreement shall mean know-how and other technical information owned and used by the Licensor in its commercial production of the Rubber Products, with respect to equipment, general estimate of utility requirement and layout, operating technique, the Specifications, test procedure and test data. However, the Technical Information shall not include any information, data or records as to the Licensor's costs, prices, finances, or contractual or business relationships, or any information or assistance relating to themanufacture of products other than the Rubber Products." Article 2 contains the substantive provisions relating to the obligation of BSJ to supply BSAL with the technical information and assistance. The article contains seven sub-clauses dealing with detail. We can content ourselves by setting out three of the sub clauses: "ARTICLE-2: TECHNICAL ASSISTANCE: 2-1: To the extent of its right legally to do so, the Licensor will provide the Licensee during the effective period of this Agreement with such Technical Information as will enable the Licensee to manufacture the Rubber Products to the then current Specifications used by the Licensor from time to time in its commercial production of the Rubber Products. The technical assistance under this Article-2 shall be provided, not at one time, but on a continuing basis as the Licensee actually requires it and is ready to commence commercial production of the particular type of the Rubber Products for which the technical assistance is necessary. When and how such technical assistance is provided to the Licensee shall be determined by agreement of the parties hereto from time to time. … 2-4: The Licensor shall, upon the Licensee's request, permit representatives of the Licensee who are acceptable to the Licensor to visit the Licensor's plants engaged in the manufacture of the Rubber Products at the expense of the Licensee for the purpose of receiving the technical assistance under this Article-2. When and how such plant visits take place shall be determined by agreement of the parties hereto from time to time. … 2-7: The furnishing of and the granting the right to use the Technical Information and the licensing of the Patents under this Agreement are made without any representation or warranty by the Licensor as to patentability, exclusiveness, freedom from infringement of patents or proprietary rights, or freedom from risk of damage or harm. However, the Licensor shall give the Licensee such assistance and information in its possession as may be useful in determining the Australian patent implications of the Facility, design, and operation, for the purpose of minimizing the use of designs and processes patented by third parties." Article 3 confers the license on BSAL. Again, we need not set out all the detail in the clause: "ARTICLE-3: LICENSES: 3-1: The Licensor hereby grants to the Licensee a non-transferable license, without the right to grant sub-licences, to use the Technical Information and Patents in the manufacture of Rubber Products in Australia and the sale of such rubber products anywhere in the world in accordance with Article-9 hereof. Limited to the use of the Technical Information by Licensee, the License granted hereunder shall, except to the extent the same is inconsistent with any licenses licensor may have granted to third parties as of the date hereof, be exclusive to manufacture Rubber Products in Australia and to sell in Australia Rubber Products so manufactured by the Licensee, but shall otherwise be non-exclusive. 3-2: The Licensee agrees not to enter into any agreement relating to the Rubber Products with a third party similar to this Agreement without the prior written approval of the Licensor." Article 4 concerns language and units of measurement. Article 5 provides for special technical services to be provided by BSJ to BSAL at BSAL's cost.. Article 6 provides for an annual payment of royalties by BSAL to BSJ "on the basis of the "Net Sales Value" of the Rubber Products (Uniroyal brand and Bridgestone and other brands respectively) manufactured and sold" by BSAL. "Net Sales Value" is defined in Article 6-2. The royalty rates are set out in Article 6-1 and range between 0.5 percent and 2.25 percent. The royalty rate for the Uniroyal brand is 0.75 percentage points lower than the rates applying to the Bridgestone brand and any other brand. Article 7 of the TALA is of particular relevance in the current proceedings. It provides for the transfer of technical information from BSAL to BSJ; grants licenses from BSAL to BSJ; and sets out conditions for the granting of sub-licenses and the seeking of patents by BSAL with respect to Rubber Products or their manufacture. We will set out the clause in full: "ARTICLE-7: TECHNICAL INFORMATION TO BE SUPPLIED BY THE LICENSEE: 7-1: During the term of this agreement the Licensee shall furnish to the Licensor any technical information which it has or may acquire during the term of this Agreement with respect to the Rubber Products or its manufacture, except to the extent that the same may be contractually prohibited. The Licensee hereby grants to the Licensor a non-exclusive, irrevocable, worldwide royalty free license (except to the extent the same may be contractually prohibited) with the right to grant sub-licenses thereunder except, in Australia, New Zealand and Papua New Guinea to use and cause to be used any information supplied under this Article-7. 7-2: During the term of this Agreement the Licensor shall have the right to send, at its own expense, a reasonable number of representatives to the plant or plants of the Licensee [engaged] in the manufacture of the Rubber Products for a reasonable period and at mutually convenient times who shall have access to all premises, goods, and documents of the Licensee relevant to the manufacture of the Rubber Products. 7-3: The Licensee shall have the right to seek patent or other industrial property rights of its original inventions, with respect to the Rubber Products or its manufacture, as long as the Licensee shall not breach its obligation of secrecy under Article-8 herein below. 7-4: The Licensee also grants to the Licensor a non-exclusive, worldwide royalty free license except to the extent that the same may be contractually prohibited with the right to grant sub-licenses except in Australia, New Zealand, and Papua New Guinea, under any patents or industrial property rights relating to the Rubber Products or its manufacture which the Licensee may own, acquire or apply for during the term of this Agreement." Article 8 is a confidentiality clause concerning "all manuals, data, diagrams, the Specifications, the Technical Information, and all other technical information and advice". Article 9 concerns the sale of rubber products by BSAL in foreign markets in which BSJ has a marketing organisation, requiring, with limited exceptions, the sale of such products through that organisation. Article 10 is headed "Default: Force Majeure: Etc:" It contains the provision, anticipated in the recitals, permitting termination by BSJ if it ceased to hold 50 percent of Bridgestone Holdings Ltd.. We will set out part of the Article: "10-1: In addition to any other rights or remedies it may have, either party may cancel and terminate this Agreement if the other party shall default in the performance of any obligation hereunder on its part to be performed and such default shall not have been remedied within sixty(60) days after notice specifying particulars of the default and of the remedy required. Upon cancellation or termination pursuant to this Paragraph, Paragraph 10-4 or otherwise, the Licensee shall immediately cease to use the Technical Information furnished to it hereunder and the Patents and shall return to the Licensor all information furnished by the Licensor; provided however that if the cancellation or termination is the result of a voluntary sale by Licensor of shares it holds in Holdings, then Licensee may continue to use such Technical Information and Patents on the terms and conditions which shall be mutually agreed, but failing such agreement within 30 days of the date of such cancellation or termination, then for a period of three(3) years, at a royalty rate which shall be decided by arbitration and shall be no greater than that provided herein and no less than half of that provided herein, and otherwise on the terms and conditions provided herein. … 10-4: Notwithstanding the provisions of Paragraph 15-1, this Agreement may be, at the discretion of the Licensor, terminate [sic] by notice to the Licensee, when the Licensor, by itself or together with one or more other companies which are associated with proprietor within the meaning of Section 6-a) of the Companies Act 1962-1980 of the State of South Australia, ceases to hold more than fifty (50) percent of the then issued voting shares in the Holdings, or when the Holdings ceases to hold at least seventy-five (75) percent of the then issued voting shares in the Licensee, and further in the event that the Holdings, and/or the Licensee shall be nationalized or in any other manner controlled, either directly or indirectly, by any government or agency thereof." Article 10.1 contains two sentences. The first sentence gives either party a right to "cancel and terminate" the agreement for failure by the other party to "remedy" a "default in the performance of any obligation hereunder" within 60 days after notice. The second sentence applies whenever the agreement is cancelled or terminated. The first part of the sentence essentially requires BSAL to cease using and return BSJ's information. The second part of the sentence contains an exception to that requirement, or a proviso, that effectively will only apply to termination under Article 10.4, in particular where termination is the result of "a voluntary sale by [BSJ] of shares it holds in [BSAL.]". The proviso allows, in the absence of a different arrangement, for BSAL to continue using BSJ's information for three years at a royalty rate no greater than the rate provided for by the TALA and no less than half of that rate, the actual rate to be decided by arbitration. Article 11 is an indemnity clause in favour of BSJ. Article 12 provides that BSAL may not assign the Agreement without the written consent of BSJ. Article 15 provides that the agreement has a term of 10 years which will automatically be renewed from year to year unless terminated on 2 years notice by one of the parties. Article 16 provides that the agreement was to be effective from 27 April 1981. There is no suggestion that the agreement was not in force at any time relevant to these proceedings. Article 17 is an arbitration clause, which provides for the settlement of any dispute between the parties by arbitration in Tokyo. Article 19 provides that the applicable law is the law of Japan.' 14 The particular research for which concessions were claimed was described by the AAT as follows: 'There is nothing before the Tribunal to suggest that the Board disputed that the results of the research and development activities were as reported by BSAL on 23 December 1996 (Exhibit E, p. 246), which we accept, as follows: "…The results of BSAL's R&D in the years under review are high quality, cost competitive tyres which have been sold on normal negotiated commercial arrangements with Original Equipment Users or via BSAL's established distributors and franchisee network to after market end users … Our research & development in the tyre industry has created the following results: · Specialist Machines · Specialist Tyres · Tyres specifically made for the Australian market because of road conditions · Increased sales to Original Equipment Manufacturers in Australia · Tyres for export · Information Technology and Know How (this has not flowed to Japan)" The way in which the results of the research and development were exploited is partly set out in BSAL's letter of 23 December 1996 (set out above at par [27]). This material was supported by evidence before Senior Member Kiosoglous, which was also evidence before us, in a statement by Andrew Moffatt, the Executive Director - Finance of BSAL (Exhibit E, pp. 380 and 381): "18. The results of BSAL's R&D activities have been exploited solely in Australia and solely in the production by BSAL in Australia of high quality, cost competitive tyres which have been sold on commercial terms to OE [original equipment] manufacturers and established distributors and franchisees"' 15 However, the exploitation of that research included exploitation under the TALA. The AAT found that BSAL had transferred the information gathered by it as a result of the research to BSJ in accordance with the TALA and that BSJ was licensed to exploit that information as it should see fit. The AAT also accepted that this transfer and licensing of information was at no cost. In this regard it is to be compared with information provided to BSAL by BSJ under the TALA which involves payment ranging from 0.5 - 2.25 per cent royalty. 16 Against this background the AAT considered what legal issue it needed to address. Relying primarily on the Full Court decision in Bridgestone No 1, the AAT identified its task as: '[seeing] whether the agreement as a whole would not have been entered into, or whether it contains terms which would not have been included in, or would have been different, if the negotiating parties had been dealing at arm's length and from positions of comparable bargaining power.'

It is important to observe that the AAT asked itself a negative question. It was not necessary, according to the AAT, for it to construct a 'hypothetical ideal contract'. Instead:

'The test to be applied is whether hypothetical persons dealing with each other at arm's length and from positions of comparable bargaining power would not enter into the actual contract in question.' 17 In applying this test, the AAT separately considered the clauses of the contract and then the contract. In this regard, the AAT commented: 'It was put to us that if any clause would be acceptable, provided it could be found or could be postulated in an actual agreement between arm's length parties with comparable bargaining power, then virtually any contract would satisfy s 39C. This argument, almost reductio ad absurdum, has two flaws. First, not every such clause is acceptable. Determining whether a clause passes the hypothetical test requires reference to parties who are acting reasonably. Secondly, there is an overriding test required by the section as to whether the agreement as a whole is one which would be entered into by arm's length parties of comparable bargaining power. That part of the test will exclude contracts with extreme clauses which unbalance the contract as a whole.'

This approach would seem to give some sort of priority to the 'clause by clause' consideration, at least if the consideration of the whole contract is only to identify 'extreme clauses which unbalance the contract as a whole'. On the other hand, elsewhere in its reasons the AAT suggests that in considering each clause it is necessary to examine the agreement as a whole:

'Persons dealing at arm's length and from positions of comparable bargaining power may be motivated by many considerations. They will negotiate on a give and take basis. What they will end up with is a fair and reasonable result overall. Such agreements will be within the hypothesis. If, overall, parties dealing at arm's length with comparable bargaining power would not make such an agreement, it will be caught by the section. If one or more of the terms would not appear, or would be different, in such an agreement, after give and take and similar considerations are taken into account, then the agreement will also be caught by the section. However, terms resulting from give and take situations will not be caught by the section if the agreement as a whole might result, with all its individual clauses, from negotiations between parties acting from a myriad of commercial and market driven considerations. The only requirement of the section is that the result must not be influenced, nor the considerations influenced, by some relationship between the parties or by disparity of bargaining power.' 18 The AAT then proceeded to consider the relevant clauses of the TALA one by one for the purpose of determining whether parties dealing at arm's length and from positions of similar bargaining power might have entered into contracts containing similar clauses. Considerable 'expert' evidence was given in relation to these questions. Whatever might be said in other contexts of such evidence, the AAT may inform itself as it sees fit (see s 33(1) AAT Act) and no objection could be or has been taken to the manner in which it informed itself of usual industry and commercial practice. The end result of the AAT's consideration of each of the relevant clauses of the TALA and of the agreement was as follows: 'Considering all the evidence, the opinions of the experts and the submissions of the parties we conclude that the TALA is an agreement as a whole that persons dealing with each other at arm's length and from positions of comparable bargaining power might reasonably have entered into. It does not contain clauses that fall outside the range of clauses that could have been contained, nor does it contain clauses that would have been different, in an agreement entered into by such persons. … We find that the TALA is not an agreement that would not have been entered into by persons dealing with each other at arm's length and from positions of comparable bargaining power, nor does it contain terms that would not have been contained or would have been different had it been negotiated by such persons.' 19 The AAT therefore determined that it was inappropriate for a certificate to be given under s 39M of the Act.

THE GROUNDS OF APPEAL 20 There are effectively three grounds of appeal. They can be paraphrased as follows: · The AAT failed to address the case the Board put to it and thereby failed to exercise its jurisdiction; · The AAT applied the wrong test in the application of s 39C of the Act; · The AAT erred in law in the way it dealt with cl 10-4 of the TALA.

Failure to address the Board's Case 21 The Board's case seems to have been contained in, or was at least summarised in, the 'evidence' of one of the witnesses it called, Mr De Boos. His evidence was based upon his understanding of the meaning and effect of s 39C of the Act. He explained that understanding in his report, which was tendered to the AAT. He assumed that: 'As the analysis is to be dictated purely by commercial or market considerations then there is no room to allow into the analysis the private considerations of one or other of the parties. If the approach is correct and the analysis is principally hypothetical, the issue is not, in my view, to look to see what has or has not happened in the "real life" arms length situations as these will always involve the subjective considerations of the parties at the time. The hypothesis I have adopted is one of two parties negotiating where each is not unwilling to enter into an agreement but neither is anxious to; in other words, the particular transaction is not critical to the future business of either. Neither will be influenced otherwise than by market or commercial considerations and I will not speculate on whether a clause which appears to be against a particular party's interests, might, on one hypothesis or another be explicable by ascribing to that party some hypothetical subjective considerations.' (emphasis added) 22 This was a narrow test. When applied to each individual term of an agreement (as Mr De Boos did in his report and his evidence) it was plainly likely to identify a relatively confined range of possible clauses that would meet its requirements. 23 The AAT described this assumption as requiring the construction of a 'hypothetical ideal contract'. The Board complains that this description shows that the AAT misunderstood the argument being put. It says that its argument always was that there was not a 'single' ideal contract, but a range of possible contracts or possible terms. The Board says that the failure of the AAT to understand and deal with the argument being put to it was an error of law. 24 There are two obvious answers to this ground of appeal. The first is that the AAT did understand the submission. As it said, 'Mr De Boos appears to be espousing the argument that there can be only one model or at best a limited range.' This seems to us to be a fair understanding of the effect of Mr De Boos' evidence. It shows that the AAT well understood the principal issues between the parties: what were the relevant factors to consider in identifying the hypothetical comparator and what was the appropriate range of hypothetical contracts and terms that would answer the description in s 39C of the Act? 25 The second, and more fundamental answer is that there is no necessary error of law by the AAT in not understanding or not dealing with each submission made by a party. Particularly this is so where the submission relates to a question of law, as it did in this case, notwithstanding that 'evidence' was given in relation to it. 26 True it is that the AAT is required to deal with the case before it. A failure to identify that case, or a failure to deal with the issues raised by it may involve an error of law. Thus in Dranichnikov v Minister for Immigration and Multicultural Affairs (2003) 197 ALR 389 (Dranichnikov), the High Court held that the failure of the Refugee Review Tribunal to respond to 'a substantial, clearly articulated argument relying upon established facts' constituted a constructive failure to exercise jurisdiction. The Tribunal had failed to consider whether the group or class to which the applicant claimed to belong (Russian entrepreneurs and businessmen who publicly criticised law enforcement authorities for failing to take action against criminals) was capable of constituting a 'particular social group' for the purposes of the Refugees Convention. In so doing it 'misunderstood and failed to deal with [an] important aspect of Mr Dranichnikov's case': at 394 [23], per Gummow and Callinan JJ, with whom Hayne J agreed. The case was said to be analogous to Minister for Immigration and Multicultural Affairs v Bhardwaj (2002) 209 CLR 597, where the Tribunal effectively denied Mr Bhardwaj a hearing of his application for an ajournment and, as a result, denied him a hearing of the kind to which he was entitled by statute. 27 The present case is, however, different from Dranichnikov. Here the AAT fully understood and dealt with the case it was required to consider, that is, whether the terms of the TALA met the requirements of s 39C of the Act. It made the findings of fact and reached the conclusions of law necessary to resolve the case presented. If its conclusions of law were wrong, or if the findings of fact were insufficient as a matter of law to justify its conclusions, then of course this Court can intervene. These questions are discussed later in this judgment. 28 But the Board's first ground of appeal goes much wider. The Board argues that the failure to understand and separately address each argument of law raised by a party, itself involves an error of law, even if the AAT correctly identifies the legal issues it is required to address and makes the factual findings required to resolve those issues. The proposition only has to be stated in that form to be rejected. Nevertheless the Board refers to certain comments in Dennis Willcox Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 267 (Dennis Willcox),at 275-276, where it appears to have been suggested that the failure of the AAT to consider a submission made to it involved an error of law. That case involved, in part, an issue as to the value of shares that had been acquired by a company and subsequently resold. It had been submitted to the AAT that the price paid by the company was an undervalue and that there should have been deducted from the alleged 'profit' on the resale the amount by which the actual value of the shares exceeded the purchase price. Evidence was called as to the actual value of the shares at the time of acquisition. The submission was apparently ignored by the AAT. Accordingly, it made no findings in relation to the contention, in particular the actual value of the shares when purchased by the company 29 Jenkinson J (with whom Woodward and Foster JJ agreed) noted (at 276) that s 43(2) of the AAT Act,as then drafted, required the AAT to give reasons for its decision and to include its findings on material questions of fact (see now s 43(2), (2A), (2B)). The failure of the AAT to mention either the submission or the factual questions relating to the value of the shares left the Court uncertain as to whether an error of law had vitiated the AAT's consideration of the submission or whether the AAT had rejected the factual basis for the submission. Jenkinson J acknowledged (at 276) that not every failure by the AAT to mention a contention advanced on behalf of a party will amount to a failure to comply with s 43(2) or demonstrate that the AAT has overlooked a significant matter. But this particular submission was worthy of serious consideration. In Jenkinson J's view (at 277): 'The failure of the tribunal to carry out the duty to consider and determine each question of law and fact relevant to the determination of the reference to it of the respondent's decision, or the failure to carry out the duty imposed by s 43(2) of that Act, as the case may be, has brought about a miscarriage of justice by preventing this court from affording the parties a determination whether the tribunal's decision was vitiated by error of law.' 30 In the present case, even if the AAT (contrary to our view) had misunderstood some aspect of BSAL's case, it would not have precluded this Court from determining whether the AAT had erred in its construction of the Act or had failed to make a critical finding of fact. On that hypothesis, the present case would not have created the same difficulty as in Dennis Willcox. Thus Dennis Willcox does not support a proposition in the broad terms put to us. Where the decision maker has properly identified the issues that it needs to resolve and has correctly resolved them, it makes no error of law merely because it has misunderstood or even overlooked a particular submission of law that has been made to it.

Wrong Legal Test 31 The Board alleged that the AAT made two errors of law in its analysis of s 39C of the Act and its application to this case. The first alleged error has already been referred to. It involved the failure of the AAT to adopt the interpretation of s 39C put forward by Mr De Boos in his evidence. 32 The effect of that interpretation if adopted, can be seen in Mr De Boos' evidence to the effect that any agreement for the licensing of the use of intellectual property would be otherwise than on normal commercial terms if the agreement contained 'exclusive terms', including exclusive rights to termination. He said that any such terms could not be justified by 'commercial or market' considerations but only by subjective considerations of a licensee. The evidence of other witnesses was that they were aware of such terms in comparable contracts entered into between parties dealing at arms length and from comparable bargaining positions. They identified various commercial reasons why it might be in the interests of particular parties to seek such terms in their contracts. 33 The AAT rejected the approach put forward by Mr De Boos and adopted by the Board: 'Mr De Boos' hypothesis was that "the analysis is to be dictated purely by commercial or market considerations [so that] there is no room to allow into the analysis, the private considerations of one or other of the parties" …. He explains at least part of the basis for this approach by reference to his belief that the research is for the contract that "would" be entered into: the ideal contract. Not only is Mr De Boos wrong in his understanding of the effect of "would" in s 39C, but he also misunderstands the fundamental requirement of the section. Section 39C does not require the identification of a hypothetical contract framed by reference solely to commercial or market considerations without reference to what actual parties might do. Rather, it requires the identification of hypothetical contracts which represent the contracts that real parties who are dealing with each other at arm's length and from positions of comparable bargaining power might enter into. It is contracts that "persons" might enter into and not artificial constructs with which the section is concerned. Such contracts will inevitably involve subjective elements. "Persons dealing with each other at arms length and from positions of comparable bargaining power" will always be affected by subjective considerations. Yet Mr De Boos entirely rejected "what has or has not happened in "real life" situations" … He postulated parties who would not be "influenced otherwise than by market or commercial considerations" …. Whether or not particular clauses in the TALA, or clauses to similar effect, had appeared in other agreements was, to him, an irrelevant consideration. This is not the approach required by the words of s 39C. The section simply and directly requires the hypothesis to address contracts that might actually be made by parties in fact dealing at arm's length and from positions of comparable bargaining power. That is what the words of the section say. What is to be hypothesised are the persons with the required characteristics and, by comparative reference to the actual contract in question, the contractual terms upon which such persons might reasonably agree. (emphasis added) 34 On one reading, some support for the approach espoused by Mr De Boos might be found in some comments made by Branson J in Bridgestone No 1 (at 568): 'In my view, what s 39C requires the Board to hypothesise is the result of negotiations between persons dealing with each other in circumstances which may rarely exist outside of economic theory, namely circumstances in which the result of their negotiations will be dictated purely by commercial or market considerations and not by their relationship one to the other or by appreciable disparities of power between them.'

To suggest, as the Board did, that this sentence means that the required analysis is one of 'economic theory' bearing no relationship 'to reality' is to read it out of context. We do not understand her Honour to have intended to say that s 39C requires the decision-maker to ignore the reality of the actual practice in relation to contracts 'of the kind to be expected of hypothetical persons dealing with each other at arm's length and from positions of 'similar'…bargaining power' (to adopt Lindgren J's language in Bridgestone No 1, at 582). There may well be instances where all contracts of a particular kind involve persons who are not at arm's length or between whom there are substantial disparities of power. But there will be other cases where contracts of the relevant kind in fact have been entered into between parties at arm's length and from positions of similar bargaining power. In the former case it may perhaps be appropriate to resort to some form of 'economic theory'. In the latter case actual practice is likely to be important.

35 We understand the words 'commercial' and 'market' as used by Branson J to refer, not to an economist's theoretical model, but to the operations of real markets and real commerce. It is the comparable transaction or contract which is hypothetical. We do not read her Honour as suggesting that the universe in which that hypothetical transaction occurs must also be hypothetical. In our view her Honour's comments, properly understood, do not support the argument of the Board. 36 Nevertheless, with the benefit of the further evidence given when the case was remitted to the AAT, it does not seem to us that the comparison drawn between 'commercial or market considerations' and 'their relationship one to the other or by appreciable disparities of power between them' is a particularly helpful distinction. The section itself makes no reference to 'commercial or market considerations'. Reference to them may only raise yet another and unnecessary level of complexity in the interpretation of the section. 37 The relevant test is that posed by Branson J in Bridgestone No 1 at 566: '[T]he opinion of which the section speaks is, in effect, an opinion as to whether any contract or transaction relating to the exploitation of a result of an activity is consistent with the contractual or transactional outcome to be expected from hypothetical negotiations between persons dealing with each other at arm's length and from positions of comparable bargaining power. It is not an opinion as to whether the taxpayer engaged in arm's length negotiations with another person in which negotiations the taxpayer and the other person held positions of comparable bargaining power.'

In practical effect this is the same test as that posed by Lindgren J at 582:

'In my opinion, what is required if a taxpayer is to have the benefit of the concessionally enlarged deduction for expenditure upon particular research and development activities is that any actual contract or transaction that was entered into relating to the exploitation of the results of those activities must have been of the kind to be expected of hypothetical persons dealing with each other at arm's length and from positions of "similar" or "like" or "roughly equivalent" bargaining power.' 38 This is the test applied by the AAT: 'The section simply and directly requires the hypothesis to address contracts that might actually be made by parties in fact dealing at arm's length and from positions of comparable bargaining power. That is what the words of the section say.' 39 Contrary to BSAL's submissions, the appropriate test does not exclude 'subjective factors' (whatever that might mean). It not only permits but requires a comparison between the actual contract and terms between the parties and the range of hypothetical transactions and contracts that might be entered into between parties dealing at arm's length and from positions of comparable bargaining power. Evidence of actual transactions and contracts and terms of the relevant kind between parties that bear the statutory characteristics may be highly relevant in determining whether the particular contract or terms fall within the language of s 39C of the Act. 40 On the other hand, care must be taken to ensure that the comparator actually meets the statutory requirements. For example, where the parties to the transaction are otherwise independent of each other, but nevertheless 'collude' to reach a fictitious or false outcome so as to share in the resulting benefit then they cannot be described as 'dealing at arm's length': see Collis v Federal Commissioner of Taxation (1996) 96 ATC 4831. Similarly, the hypothetical comparator cannot be so idiosyncratic that no true comparison can be made. If it were then the contract would not be 'of a kind' that can be compared (to again adopt the words used by Lindgren J). The Board put to us that the relevant comparator cannot be someone who is 'naďve' or who is 'indifferent'. Again, there are dangers in using these labels; they may mislead. It is safer to adhere to the statutory language. 41 In this regard what the AAT did was consider the evidence of actual contracts and terms of contracts made in relation to the transmission of intellectual property and 'know how' in relation to 'rubber products'. These would seem to be contracts 'of the kind' that can be regarded as comparable to the TALA. No-one has submitted otherwise. The AAT assumed that the relevant hypothetical comparator would be such contracts and transactions between persons who were 'acting reasonably' and were dealing with each other at arm's length and from positions of comparable bargaining power. Its conclusion that the relevant hypothetical comparator should be persons 'acting reasonably' may be a sensible conclusion of fact, rather than a requirement of law. No issue was raised in respect if it. In any event, we cannot identify any error of law in the approach that the AAT took in the circumstances of this case. 42 The second ground of appeal in relation to the legal test applied by the AAT relates to the application of s 39C of the Act to particular terms of the TALA. The Board submitted that the separate reference in s 39C of the Act to 'terms that would not have been contained or would have been different' required that each clause be separately reviewed in order to determine if that particular clause was within the range that might be expected in an agreement made by a hypothetical comparator. Although the Board conceded that the respective clauses had to be understood in their context, it nevertheless was unable to identify clearly what this meant in practice. The effect of the Board's argument was that the AAT was required to consider each clause in isolation. 43 BSAL, by contrast, put to the Court that the specific and separate reference in s 39C of the Act to the terms of the contract was an example of a 'belt and braces' approach to drafting. It submitted that any consideration of the terms of the contract had to be in the context of the overall contract. Consequently, it submitted that the specific reference in s 39C to the terms of the contract added nothing to the previous reference in that section to the transaction and the contract. It would only be if the contract as a whole was one that would not have been entered into by the hypothetical comparator that the concession would not apply. 44 There are some elements of the reasoning of the AAT which might suggest that it adopted the position put to the Court by BSAL. For example, the AAT made this point: 'It was put to us that if any clause would be acceptable, provided it could be found or could be postulated in an actual agreement between arm's length parties with comparable bargaining power, then virtually any contract would satisfy s 39C. This argument, almost reductio ad absurdum, has two flaws. First, not every such clause is acceptable. Determining whether a clause passes the hypothetical test requires reference to parties who are acting reasonably. Secondly, there is an overriding test required by the section as to whether the agreement as a whole is one which would be entered into by arm's length parties of comparable bargaining power. That part of the test will exclude contracts with extreme clauses which unbalance the contract as a whole.'

Later in its reasoning it made the following comment:

'Where Mr De Boos has erred is in concluding that parties negotiating at arm's length and from positions of comparable bargaining power will only be motivated by commercial or market considerations of the narrow kind to which he has confined himself. Branson J does not say this. Section 39C does not say this. Persons dealing at arm's length and from positions of comparable bargaining power may be motivated by many considerations. They will negotiate on a give and take basis. What they will end up with is a fair and reasonable result overall. Such agreements will be within the hypothesis. If, overall, parties dealing at arm's length with comparable bargaining power would not make such an agreement, it will be caught by the section. If one or more of the terms would not appear, or would be different, in such an agreement, after give and take and similar considerations are taken into account, then the agreement will also be caught by the section. However, terms resulting from give and take situations will not be caught by the section if the agreement as a whole might result, with all its individual clauses, from negotiations between parties acting from a myriad of commercial and market driven considerations. The only requirement of the section is that the result must not be influenced, nor the considerations influenced, by some relationship between the parties or by disparity of bargaining power.' 45 These quotations could be taken as suggesting that the AAT adopted the approach suggested by BSAL and that the terms of the contract would only take the case outside s 39C if the contract as a whole did not meet the hypothetical test. 46 It seems to us that if that were the approach that had been taken by the AAT it would involve an error of law. It is clear from the terms of s 39C of the Act that the decision maker is required to consider separately the transaction and the contract on the one hand and the terms of the contract on the other. The section envisages as a real possibility that the contract or transaction considered as a whole might be one that the hypothetical comparator might make, but that a particular term would not. This is consistent with the approach of Lindgren J in Bridgestone No 1, at 566-567, which seems, with respect, to be plainly right. 47 However, accepting that there must be a separate consideration of the terms of the contract independent of the contract as a whole does not mean that each clause is to be considered in isolation. Section 39C of the Act needs to be understood in the context of the relevant legislative purpose as described by Lindgren J in Bridgestone No 1, at 580. After considering various extrinsic materials his Honour concluded that the object and purpose of s 39C was to ensure the 'appropriate exploitation' of research and development for which the relevant taxation concessions were provided. His Honour continued: 'Section 39M(1)(b)(i)(A) speaks of the results of the research and development activities having been exploited on "normal commercial terms". Section 39C describes, in substance, "abnormal commercial terms". Terms are abnormal if, in the opinion of the Board, a contract or transaction relating to the exploitation would not have been entered into, or contained terms which it would not have contained or which would have been different, if "the contract or transaction" had been entered into by persons dealing with each other at arm's length and from positions of comparable bargaining power.' 48 The interpretation put forward by the Board does not meet this legislative purpose. Simply as a matter of interpretation a single clause of a contract cannot ordinarily be understood in isolation from its context. But in the present context to consider each clause in isolation from the rest of the contract would result in manifest absurdities. Section 39C is directed to matters of substance, not form. Plainly enough if the relevant term or 'terms' are to the same effect as the hypothetical comparators might make, then the fact that different words are used to achieve that effect does not matter. Similarly the word 'terms' in s 39C is not used in any specialised sense. In a particular context, the relevant 'term' might encompass a number of clauses or parts of clauses. Assume, for example, that the 'usual' royalty for the licensing of the use of intellectual property of a relevant kind is 5 percent of the wholesale price, but the relevant term of the contract under consideration only provides for a 1 per cent royalty. Another term of the contract might provide for a very large 'signing fee' which is also not usual in contracts of this kind. Assume that, from the licensor's perspective, the overall result which might be expected from the two separate sums is as good as or better than might be expected of the 'usual' fee. On the Board's argument the two clauses cannot be considered together in order to ascertain if, considered together, they meet the relevant test. Such a result would be inconsistent with the legislative purpose. However, if the 'term' is considered as a matter of substance so as to identify the financial return from the transaction then the relevant clauses, read together, may well meet the statutory test for being 'on normal commercial terms'. 49 It seems to us that the legislative purpose and the legislative context identify the nature of the inquiry required by s 39C of the Act. The inquiry is whether the terms of the contract, considered in their context and as an issue of substance rather than form, would not have been contained in the contract or would have been different if the contract or transaction had been entered into by persons dealing with each other at arm's length and from positions of comparable bargaining power. The test requires an identification of the substantive terms of the contract, a matter which may well require evidence. The issue then to be determined is whether that term, as a matter of substance, would not have been contained in the contract or would have been different if the contract or transaction had been made by the hypothetical comparators. So understood, the range of individual clauses that might be acceptable may well be reasonably large. As the example given above in relation to royalties might suggest, persons dealing at arm's length and from positions of comparable power might reasonably be expected to enter into contracts containing many and various clauses which, when considered as a matter of substance, do not contain 'abnormal commercial terms' in the sense explained by s 39C. 50 On the other hand, there will still be particular contractual terms which would not be contained in any contract made by the hypothetical comparators, even if such a term, when 'balanced' with other terms, might still be viewed as commercially acceptable. This aspect of s 39C involves the individual consideration of each term. It does not involve some sort of 'balancing' of the various terms in an attempt to identify the 'commerciality' of the overall contract. 51 As we have mentioned, there are some quotations from the reasons of the AAT which suggest that it accepted that the proper approach for it to adopt was such a 'balancing' approach. Nevertheless, it seems to us that when properly read these quotations are, in fact, directed to the problems inherent in the approach suggested by Mr De Boos rather than with reaching any definitive conclusion as to the approach to be taken in considering individual terms. When the reasons are looked at its their totality it is clear that the Tribunal did look at each term one by one. It appeared to do so on a 'clause by clause' basis, but it is plain from its reasoning that it considered each relevant term in the context of the contract as a whole. For example, it treated Article 2 of the TALA as relating generally to 'technical assistance'; it received evidence relevant to the issue of what might be expected in a contract between hypothetical contractors in relation to technical assistance; and it concluded that the provisions of Article 2 are terms within a spectrum that might reasonably be entered into by parties dealing with each other at arm's length and from positions of comparable bargaining power. Similar comments can be made as to the manner in which the AAT treated the other provisions of the TALA. We deal below with the specific criticism of the manner in which the AAT dealt with Article 10-4 of the TALA. 52 It seems to us that the approach of the AAT is consistent with the correct test as we have identified it. On this basis, there was no error of law in the approach actually taken by the AAT to the resolution of the issues before it.

Clause 10-4 53 This ground of appeal is directly related to the alleged error of the AAT in its approach to individual terms of the TALA. It can be viewed as a practical example of the alleged error. At all relevant times, BSAL was the wholly owned subsidiary of BSJ. In reflection of that relationship, cl 10-4 of the TALA (set out above), read together with the Recitals of the TALA, conferred a discretion on BSJ to terminate the contract in the event that BSJ's interest in BSAL ceased to be a controlling interest, or when BSJ ceased to hold 75% of the shares of BSAL. The Board said that this clause, reflecting as it does the actual relationship of the parties, is one that persons dealing at 'arm's length' would not enter into and consequently the TALA did not fall within s 39C. The Board accepted that if the clause had referred merely to changes in ownership, rather than changes in the actual relationship of the parties then it would be such a clause that hypothetical contractors might make. There was evidence before the AAT which it accepted that such termination clauses upon changes in ownership were well known in agreements for licensing the use of intellectual property. 54 The argument put by the Board treats the issue as one of form rather then substance. It treats the mere recognition of the actual relationship of the parties as sufficient to mean that the exploitation must be treated as being otherwise than on normal commercial terms. The practical result would be to exclude many agreements between parent and subsidiary companies from the taxation concessions for reasons having nothing to do with the exploitation of research and development otherwise than on normal commercial terms. A purely formal acknowledgement in the agreement of the parent-subsidiary relationship would bring the agreement within s 39C. 55 As we have pointed out, that is not what the section requires. The question that the AAT had to determine was whether, as a matter of substance, the relevant term was one that would not have been contained or would have been different if the contract had been made by the hypothetical comparators. It is plain from its reasons that that is the issue which the AAT addressed: 'There is no doubt in our minds that the terms of Article 10 reflect the intellectual property interests of the licensor, BSJ. However, the interests of BSAL are also reflected. The process of bargaining, it should be noted, is one in which parties seek expression and satisfaction of their interests in the various terms of agreement. By its nature, the process of negotiation and agreement is one in which "give and take" forms an essential part, leading to a balanced outcome overall. It is reasonable, therefore, to expect to find terms in an agreement negotiated by arm's length parties with comparable bargaining power that give expression to and reflect their various interests, insofar as such terms are acceptable to both parties within the overall context of the agreement. We have noted previously that the tests to be applied do not require the sterilisation of options for the purpose of conformity with one ideal model of agreement. We are persuaded by the evidence of Messrs Marsh, McMaster and Bouette and there is no doubt in our minds that a licensor, that is unrelated to its licensee, may seek to protect its intellectual property from access by a competitor in consequence of a change in the ownership of the licensee. We find that parties dealing with each other at arm's length and from positions of comparable bargaining power might reasonably enter into an agreement containing terms designed to protect the intellectual property of the licensor in respect of a change in the ownership of the licensee. The fact that the licensee is a majority owned subsidiary of the licensor, as in the present case, does not disturb this finding. We are persuaded by the evidence of Messrs, Marsh, McMaster and Bouette that the provisions for termination of the TALA at Article 10 are not outside the range of such provisions that may reasonably be entered into by parties dealing with each other at arm's length and from positions of comparable bargaining power. We find that Article 10 of the TALA is not a term that would not have been contained or would have been different had it been entered into by parties dealing with each other at arm's length and from positions of comparable bargaining power.' 56 Whether this conclusion is correct as a matter of fact is not for us to determine. The analysis does not contain any error of law.

CONCLUSION 57 For these reasons none of the grounds of appeal by the Board succeeds. The application will be dismissed. The Board should pay BSAL's costs. I certify that the preceding fifty-seven (57) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Tamberlin, Sackville and Selway.

Counsel for the Applicant: N Williams QC with J Stephenson

Solicitor for the Applicant: Australian Government Solicitor

Counsel for the Respondent: RF Edmonds SC with EA Collins

Date of Hearing: 25 & 26 February 2004