SNF (Australia) Pty Ltd v Commissioner of Taxation

REASONS FOR JUDGMENT 1 On 25 June 2010, the Court delivered reasons in this matter and invited written submissions by the parties as to costs. The parties have now filed written submissions. 2 There is no dispute that the Commissioner pay the costs of the taxpayer on a party and party basis other than in respect of the period from 24 June 2009. In respect of that period the taxpayer seeks indemnity costs relying upon the Commissioner's rejection of a Calderbank offer. 3 Pursuant to s 43(2) of the Federal Court of Australia Act 1976 (Cth), indemnity costs may properly be awarded where there is some special or unusual feature in the case justifying the Court exercising its discretion in that way: see John S Hayes & Associates Pty Ltd v Kimberly-Clark Australia Pty Ltd (1994) 52 FCR 201 at 203. There may be a broader basis to award indemnity costs, but I need not consider that issue for the purposes of disposing of this application for costs by the taxpayer. 4 Further, a rejection of a proper Calderbank offer is relevant in exercising the discretion to grant indemnity costs. The offer does not of itself necessarily justify an order for costs on a indemnity basis merely because the offeree fails to secure a more favourable outcome in the proceeding: see John S Hayes & Associates Pty Ltd (1994) 52 FCR 201, at 206. To obtain an order for indemnity costs the offeror must show that the refusal to accept it was unreasonable: see CGU Insurance Ltd v Corrections Corporation of Australia Staff Superannuation Pty Ltd [2008] FCAFC 173 at [75]. It is accepted that the reasonableness of the conduct of the offeree is reviewed in light the circumstances facing the offeree at the time of the offer. 5 On 23 June 2009, by letter from the taxpayer's solicitors, the taxpayer made an offer to settle the proceeding on the following terms: (a) the taxpayer agrees to the Commissioner adjusting the purchase price of products it purchased from the SNF Group in the amount of $3,290,864 (instead of the Commissioner's adjustment of $13,166,301) which adjustment was to be applied on a pro rata basis to each of the calendar years 1997-2003; (b) the taxpayer and the Commissioner each agree to bear their own costs incurred in proceeding No VID132 of 2008; (c) the taxpayer and the Commissioner agree to discontinue proceeding No VID132 of 2008 in the Federal Court with no order as to costs within 14 days; (d) The Commissioner issue amended assessments to record the agreed adjustment in para (a) within 60 days. 6 By letter dated 7 July 2009 from the Commissioner's solicitors the Commissioner rejected the Calderbank offer and set out reasons for doing so. Relevantly, the Commissioner's solicitors stated that the Commissioner would only resolve the matter if the adjustment left "the Applicant in a position of making a reasonable profit overall during the years in dispute". 7 In relation to this rejection the taxpayer makes the following submissions: (a) The issue to be determined in the proceedings was whether the taxpayer gave more than the "arm's length consideration" for the polyacrylamide products it purchased from the SNF Manufacturers during the period 1997 to 2003 (inclusive). (b) The evidence filed in the proceedings was that even without making that adjustment the taxpayer was already paying substantially less than arm's length third parties paid for the same or similar products. This conclusion was agreed to by the Commissioner. (c) The taxpayer's offer of settlement was that the cost of goods over the dispute period be adjusted by $3.29 million resulting in a $3.29 million reduction in allowable deductions. The offer further provided that the taxpayer would bear its own costs, which were considerable. The offer was generous and as stated in the letter was made to avoid the cost and inconvenience of litigation. (d) The Commissioner's requirement that any adjustment would "need to leave the Applicant in a position of making a reasonable profit overall" bore no relationship to the statutory test imposed by s 136AD of the Income Tax Assessment Act 1936 upon which the Commissioner relied. (e) Moreover, the Commissioner's requirement failed to have any regard to the possibility that the taxpayer may have incurred losses not by reason of the price it paid for goods but for other commercial reasons. 8 I accept each of these submissions. 9 Further, the offer was made at a stage in the proceeding when the Commissioner had the benefit of most of the taxpayer's affidavit material including: (a) The affidavits of Mr Pich and Mr Schroeter that explained the reasons for the losses incurred by the taxpayer in conducting business in Australia; (b) The affidavits of Mr Karoudjian and Mr Schlagg that identified the evidence supporting the conclusion that the taxpayer had paid less than arm's length consideration for its purchases of product; (c) The expert report of Mr Seve that set out in detail an analysis supporting the conclusion that the taxpayer had paid less than arm's length parties for identical products. 10 I also accept that by the time the offer was made the taxpayer's evidence covered all of the primary facts on which it relied and was successful. 11 Nevertheless, I think there is good reason for not making indemnity costs order as sought by the taxpayer. 12 Having regard to the following, in my view the Commissioner's rejection of the taxpayer's offer was not unreasonable: (a) The proceedings raised a significant question of law. I accept that the Commissioner reasonably believed the assessments he issued to be correct and that they ought to be defended in the discharge of his statutory duty; (b) The Commissioner's case relied upon an argument that the statutory definition of "arm's length consideration" in s 136AA(3)(d) required the Court to consider what consideration an arm's length party in the position of the taxpayer would have given for the products. That construction had some support on existing authority, which did not require the Commissioner to necessarily challenge the contentions of fact made by the taxpayer: see DSG Retail Limited v Commissioners for the Majesty's Revenue and Customs (2009) UKFTT 31 (TC) 1. At the time of receipt of the Calderbank offer it was reasonable for the Commissioner to rely upon the existing authority; (c) It was appropriate for the Commissioner to fully test the strength and quality of the taxpayer's evidence. Further, some facts found by the Court could only have been ascertained after cross-examination. A significant number of the Commissioner's objections to the taxpayer's evidence were upheld and some evidence was disclosed at trial only for the first time. 13 In the circumstances, I think it was not unreasonable for the Commissioner to have rejected the Calderbank offer. I see no other basis which would justify the Court exercising its discretion other than to order costs on a party-party basis. 14 Therefore, in view of the acceptance by the parties of the proposed orders referred to at [172] of the principal reasons for judgment (SNF (Australia) Pty Ltd v Commissioner of Taxation [2010] FCA 635) I propose to make orders as follows: (1) The appeals against the respondent's objection decisions dated 7 January 2008 disallowing the taxpayer's objection dated 6 August 2007 against income tax assessments: (a) in respect of the year ended 31 December 1997 in lieu of the year of income ended 30 June 1998, dated 19 April 2007; (b) in respect of the year ended 31 December 1998 in lieu of the year of income ended 30 June 1999, dated 19 April 2007; (c) in respect of the year ended 31 December 1999 in lieu of the year of income ended 30 June 2000, dated 19 April 2007; (d) in respect of the year ended 31 December 2001 in lieu of the year of income ended 30 June 2002, dated 27 April 2007; (e) in respect of the year ended 31 December 2002 in lieu of the year of income ended 30 June 2003, dated 27 April 2007; and (f) in respect of the year ended 31 December 2003 in lieu of the year of income ended 30 June 2004, dated 27 April 2007; be allowed. (2) Each of the objection decisions be set aside and in lieu thereof it be ordered that the objections of the taxpayer be allowed in full. (3) The respondent pay the costs of the taxpayer on a party-party basis, such costs to be taxed in default of agreement. I certify that the preceding fourteen (14) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Middleton.