Were the determinations or assessments made in bad faith?
58 As has already been shortly noted the submission made on behalf of San Remo was that Mr Read approached the task of making the determinations and subsequent assessments with a preconceived view and with a predetermined result in mind. It is said that Mr Read manipulated the material before him as to pasta prices so as to support that view and bring about that result. He did not, so it is submitted, make any real or bona fide attempt to assess what would be the arm's length consideration for the acquisition by San Remo of pasta. The preconceived view was said to be that the transaction between San Remo and Bigalle was a sham; or alternatively that all that was done was that Bigalle reinvoiced at a mark up. The predetermined result was to treat the prices paid by Bigalle, consistent with the preconceived view, as the arm's length price.
59 It is true that there are references throughout the material in Mr Read's file to Bigalle being merely an invoicing vehicle. The word sham is used on a few occasions, albeit rather in the context of the loans which Bigalle made to San Remo than the pasta dealings. It is a word which may have different meanings to different people, albeit that its dictionary meaning is "a pretence". Some might well say that the facts which I have narrated illustrate that the dealings between San Remo and Bigalle are a sham, using the expression, not in a legal sense, but rather in the sense that the insertion of Bigalle between the manufacturers and San Remo was an artifice with no commercial purpose (assuming there was some other relationship between the two companies which remitted the profits to be returned to San Remo.) In Anglo-Australian law the word sham has tended to convey a transaction entered into by two or more parties with the common intention that the transaction is a disguise for some other and real transaction or no transaction at all: cf Sharment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449.
60 It would seem to be, to say the least, a difficult case to mount to argue that there was bad faith to be found by the use of the word "sham" in the course of reports leading up to the issue of determinations, which of themselves could only validly issue if in law the transactions involving Bigalle were not shams. Of course if the transactions were shams there would be no occasion for the use of Division 13. The real transaction would be, presumably between the manufacturer and San Remo directly at the price those manufacturers apparently charged to Bigalle. Indeed it is open to be inferred that, assuming there was no real arm's length dealing between San Remo and Bigalle, (and the material to which I have referred permits that conclusion to be reached, but subject ultimately to whatever evidence may be adduced in the objection and appeal proceedings) San Remo would have had the intention that there were real purchases from Bigalle, for ultimately the arrangement would have had no possibility of success, and the tax returns of San Remo would have been inaccurate and expose that company to penalties.
61 Be that as it may, the real substance of the argument was that Mr Read improperly formed the view that the arrangement with Bigalle was merely a reinvoicing arrangement and then "manipulated" the information he obtained as to pasta prices to arrive at a result that was consistent with the approach that an arm's length price was the price at which the manufacturers sold pasta to Bigalle.
62 Whatever the expression "good faith" as used in Hickman may mean there is absolutely nothing in the material before me which would suggest that Mr Read in any way acted other than in good faith in the way he approached the task before him. It was clearly open to Mr Read on the material before him to form the view as he did that San Remo and Bigalle were not dealing with each other at arm's length, even if San Remo had no direct financial interest in Bigalle. The fact that Bigalle appeared to be owned and controlled by an accountant, the circumstances of its incorporation, the fact that no attempt was made to renegotiate prices as the Swiss franc appreciated and that what may have been some of the profit to Bigalle was repatriated to San Remo by way of loan all pointed to this conclusion. These facts pointed also to the conclusion that really all that was happening was a reinvoicing arrangement.
63 If the conclusion was open that San Remo and Bigalle were not dealing with each other at arm's length, as I think it was, then the best evidence of an arm's length price would be the price at which the manufacturer sold pasta to Bigalle. There was nothing before Mr Read to suggest that the manufacturers would have been not prepared to sell pasta to San Remo at that price.
64 The suggestion that Mr Read in some way manipulated the figures available to him to reach the conclusion he did poses the question why he should do so. There is nothing in the file to suggest any reason why he would have done so and none has been proffered by San Remo. It was open to San Remo if they wished to call Mr Read to do so. They did not. No doubt the failure of the Commissioner to call him might permit me, as I have already indicated, more easily to draw any available inference, but it does not permit me to make the inference itself. There is no material from which I could infer any action on Mr Read's part to manipulate figures to arrive at an arm's length price.
65 To say, as San Remo does, that Mr Read had a desire to treat Bigalle as a re-invoicing vehicle notwithstanding what is said to be an admission that the evidence failed to support that suspicion, is simply incorrect. What the file clearly shows is merely that Mr Read was unable to establish any ownership connection between Bigalle and San Remo. The fact that there was no evidence of any ownership connection does not mean that it was not open to Mr Read to conclude that the dealings between Bigalle and San Remo were not at arm's length. What the relevant statutory provisions is concerned with is not whether the two parties to the international transaction were unrelated to each other, but whether their dealing was an arm's length dealing: cf The Trustee for the Estate of the late AW Furse No 5 Will Trust v Federal Commissioner of Taxation (1991) 91 ATC 4007, Barnsdall v Federal Commissioner of Taxation (1988) 88 ATC 4565.
66 It was open, in any case, to Mr Read to infer from the facts already known to him, including the loans back from Bigalle to San Remo, that there was some connection between Bigalle and San Remo beyond the normal vendor, purchaser relationship, whatever that connection may have been.
67 Further, it is simply not true that there was any "manipulation" of the figures which in the course of his enquiries Mr Read had ascertained.
68 In the circumstances of the case, as I have already noted, the best measure of an arm's length price if Bigalle and San Remo were not dealing with each other at arm's length was the price which Bigalle was charged by third party suppliers of pasta to that company. It may be that some adjustment might have been necessary to reflect different terms of trade, but the failure to take that matter into account is not indicative of bad faith.
69 The use which Mr Read made of the other material he acquired was really merely a check on whether the price charged to Bigalle was an arm's length price. He carried out this check by comparing the customs material, invoices of pasta products obtained from Italy and information he had obtained as to the price at which Australian importers had purchased pasta from Italy. Mr Read's use of this material is criticised in a number of ways in the written submissions filed by San Remo as follows:
"(a) he used the 1990 Australian Customs Service (ACS) Report, but ignored material relating to average prices of standard pasta imported into Australia dealt with at para. 7.10 of that Report;
(b) with respect to the data in the ASC Report he selectively chose to use a range of prices of dumped pasta in a calculation which was further distorted by inappropriately adjusting those prices by reference to the maximum dumping margin reported by the ACS;
(c) he ignored the effect of exchange rate variations on the Australian dollar price paid by the Applicant. He determined arm's length price by converting the Italian manufacturer's price in lire to Australian dollars, ignoring the fact that the Applicant was committed to purchasing at a price in Swiss francs;
(d) he ignored material indicating that during the period in which an anti-dumping notice was in force (March to August 1990) the arm's length price of imported pasta rose to the assessed normal value for the purposes of the anti-dumping notice (1140 lire per kg.);
(e) he also ignored the effect on price of the anti-dumping notice in force in the period from 1984 to 1986;
(f) he recognised that Bigalle provided valuable services to San Remo, but chose to ignore that in his purported determination of an arm's length price;
(g) he obtained some limited pricing information from other Australian importers of pasta but ignored material which indicated that sales which he relied upon were not comparable to sales from Bigalle to the Applicant."
70 These criticisms misunderstand the issue which the Court has to address; they confuse the question of whether or not Mr Read's calculation was correct with the question whether he bona fide attempted to make an assessment of the arm's length price. The distinction is a crucial one.
71 In Darrell Lea the full Court said at 186:
"The fact that an assessment may be wrong could never enliven the Hickman principle. Provided that the Commissioner made a bona fide attempt to assess the relevant tax or … to ascertain the sale value of relevant goods … that notice of assessment will be immune from attack. … There will of course be cases where there will be uncertainty as to the facts. But that uncertainty will not invalidate a bona fide attempt to assess."
72 Paraphrasing what the court said, but by reference to the facts of the present case, the fact that Mr Read got it wrong in calculating an arm's length price because, for example, he ignored the effect of exchange rate variations on Australian dollar prices paid, does not permit the Court to set aside the assessments. So long as he made a bona fide attempt to determine the arm's length prices the notices of assessments which issued and were based on that price are immune from attack in proceedings for judicial review. They may, however, be the subject of a full review on the merits when the matter comes to be heard in the Administrative Appeals Tribunal. That Tribunal may, standing as it does in the shoes of the Commissioner, substitute its own opinion for that upon which the assessment was based.
73 The difference is well made by a consideration of two examples. First, let it be assumed that the Commissioner is faced with the question of determining for the purposes of a default assessment under s 167 of the Act what the amount should be upon which tax is levied. If the Commissioner merely plucks a figure out of the air without any attempt to make a real calculation and on no intelligible basis, the assessment upon which that is based may not be protected by s 177: cf Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63 at 88; R v Commissioner of Taxation (WA); Ex parte Briggs (1986) 12 FCR 301 at 308. Second, let it be assumed that the Commissioner faced with the same question attempts a calculation, it may be an approximation only, but does so on a wrong basis. The assessment thereafter made will be protected from judicial review, albeit that it is wrong. It may, however, be corrected by the Tribunal on a review of the objection decision of the taxpayer, or by the Court on an appeal from that objection decision.
74 So, it may be that there is material in the Report of the Australian Customs Service which might be relevant to the computation of an arm's length price; it may be that adjustment of prices in that report by reference to the maximum dumping margin would lead to a wrong result; it may be that consideration of the fact that San Remo was committed (at least for the initial term of the contract) to pay for pasta imported in Swiss francs was left out of account; it may be that Bigalle provided "valuable services" over and above the services which would have been provided by Italian manufacturers; it may be that there was other material which could suggest that some Australian importers were paying higher prices; but none of these factors demonstrate that there was no attempt to assess in good faith. At best, they go to a question not relevant here, namely that the arm's length price determined by Mr Read was wrong.
75 Senior counsel for San Remo additionally criticised the calculation of arm's length prices in the period from January 1991 to November 1992. In this period manufacturers other than Gazzola were selling pasta to Bigalle which in turn resold the pasta to San Remo. Yet Mr Read continued to used the prices charged by Gazzola in the period to December 1990 as the arm's length prices.
76 It may be that before the Tribunal San Remo may be able to show that in the period from January 1991 to November 1992 the prices charged to Bigalle from companies which in fact sold pasta to Bigalle were less than the figures which Mr Read used, emanating as they did from the prices charged by Gazzola. It this can be shown, then it will be open to the Tribunal to conclude that some other figure should be substituted for the arm's length prices upon which the assessments were based. The assessments will then have been shown to have been excessive. But the fact that Mr Read used the Gazzola figures does not lead to the conclusion that he acted in bad faith or so as not to make any real assessment at all.
77 Mr Read had conducted his investigation over a long period. He had had difficulty in obtaining information through the Italian authorities. He fell back on the Gazzola prices. It is not as if he merely made some guess or pulled some figures out of the air. The figure arrived at was made in the course of a process of assessment. If it turns out to be wrong then there is a proceeding already on foot to correct it.
78 Then, it is submitted that the Commissioner had collected no information as to comparable uncontrolled prices in the period from 1 July 1985 to 30 June 1987. As I have sought to show, that is not strictly so. He had made the enquiries which I have summarised. He used the results of that enquiry to form the best view he could as to an arm's length price. He made an assessment. It has not been shown that he did so in bad faith. The assessment he made, once a notice of it has been tendered in these proceedings, is conclusive. The tender of that assessment leads to the result that the Application must be dismissed.
79 The final submission made on behalf of San Remo is that the Commissioner improperly took into account a number of matters in concluding that San Remo had not dealt at arm's length with Bigalle in the sales of pasta products between them. The matters said improperly to have been taken into account are listed in the written submissions of San Remo as follows:
"(a) his own allegation that the Applicant failed adequately to document aspects of its dealings with Bigalle;
(b) his own allegation that actions of the Applicant were inconsistent with prudent commercial dealings;
(c) his own incorrect assertion that the directors of the Applicant visited factories of Italian pasta manufacturers with a view to negotiating prices of pasta; and
(d) his own allegation that Bigalle was a company without substance and without the capacity to perform its functions as a supplier of pasta and tomato products to the Applicant, when the evidence before him was to the contrary."
80 The submission lacks any substance. The matters which are said to be "assertions" or "allegations" are all matters either of judgment or inference. As matters of judgment they do not demonstrate bad faith; as matters of inference, the inferences were open.
81 It is said that the fact that Mr Read took no account of the possibility that Bigalle may well have been a vehicle set up by Italian pasta manufacturers for the purpose of avoiding Italian taxes indicated that the determinations and related assessments should be set aside. There is, I suppose, a possibility that this was the case. It was not, however, a hypothesis which Mr Read accepted. The objective facts make it clear why. Ultimately the Commissioner had to form a view whether San Remo and Bigalle were dealing with each other at arm's length and what an arm's length price was. Mr Read, upon whose recommendations the determinations and assessments were made formed a view on the first matter, a view open to him and on the second, made a calculation. Both views may, when evidence is adduced before the Tribunal, be shown to have been wrong. It will be open to San Remo to call Mr Seglias to explain the circumstances in which Bigalle was incorporated, who was behind it and what dealings Bigalle had with external suppliers and what Bigalle did. It will be open for the directors of San Remo on oath to explain the circumstances by reason of which they came to deal with Bigalle, their lack of connection with Bigalle, the relationship between Bigalle's profits and the loans made by Bigalle to San Remo and their dealings, or lack of dealings with the arm's length suppliers. It will be open to San Remo to adduce such evidence as may be available to it to demonstrate that the price paid by San Remo was actually an arm's length price, or that the arm's length price which Mr Read calculated was too high. It may be able to satisfy the onus upon it of showing that the amended assessments are excessive. But that matter lies in the future.
82 I would not conclude these reasons without comment on the procedure adopted in the present case. The events in question occurred between 1984 and 1993. The investigation in the Australian taxation office appears to have commenced in 1986. The determinations and assessments were issued in 1995. The proceedings under Part IVC of the Taxation Administration Act came before the Administrative Appeals Tribunal in or about October 1997. The proceedings in this Court were instituted in January 1998. It is now October 1999. So far as appears from the material before me the assessments remain unpaid. There is some suggestion in the material, it may not be true, that San Remo would be unable to meet the assessments. It is possible, I would not make any finding to this effect, that the present proceedings were commenced to earn yet more time for San Remo. This is easier to infer where there is no substance in the claim which has been advanced, and no material from which any suggestion of bad faith could be inferred.
83 I offered the parties the opportunity of having both the Tribunal reviews and the judicial review in this Court heard at the same time. That offer was not received by the applicant with any enthusiasm. The Tribunal proceeding has been stood over awaiting the decision in the present application. This is a very unsatisfactory situation. The Tribunal, no doubt, was concerned not to proceed with its hearing, in deference to this Court perhaps deciding that the assessments were invalid. In cases such as the present it would be preferable if the Tribunal proceeded with its hearing, notwithstanding that an application for judicial review has been filed in the Court. It would be a very rare case where a taxpayer will be able to show that an assessment has, in the relevant sense, been made in bad faith, so that it should be set aside. To defer the Tribunal proceedings until an application of this kind has been determined will usually result in injustice to the Commissioner, unless the assessment has been paid. The policy of the Act is still that income tax is payable and is recoverable, whether or not a taxpayer objects to the assessment. It will be open to the taxpayer, if there is a prima facie case of bad faith, to have this Court intervene to halt the proceedings in the Tribunal pending the determination of the application for judicial review.
84 The application will be dismissed with costs.
I certify that the preceding eighty-four (84) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Hill.