Tanu Pty Ltd v Commissioner of Taxation

Federal Court of Australia|1999-01-13|Before: Lehane J, Finkelstein J, Finkelstein JJ, Lindgren J

LINDGREN J 1 I have had the benefit of reading in draft the Reasons for Judgment of Lehane J and of Finkelstein J. Notwithstanding that advantage, and the helpful submissions of counsel on both sides, I have not found resolution of the appeal to be easy. 2 I gratefully adopt their Honours' account of the legislation and of the background to the appeal. 3 In my view the appeal should be dismissed with costs. I agree in substance with the reasons of Lehane J and add the following observations (I will refer to the appellant as "Tanu"). 4 (1) It is not, and cannot be, in dispute that Tanu manufactures and sells the prints: Federal Commissioner of Taxation v Butcher (1935) 53 CLR 82 (prints made from exposed film provided by amateur photographers and developed by the taxpayer are "manufactured" by the taxpayer); Pacific Film Laboratories Pty Ltd v Federal Commissioner of Taxation (1970) 121 CLR 154 (prints manufactured by the taxpayer and delivered to the amateur photographer who supplied the exposed photographic film are "sold" by it to him or her). 5 (2) It is not, and cannot be, in dispute that as a result, but only as a result, of para (d) of the definition of "manufacture" in s 5 of the Sales Tax Assessment Act 1992 (Cth) ("the Act") ("manufacture" includes "processing or treating exposed photographic film ... so as to produce a negative ..."), the negatives are goods manufactured by Tanu: Commonwealth of Australia v Genex Corporation Pty Ltd (1992) 176 CLR 277 ("Genex") at 289-291. 6 (3) It is not, and cannot be, in dispute that in the case of a "develop-only" contract, the negatives are goods manufactured by Tanu and upon delivery of them to the customer, a liability to sales tax arises under item AD4a of Table 1 in Schedule 1 to the Act, or that the normal taxable value in respect of that assessable dealing is the amount charged by Tanu for its chemical treatment of, and other work done in respect of, the exposed photographic film: Genex. (The processes of "development" and "printing" were described by Hill J in Genex Corporation Pty Ltd v Commonwealth of Australia (1991) 30 FCR 193 (FC) at 194-196.) 7 (4) It is not in dispute, and is supported by authority, that where A, for a price, develops B's exposed photographic film and delivers the negatives to B, there is no sale of the negatives because the film is B's property throughout, that is, before, during and after A chemically treats and does other work in relation to the film in the development process: Genex at 288, 296. The position was described by Windeyer J in Pacific Film Laboratories Pty Ltd v Federal Commissioner of Taxation (1970) 121 CLR 154 at 165 in these terms: "Exposed photographic film may be developed for its owner by a person who carries on the business of film developing. The owner pays him for this when the developed film is delivered. There is no sale involved in that. The film remains the property of the owner throughout. He paid to have his film developed, not to buy the negatives thereby produced." 8 (5) It has not been, and could not be, suggested that AD3b ("AOU by a person who manufactured the goods in the course of any business") applies when Tanu uses the negatives to produce the prints, no doubt because of the "insuperable difficulty" that the negatives remain the customer's property throughout: Genex at 295-296, referring with approval to Genex Corporation Pty Ltd v Commonwealth of Australia (1991) 30 FCR 193 (FC) at 207 per Hill J. 9 (6) There was evidence before the trial judge of two "developing and printing" ("D & P") contracts entered into by Tanu. In my view, the amount charged by Tanu to the customer was truly a "global" amount which was not wholly for the prints but was in part a selling price of the prints and in part a charge made for the work done to convert the exposed photographic film into negatives. That is, Tanu actually charged the customer for the chemical treatment of, and other work done to, the exposed photographic film, even though the amount charged is not identified and was part of a larger amount. 10 The negatives themselves had commercial value. There was uncontradicted evidence before the primary judge that in addition to D & P contracts, Tanu performed "develop-only" and "reprint" contracts; that the develop-only contracts involved developing the customers' exposed photographic film for which the charge was $3.00 for films of 12, 24 or 36 exposures; that reprint contracts involved using the customer's negatives to make prints; and that develop-only and reprint contracts comprised a small part of Tanu's business. A customer can engage Tanu to produce further prints from the negatives at a cost less than what the customer would have to pay it under a D & P contract. 11 The negatives are unlike that part of a length of fabric which is surplus to a tailor's requirements and which he or she discards as waste. I have not been able to think of a satisfactory analogue to the negatives but some imperfect ones are: · a mould which the moulder sells to a product manufacturer with some sample products made by the use of the mould for a single global price; · a model structure which a builder sells to the client with the completed structure for a single global price; · a portrait painter's preliminary sketch which the painter delivers to the client with the completed portrait for a single global price. 12 The mould, the model structure and the preliminary sketch convey an idea which finds its ultimate expression in the manufactured product, the completed structure and the portrait, but have ongoing utility and value for the client in themselves. 13 (7) Let it be assumed, contrary to my opinion expressed in (6) above, that according to general legal principles the transactions into which Tanu entered are properly to be understood as sales of the prints for the whole of the price charged and that therefore there is no "amount ... charged ... in respect of the negatives". Nevertheless, in that case, and as an alternative basis on which the appeal should be dismissed, I think that the Act, on its proper construction, produces a different result for its purposes. On their proper construction the terms of AD4a, para (d) of the definition of "manufacture" in s 5, and s 22 (esp s 22(3)), evince a clear legislative intention to catch as an assessable dealing the making up and delivery of the negatives, and that intention is not, in my view, displaced by the considerations that those acts are performed by the manufacturer only as part of a D& P contract or that a separate price is not allocated to them. 14 (8) While it is usually inappropriate, in arriving at the normal taxable value of manufactured goods, to make any deduction from the cost, labour and expenditure of all steps in their manufacture, a case such as the present one is special. The reason is that although they were necessarily used in the manufacture of the prints, the negatives had an independent existence and value which survived the manufacture of the prints. Let it be assumed that a taxpayer manufactured a tool which it used to manufacture other goods and that it sold both the tool and those goods for a single undifferentiated price: it could hardly be suggested that the only taxable dealing was the sale of the other goods for that price. 15 (9) The fact that no part of the global amount was allocated to the negatives does not signify that no amount was "charged" in respect of them. The contrary view would arguably lead to the absurd result that in the case of a develop-only contract in respect of two films for a single price, no amount is charged in respect of either negative and so no tax is payable. 16 (10) Once it is accepted that the amount charged by a taxpayer to the customer includes a charge made for processing or treating the exposed photographic film so as to produce the negatives, much else falls into place. In the case of a wholesale sale, the normal taxable value of the prints (AD1a) is that part (wholesale) of the price (wholesale) for which the prints are sold. This would be ascertained in conformity with s 95(1), while the amount charged (wholesale) in respect of the negatives (AD4a) would be that part of the global amount ascertained in conformity with s 95(2). In my view, this is what the terms of the legislation require. Apparently the author of the Explanatory Memorandum which was distributed with the bill that became the Act thought that since the total of the two amounts would be the global wholesale figure, there is no "need to know" the separate normal taxable values and therefore no occasion to resort to s 95. The Explanatory Memorandum stated: "21.5 If the print is sold by wholesale, the making up charge on the negative will be included in the wholesale price. The taxable value is simply the amount for which the goods were sold." 17 As a practical matter, this approach would yield the same result as the "two assessable dealings" approach. But I think that the latter is correct because, as I have said above, in my view Tanu sold the prints, not for the whole price charged, but only for part of it, and the remainder was charged in respect of the negatives. 18 In the case of a retail sale, the normal taxable values would be, for the prints (AD2a) their "notional wholesale selling price" (as defined in the notes to Table 1 in Schedule 1 to the Act) and in the case of the negatives (AD4a) that part of the global amount that is charged in respect of them ascertained in conformity with s 95(2). There is no difference in approach according to whether the transaction is wholesale or retail: the legislature has seen fit to make a wholesale selling price (actual or notional according to whether the transaction is wholesale or retail) applicable in respect of the "sale of prints" part of the transaction, and the actual amount charged (whether the transaction is wholesale or retail) applicable in respect of the "delivery of negatives" part of the transaction. 19 (11) There is no double taxation in the scheme outlined. It may be thought, however, to involve an anomaly: in the case of a retail sale, tax will be calculated in respect of the negatives on "the amount ... charged by the manufacturer to the customer in respect of the [negatives]" (AD4a), that is, a retail charge, rather than a "notional wholesale charge". That is to say, the aggregate of the two taxable values in the case of a retail transaction will exceed the aggregate of the two normal taxable values in the case of a wholesale transaction because of the inclusion in the former case of a "retail mark-up" element in respect of the negatives. The position was illustrated by the primary judge in his Reasons for Judgment in the present case. 20 The "anomaly" is, however, also to be found in the construction urged by Tanu. Tanu concedes that in the case of a develop-only contract, the normal taxable value is the charge actually made: wholesale in the case of a wholesale transaction; retail in the case of a retail transaction. 21 (12) The "notional wholesale selling price" referred to in AD2a as applied to the prints must be applied to them as they are produced pursuant to a D & P contract. Accordingly, the notional wholesale selling price will allow for the fact that the global price includes a charge that is also being made in respect of the negatives. This is to give effect to the passage in Commonwealth Quarries (Footscray) Pty Ltd v Federal Commissioner of Taxation (1938) 59 CLR 111 at 122 set out by Finkelstein J in his Reasons for Judgment. 22 (13) If the transaction, in so far as it relates to the negatives, had constituted a sale of them, s 95(1) would apply, unless, again, one were to take the view that as a practical matter there was no "need to know" the separate prices for which the negatives and prints had been sold because the taxing result would be the same if the whole price were treated as being the selling price of the prints and the assessable dealing constituted by delivery of the negatives were ignored. As I have said above, however, in my view, this approach is not in conformity with the terms of the Act. If I am correct, a further reason suggests itself for the finding of the two assessable dealings in Tanu's transaction: it is desirable, and seems to have been intended, that a global transaction comprising two sales of goods for a global unapportioned amount be treated under s 95(1) in the same way as a global transaction comprising one sale of goods and an AD4a dealing is treated under s 95(2). 23 (14) Genex is distinguishable from the present case. The High Court there held that negatives delivered to the customer with prints pursuant to a D & P contract, although previously goods manufactured by the developer, had ceased to be "goods" in the meanwhile upon being used in the making of the prints. The reason was that they had then gone "into use or consumption in Australia" and the definition of "goods" in s 3(1) of the Sales Tax Assessment Act (No. 1) 1930 (Cth), with which that case was concerned, provided that "goods" did not include, inter alia, such goods. But that exclusion is not retained in the definition of "goods" in s 5 of the Act (the current definition retains another exclusion, namely, property that is "sold as second-hand and is manufactured exclusively or principally from goods that" satisfy certain descriptions, but the negatives are not sold as second-hand goods). 24 (15) The construction which I favour is consistent with the purpose of the introduction of para (d) into the definition of "manufacture" in the 1930 Act by the Sales Tax Laws Amendment Act 1986 (Cth). The Explanatory Memorandum which accompanied the Bill for that Act said this (p 38): "The developing of a film is part of the process usually undertaken in laboratories in ultimately producing a photographic print or a cinematograph print. The cost of the developing charge has not previously been subject to sales tax as that process is not under the present law considered to be "manufacture" for WST [wholesale sales tax] purposes. As was mentioned earlier in this memorandum, the exclusion of the developing charge from a liability to sales tax has led to avoidance arrangements where some laboratories inflate the developing charge of a 'develop and print order' to reduce their sales tax liability on the prints." 25 The legislature's purpose in introducing para (d) into the definition would not be achieved if the processing or treating of exposed photographic film so as to produce the negatives in part performance of a D & P contract remained uncaught. On the construction adopted by the primary judge, Lehane J and me, that misadventure would have occurred under the earlier legislation but for the fact that, as was held in Genex, the negatives ceased to be "goods" once they were used in the production of the prints (see (14) above). 26 As indicated earlier, in my opinion the appeal should be dismissed with costs. I certify that the preceding twenty six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren.

AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

LEHANE J: 27 This appeal from a decision of a judge of the Court (Hill J) has to do with the sales tax consequences of contracts by which the appellant taxpayer agreed, for a global price, to develop its customers' photographic film and to make prints from the resulting negatives. The primary judge made a declaration in the following terms: "The Court declares that, in respect of each of the contracts …, sales tax is payable at the time of delivery of the negatives of the respective customer by reference, in the case of negatives to a charge for developing apportioned in accordance of s 95 of the Sales Tax Assessment Act 1992 and, in the case of prints, by reference to a notional wholesale selling price of those prints excluding therefrom developing charges." 28 The taxpayer's primary contention is that there should be no such apportionment; the entire contract should be regarded as one for the manufacture and sale of the prints, the entire sum paid by a customer being properly characterised as the price paid on a retail sale of the prints. The taxpayer propounds an alternative case: if the Court were to hold that the price should be apportioned, the taxpayer would be entitled to a credit equal to the amount of the sales tax on that part of the price apportioned to the developing of the film.

Film processing 29 It is unnecessary to describe in detail the way in which the taxpayer deals with its customers' film. It is common ground that the processes involved are those described in some detail by Hill J in Genex Corporation Pty Ltd v Commonwealth of Australia (1991) 30 FCR 193 at 195, 196. In broad terms, developing and printing are performed separately in machines designed for those purposes. Exposed film is subjected to a series of chemical processes to produce the developed negatives. Printing involves the projection on to light sensitive paper of the image recorded on a negative and then subjecting the paper to a series of chemical processes. The negatives and the prints are then placed in wallets which are placed in turn in bags, to await collection by the customer. They are delivered to the customer on payment of the global price.

The legislation 30 The appeal involves the construction and application of a number of provisions of the Sales Tax Assessment Act 1992 (Cth) (the 1992 Act). 31 Section 16 of the 1992 Act provides what its heading describes as "general rules for taxing assessable dealings". Sales tax is calculated by reference to the taxable value of a taxable dealing; a taxable dealing is an assessable dealing to which no exemption applies; Table 1 in Schedule 1 to the 1992 Act describes those dealings which are assessable dealings and specifies the person liable to pay the tax, the time at which the tax is payable and the "normal taxable value". 32 Two kinds of assessable dealing are relevant for the purposes of this appeal. One is item AD2a in Table 1, described as "retail sale by a person who manufactured the goods in the course of any business". The person liable to tax in respect of such a dealing is the seller, tax becomes payable at the time of sale and the normal taxable value is "the notional wholesale selling price": that expression, in turn, is defined in note 2 at the foot of Table 1 as meaning "the price (excluding sales tax) for which the taxpayer could reasonably have been expected to purchase the goods by wholesale under an arm's length transaction". 33 It may be interpolated at this point that it is common ground that the sale of the prints is an assessable dealing of that type. There is, however, an issue between the parties as to whether the notional wholesale selling price is to be calculated by reference to the whole, or only to a part, of the global retail price charged to the customer. 34 The other kind of assessable dealing in question is AD4a, described as "delivery of customer's materials goods as defined by section 22"; the person liable in respect of such a dealing is the manufacturer, the tax becomes payable at the time of delivery and the normal taxable value is "the amount (excluding the sales tax) charged by the manufacturer to the customer in respect of the goods …". The description of that category of assessable dealing refers the reader to s 22 and, in turn, to the definition of "manufacture" in s 5. That definition includes: "(d) processing or treating exposed photographic film … so as to produce a negative …;" Section 22 provides: "22(1)This dealing involves assessable goods that are manufactured by a person, in the course of a business, for another person ("the customer") wholly or partly out of materials that: (a) were supplied by the customer …. (2)The dealing consists of the delivery of the goods either to the customer or to someone else at the direction of the customer or under an agreement to which the customer is a party. (3)In this section: "materials" includes exposed photographic film … that is to be processed or treated so as to produce a negative … ." 35 The Commissioner contends, and the primary judge held, that the delivery of the negatives (with the prints) to a customer under one of the contracts in question is an assessable dealing of that kind. The taxpayer contends that it is not. It is common ground - inevitably given the terms of the provisions - that if the taxpayer contracted with a customer only to develop the customer's film (not, additionally, to make prints from the negatives) the delivery of the negatives would be an assessable dealing within category AD4a. 36 The basis of the decision of the primary judge, upholding the contention of the Commissioner that the global price might be apportioned, was s 95(2). It is necessary to set out s 95 in full. It is headed "apportionment of global amounts" and provides: "95. (1)If there is a need to know the price for which particular goods were sold, but the parties have not allocated a particular amount to those goods, the price for which those goods were sold is (for the purposes of the sales tax law) the price for which the goods could reasonably be expected to have been sold if they had been sold separately. (2)Similarly, if there is a need to know how much of a global amount relates to some other element of a transaction, but the parties have not allocated a particular amount to that element, the amount to be allocated to that element (for the purposes of the sales tax law) is the amount that could reasonably be expected to have been allocated to that element if that element had been the only subject matter of the transaction." 37 If apportionment under that provision is both possible and appropriate, then the question arises whether the taxpayer is entitled to a credit. Credits are dealt with in Pt 4 of the Act and s 51 provides that Table 3 sets out the situations in which a claimant is entitled to a credit. The taxpayer claims, if the global price is to be apportioned, an entitlement to a credit under item CR6 in that table: the details of that credit ground are: "Claimant is liable to tax on an assessable dealing with goods ("the output goods") and has borne tax on other goods ("the input goods") that have a sufficient link (as defined by s 52) with the output goods." 38 That directs the reader's attention to s 52. Section 52 provides the information that for the purpose of, among others, credit ground CR6, input goods have a sufficient link with output goods in the following cases: "(a) The input goods, or some essential element of the input goods, has become an integral part of the output goods; … (c) Something that formed part of the input goods at the time of the tax‑bearing dealing with the input goods has become an integral part of the output goods."

Taxpayer's primary case: submissions and discussion 39 It is convenient to begin with the following abbreviated summary of the reasoning of the learned primary judge, supported by the Commissioner on the appeal. The transaction between the taxpayer and a customer incorporates two elements, each of which is an assessable dealing. The taxpayer manufactures the prints and sells them to the customer by retail: a dealing the normal taxable value of which is the notional wholesale selling price. Additionally, the taxpayer manufactures (within the meaning of that term in s 5) the negatives out of materials (exposed film) supplied by the customer: accordingly, the delivery of the negatives is an assessable dealing in category AD4a. The circumstance that the price is not apportioned between the two elements does not give rise to difficulty - particularly, does not give rise to double taxation - because s 95 permits apportionment. The delivery of the negatives is "some other element of" the global transaction, the parties have not allocated a particular amount to that element and subs (2) accordingly requires that the amount to be allocated to it, for the purposes of the sales tax law, is the amount that could reasonably be expected to have been allocated to it had it been the only subject matter of the transaction (that is, in substance, if the contract had been one for development only, not printing as well). There is no difficulty about the taxable value to be attributed to the sale of the prints: it is the notional wholesale purchase price, being the price for which the taxpayer could reasonably have been expected to purchase them (that is, presumably, the prints alone under a "print only" contract - and, apparently, one under which the taxpayer was the customer) under an arm's length transaction. 40 In essence, the taxpayer's argument proceeded as follows. The contract between taxpayer and customer is to be regarded, and regarded only, as one for the manufacture and sale of the prints. The developing of the film is to be regarded simply as a step in the manufacture of the prints, so that what the customer pays (the global price) is the price of what the customer has bought (the prints) which will include elements attributable to each step in the manufacturing process, including the development of the film. Such an approach, it was submitted, is warranted in principle by the decision of the High Court in Commonwealth Quarries (Footscray) Pty Ltd v Federal Commissioner of Taxation (1938) 59 CLR 111 and, in the particular context, by the following observations of Hill J, with whom Beaumont and Burchett JJ agreed, in Genex at 211, 212: "Where the contract between the customer and the laboratory is one for developing only, s 17A [of the earlier legislation] will operate to deem there to be a sale at the time the negatives, then unused, are delivered to the customer. The sale value in such a case will be determined under s 18(1B) to be the amount charged by the laboratory for the processing. Where, on the other hand, the contract between the customer and the laboratory is a contract for the developing of the film and the making of prints, there is much to be said for the view that the entire process should be seen as a process of manufacturing the prints, with the negatives but an intermediate stage of that process. In such a case there will be an actual sale of the prints, and the sale value of them will fall to be determined in accordance with s 18(1)(b) in the normal case of a sale by retail, as the amount for which the prints could reasonably be expected to have been sold by the manufacturer by wholesale. In carrying out the hypothesis of a wholesale sale postulated by s 18(1)(b) the Commissioner may assume the hypothetical sale is made on the same terms and conditions as the actual retail sale is made, except in respect of price, there being no term of the contractual arrangement which would be absent or modified if the real sale were a wholesale sale … . On this basis the sale value of the prints would include an appropriate component for the process of developing. This appears to have been the way contracts of developing and printing were treated by the Commissioner in the transactions before the High Court in [Federal Commissioner of Taxation v Butcher (1935) 53 CLR 82] and in the United States cases to which I have referred. The issue was not, however, the subject of argument before us and it is therefore not appropriate that I express a decided view upon it." 41 That being the correct analysis of the contracts, the argument proceeded, there is no warrant in the 1992 Act for treating the price paid by the customers as anything other than the (retail) price of the prints or for ascertaining the notional wholesale price by reference to any other transaction than one which, save that it is a wholesale sale, does not differ at all from the actual contracts. As a result, to treat the delivery of the negatives separately as an assessable dealing in category AD4a would result in double taxation: the whole of the price is the basis of the amount on which tax is payable on the sale of the prints so that to tax separately any amount apportioned to the negatives is to tax that amount twice. The legislation should not be construed so as to impose double taxation. Section 95(2) is inapplicable, because while it might separate out from a contract partly for goods and partly for services an amount relating to the services, it could not, by finding an amount relating to the manufacture of the negatives, produce the amount charged by the taxpayer in respect of them required, if their delivery is to be regarded as an assessable dealing, by the terms of AD4a. And because the price paid is to be regarded as the price of the prints, and since nothing is charged for the manufacture or delivery of the negatives, there is no need to know how much of the global price relates to developing the film so as to produce the negatives. 42 Powerful as those arguments are, in my view they fail for two reasons: they place too much weight upon a particular, though important, aspect of the contracts and they give too little weight to the terms of the 1992 Act.

(a) The contracts 43 Undoubtedly the developing of the unexposed film, so as to produce negatives, is an essential preliminary step if prints are to be manufactured: prints cannot be made unless the film is first developed. It may well be that, for many customers at least, their principal object in entering into one of the contracts with the taxpayer is to obtain prints. And, no doubt, developing the film may not be within the class of case contemplated by the reservation expressed by Dixon and McTiernan JJ in Commonwealth Quarries at 121: "In a contract under which for a single lump sum of money a party undertakes to do various things, including the transfer of property in goods, it is quite true that the entire money consideration or contract price cannot be regarded as the amount for which the goods are sold. In such a case the amount for which the goods were sold could not be ascertained from the transaction except by allocating part of the consideration to the other acts or things to be done by the seller." 44 But under their contracts with the taxpayer the customers do not only get (and are not entitled only to get) prints: they are entitled also to receive, and do receive, their developed film in the form of negatives cut into convenient lengths, placed in a protective covering and available for use in the future to obtain more prints. The taxpayer might if it chose, charge separate sums for developing the film and for the prints; and if it did so there is no reason why the amount apportioned to developing would necessarily be insubstantial. The remarks of Hill J in Genex were obiter, explicitly did not represent a final view and (importantly) were made in a different, and now superseded, legislative context. In my view, it is artificial and inappropriate to describe the contracts as contracts for the manufacture and sale, for the global price, of the prints, and nothing more. It may be added that the point simply did not arise in Butcher or in any of the other earlier authorities to which we were referred. 45 Within the literal terms of Table 1, two assessable dealings take place under each contract: there is a retail sale of the prints by the manufacturer (the taxpayer) to the customer (AD2a) and there is a delivery of the customer's materials goods (the negatives) as defined by s 22 (AD4a). The consequence that each separately attracts tax can, as a matter of construction, only be resisted by way of the proposition that the price paid represents (exclusively) the price of the prints, development of the film being merely a step along the way to producing the prints, so that there is no amount charged by the manufacturer in respect of the AD4a dealing. But to say that is simply to repeat the misconstruction of the contract. The customer pays one unapportioned price for all his or her entitlements under the contract. Those entitlements include delivery of the negatives. It is no more accurate to say that nothing is charged in respect of that entitlement than to assert that nothing is paid for the prints. Once that step is taken, it becomes difficult indeed to resist the preliminary conclusion that an amount is charged in respect of the delivery of the negatives, making it necessary to ascertain, for the purposes of the 1992 Act, what that amount is. 46 The task at hand, then, is to apportion a global amount. There is a need to know how much of the global price relates to the delivery of the negatives, an element of the transaction other than the price for which particular goods were sold. There is, I think, no artificiality or straining of language involved in applying s 95(2) or, particularly, in asking what is the amount that could reasonably be expected to have been allocated to the delivery of the negatives if that had been the only subject matter of the transaction. 47 To say that there is then double taxation is, I think, to engage once more in precisely the same misconstruction of the contract. Once it is seen that the global price paid is exclusively neither the price of the prints nor the amount charged for delivery of the negatives, it must follow that a portion only of the price is attributable to the prints as well. There being, relevantly, no element of the transaction other than the sale of the prints and the delivery of the negatives, there seems to me no difficulty with the proposition that, having by application of s 95(2) discovered what is the amount charged in respect of the delivery of the negatives, the balance is the price paid for the prints. The sale being a retail sale, the retail margin is then eliminated to arrive at the notional wholesale price. It is not obvious - it is not important here, but may be important in other cases - that the same result could not be arrived at by applying s 95(1) on the footing that there is a need to know the price for which particular goods (the prints) are sold. Whichever way the matter is approached, there is thus no double taxation. 48 Three other matters should be mentioned before I leave this aspect of the case. First, an AD4a dealing is taxed in a way which differs from the way in which other assessable dealings are taxed, and that difference explains what, in practical terms, has given rise to the controversy between the parties. Where the AD4a transaction is a retail transaction, the taxable value is not the amount which would be charged under a wholesale transaction otherwise on the same terms, but is the amount actually charged by the manufacturer to the customer, that is the retail price. That is unquestionably so in the case of a retail "develop only" contract and, even if anomalous, it is a consideration which cannot affect the questions of construction which we have to decide. Secondly, if the sale of prints by the taxpayer to a customer were a wholesale sale, within assessable dealing category AD1a, the normal taxable value would be the price (excluding sales tax) for which the goods were sold. There is no question of ascertaining a "notional wholesale selling price". But, on the proper construction of the contract, the price for which the prints were sold would not be the global price payable under the contract: it would be ascertained, as in the case of a retail contract, by applying s 95. Thirdly, although we were referred helpfully to corresponding provisions of the previous sales tax law and to the Explanatory Memorandum relating to the 1992 Act, I have reached my conclusions on this aspect of the case without specific reference to either: although no doubt it is true the 1992 Act brought about no essential change to the sales tax law, there are plainly differences between the two regimes, including particular changes relevant to the treatment of contracts for processing photographic film; and, while it may be that paragraph 9.34 of the Explanatory Memorandum contemplates a somewhat narrower operation of s 95 than I have given it, my construction of it is consistent with the specific treatment of photography in chapter 21 of the Explanatory Memorandum - as it is, in my view, with the words which the Parliament has chosen to use.

(b) Credit ground CR6 49 The only argument pursued on this aspect of the appeal by the taxpayer was that the negatives (input goods) had a sufficient link with the prints (output goods) on the footing that some essential element of the negatives had become an integral part of the prints (s 52(a)) or that something that formed part of the negatives at the time of the tax‑bearing dealing with them had become an integral part of the prints (s 52(c)). On this aspect of the case, the primary judge said (154 ALR at 116): "When one turns to the provisions of s 52 it seems clear that neither paragraphs (a) nor (c) could have any application. Both require, as an essential element, that the exposed film become an integral part of the prints. No doubt it can be argued that the exposed film contains in a sense an image which ultimately is printed on the prints. However, in my view, this is not the correct construction of either paragraphs (a) or (c); both having regard to the evidence as to how the exposed film is developed and printed and also to a view I take that reference to essential element refers to a physical element rather than the chemical displacement which occurs in the photographic process and produces the developed film." 50 The taxpayer contended that in a statutory context where the definition of "manufacture" has been broadened to include such activities as "processing or treating exposed photographic film" (par (d)), "duplicating a computer program" (par (e)) and "duplicating visual images or sounds" (par (f)), there is no impediment to regarding the photographic image embedded in a negative as a physical element of it which, by the interaction of light passing through it with sensitised paper, causes a photographic image to be physically reproduced on that paper. I agree, however, with what his Honour said and do not accept the taxpayer's argument. I do not think that the process described in the taxpayer's submissions can properly be described as one through which something that formed part of the negatives has become an integral part of the prints any more than, where an object is photographed, or a painting of an object is made, it can sensibly be said that something that formed part of the object has become an integral part of the photograph or painting. Exactly the same may, I think, be said by reference to the terminology of s 52(a): the fact that the image on the negative is reproduced on the print does not, I think, mean that an essential element of the negative has become an integral part of the print. This is not a subject on which elaboration is likely to be profitable. The negatives remain intact and are delivered to the customer with the prints; in my view, the language of s 52(a) and (c) is not apt to describe what has been done.

Conclusion 51 For those reasons, which do not, I think, differ substantially from those given by the learned primary judge, the appeal in my view should be dismissed with costs. I certify that the preceding twenty-five (25) paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lehane

AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

FINKELSTEIN J 52 The appellant carries on the business of developing exposed photographic film, that is producing negatives from the exposed film, and making prints from negatives. The appellant may be employed by a customer to develop exposed film supplied by the customer and to make prints from the negatives or it may be engaged only to develop exposed films supplied by a customer or to make prints from negatives supplied by a customer. When the appellant undertakes the composite process of developing the film and making prints, the appellant returns the negatives to the customer along with the prints and charges a single fee for the work undertaken and the materials supplied. 53 An excise, known as sales tax, is imposed on the "taxable value" of goods when there has been an "assessable dealing" in respect of those goods: Sales Tax Assessment Act 1992 (Cth). Table 1 of the Sales Tax Assessment Act sets out the assessable dealings that are subject to sales tax and the taxable value on which the excise is imposed. Relevantly, those assessable dealings include a "retail sale by a person who manufactured the goods in the course of any business" where the taxable value is the "notional wholesale selling price" of the goods (AD2a) and a "delivery of customer's materials goods as defined by section 22" where the taxable value is "the amount (excluding sales tax) charged by the manufacturer to the customer in respect of the goods" (AD4a). 54 Section 22 explains the meaning of "delivery of customer's materials goods". The section provides: "(1) This dealing involves assessable goods that are manufactured by a person, in the course of a business, for another person ('the customer') wholly or partly out of materials that: (a) were supplied by the customer (or by someone else at the request of the customer); or (b) were purchased from the manufacturer by the customer (or by someone else at the request of the customer). (2) The dealing consists of the delivery of the goods either to the customer or to someone else at the direction of the customer or under an agreement to which the customer is a party. (3) In this section: 'materials' includes exposed photographic film or cinematograph film that is to be processed or treated so as to produce a negative, transparency or film strip." 55 The question raised by this appeal is whether sales tax is payable on the delivery by the appellant to a customer of negatives that were produced from the exposed photographic film supplied by the customer under a contract for the development of that film and the making of prints. 56 Before turning to answer this question it is convenient to mention those matters that are not in dispute between the parties. The first is that a print falls within the statutory definition of "goods" for the purposes of the Sales Tax Assessment Act: "goods" are defined in s 5 to mean "any form of tangible personal property" with certain irrelevant exceptions. The second matter that is common ground is that the composite process of producing negatives from an exposed film and the making of prints from those negatives is a process of manufacture: see the definition of "manufacture" in s 5; see also Federal Commissioner of Taxation v Riley (1935) 53 CLR 69; Federal Commissioner of Taxation v Butcher (1935) 53 CLR 82. Thirdly, it is agreed that when the appellant produces prints from exposed film that has been provided to it by a customer, there is a sale of those prints to the customer: Pacific Film Laboratories Pty Ltd v Federal Commissioner of Taxation (1970) 121 CLR 154. The last matter on which the parties are in agreement is that a sale of prints by the appellant to a customer is an assessable dealing being either a "wholesale sale by a person who manufactured the goods in the course of any business" (Table 1, AD1a) or a "retail sale by a person who manufactured the goods in the course of any business" (AD2a) dependent upon the circumstances of the sale. This appeal is only concerned with sales by retail. 57 I can now mention those areas where the parties are in contest. The Commissioner, whose submissions were accepted by the trial Judge, contends that the performance by the appellant of its obligations under a composite contract gives rise to two assessable dealings; viz. a retail sale (AD2a) and a delivery of customer's materials goods (AD4a) and that sales tax is payable in respect of each dealing. 58 I have already mentioned that where there is a retail sale (AD2a) sales tax is imposed on the notional wholesale selling price of the goods. In the Notes to Table 1 "notional wholesale selling price" is defined to mean "the price (excluding sales tax) for which the taxpayer could reasonably have been expected to sell the goods by wholesale under an arm's length transaction." I have also mentioned that in relation to delivery of customer's materials goods (AD4a) sales tax is imposed on the amount (excluding sales tax) charged to the customer in respect of the goods. This could be either the retail or the wholesale charge for the cost, labour and expenditure incurred dependent upon whether the customer's materials goods were manufactured in the course of a retail or wholesale transaction. 59 The Commissioner recognises that the policy of the Sales Tax Assessment Act is that sales tax is only to be levied upon one transaction involving goods so that the retail price of goods is not increased by the imposition of more than one tax: see Deputy Federal Commissioner of Taxation (S.A.) v Ellis & Clark Ltd (1934) 52 CLR 85 in relation to the Sales Tax Assessment Acts of 1930 that were replaced by the new law. 60 Although the Commissioner argues that two assessable dealings arise out of a composite contract that is entered into by the appellant, he says that the retail price of the prints sold by the taxpayer is not unduly increased by the imposition of sales tax. The reason is, so the argument goes, that in determining the notional wholesale selling price of the prints, no account is to be taken of the cost, labour or expenditure incurred in the production of the negatives. That is to say, the notional wholesale selling price of the prints is to be ascertained by reference only to the cost, labour and expenditure of producing prints from negatives. 61 With regard to the ascertainment of the taxable value of the returned negatives, the appellant does not in fact charge its customer for the "manufacture" of those negatives, at least in the sense of allocate a price to the negatives. But it does not necessarily follow that there is no taxable value of the negatives for the purposes of the imposition of sales tax. Section 95 of the Sales Tax Assessment Act provides: "(1) If there is a need to know the price for which particular goods were sold, but the parties have not allocated a particular amount to those goods, the price for which those goods were sold is (for the purposes of the sales tax law) the price for which the goods could reasonably be expected to have been sold if they had been sold separately. (2) Similarly, if there is a need to know how much of a global amount relates to some other element of a transaction, but the parties have not allocated a particular amount to that element, the amount to be allocated to that element (for the purposes of the sales tax law) is the amount that could reasonably be expected to have been allocated to that element if that element had been the only subject matter of the transaction." The Commissioner says that subsection (2) enables the charge for the negatives to be ascertained by ascribing a portion of the total amount charged by the appellant as the charge for the production of the negatives. 62 The way the appellant puts its case is as follows. Sales tax is assessable on the notional wholesale selling price of the prints. That price must include a component for the production of the negatives. In consequence, if the delivery of the negatives is also an assessable dealing there would be double taxation: the cost, labour and expenditure of producing the negatives would be twice subjected to sales tax. This result is irrational or unintended (that is, it is a result that the parliament did not intend) so that the legislation must be construed to avoid it. As an alternative argument the appellant submits that, on its proper construction, s 95(2) cannot be used to create an "amount charged" for the purposes of AD4a when there has been no amount actually charged by the taxpayer for the manufacture of the customer's materials goods and accordingly there is no charge on which sales tax can be levied. 63 I have set out the competing contentions of the parties for the purpose of highlighting one step in the chain of reasoning of each of them where there is a fundamental disagreement. It is a disagreement the resolution of which will have a crucial bearing on the outcome of this appeal. 64 The issue is whether, when determining the notional wholesale price (that is the taxable value) of the prints the subject of a retail sale, it is permissible to exclude from that notional price the cost, labour and expenditure that relates to the developing process. The trial Judge held that it was but did not give any reason for his conclusion. If the trial Judge was wrong in that regard but correct in his conclusion that the appellant was also liable to pay sales tax on the taxable value of customer's materials goods (AD4a) then there would indeed be the imposition of double taxation. In that event the question that would arise is whether, on a proper construction of the Sales Tax Assessment Act, double taxation must be avoided. 65 A convenient starting point for the resolution of these issues is to consider how the taxable value of the prints would have been determined under the replaced Sales Tax Assessment Acts of 1930. The legislative policy of those Acts was explained in detail by Dixon J in Ellis & Clark Ltd, supra. Two aspects of that description should be mentioned. First, sales tax was intended to be levied upon the last wholesale sale of all imported or locally manufactured goods. Second, when there was no wholesale sale of goods, provision was made for sales tax to be paid upon the sale value of goods where there was a retail sale of the goods by the taxpayer or where the goods were treated by him as stock for sale by retail or were applied to his own use. Sales tax was then imposed on the wholesale value of the goods in question. 66 In this connection reference should be made to s 18(1) of the Sales Tax Assessment Act (No 1) 1930. It provided: "(1) For the purposes of this Act, the sale value of goods, not being goods to which the next succeeding sub-section applies which are sold by the manufacturer to an unregistered person or to a registered person who has not quoted his certificate in respect of that sale shall be - (a) where the goods are sold by wholesale - the amount for which those goods are sold; (b) where the goods are sold by retail - (i) if the goods are of a class which the manufacturer himself sells by wholesale - the amount for which the goods would be sold by the manufacturer if sold by wholesale; and (ii) in any other case - the amount for which those goods would have been purchased by the taxpayer from another manufacturer if that other manufacturer had manufactured those goods in the ordinary course of his business for sale to the taxpayer. 67 In Commonwealth Quarries (Footscray) Pty Ltd v Federal Commissioner of Taxation (1938) 59 CLR 111 the questions that were raised for determination by the High Court were how the phrases "the amount for which those goods are sold" and "the amount for which the goods would be sold by the manufacturer if sold by wholesale" were to be applied to the facts of the case. It is not necessary to set out those facts in any detail. Briefly stated, they were as follows. A taxpayer sold goods by retail and wholesale at a published price. The published price varied with the locality where the goods were to be delivered. The issue raised was whether there should be deducted from the price charged an allowance for the cost of carriage and delivery. 68 In the course of their joint judgment Dixon and McTiernan JJ considered the means by which the notional wholesale selling price of goods sold by retail should be established. They said (at 122): "If in such a case [a manufacturer selling by retail] the goods are of a class which he usually sells by wholesale, the sale value is to be the amount for which the goods would be sold by the manufacturer if sold by wholesale. …In the context we should interpret the paragraph [s 18(1)] as requiring that a sale by wholesale should be supposed with the same terms and conditions as the actual retail sale made, except in respect of price and any other term or condition which would be absent or modified in a sale by wholesale." [emphasis added] Is there any reason why the same approach should not be adopted in the determination of the notional wholesale selling price of goods under the current legislation? In my view there is no reason. Let me explain. 69 The primary object of the Sales Tax Assessment Act is not different from the legislation that it has replaced. That object is to impose sales tax on the wholesale value of goods when a particular dealing with respect to those goods takes place. For example, in the case of a wholesale sale by the manufacturer of the goods (AD1a) the taxable value is "the price for which the goods were sold": see Table 1. No deduction from this price is contemplated or permitted to determine the taxable value of the goods sold. 70 Consider then the case of a wholesale sale of prints produced from exposed photographic film supplied by a customer. In an ordinary market the manufacturer will recover the cost labour and expenditure of producing the negatives and the prints together with a wholesale mark-up. Is this amount "the price for which the [prints] were sold"? In my opinion it is. First, the contract is for the sale of goods (prints) and is not a contract for work and labour: see e.g. Lee v Griffin (1861) 121 ER 716, which was concerned with the making and supply of a set of artificial teeth; Harvey v McDonald [1927] StRQd 50 where the contract was to manufacture and prepare steel parts for a car shed; Marcel (Furriers) Ltd v Tapper [1953] 1 WLR 49 where the contract was to make a mutation mink coat to the special measurements of the customer. Accordingly the consideration that is paid to the manufacturer can only be characterised as the price for the goods sold: it is the amount paid to obtain title. Second, although this might be stating the same proposition in a different way, the production of the negatives is an essential step in and forms part of the process of the manufacture of the prints. Thus, the cost labour and expenditure incurred in that regard is part of the total cost etc incurred in the manufacture of the prints. If the prints are sold but no price is agreed, the purchaser will be required to pay a reasonable price. In that event the cost etc of producing of the negatives will be taken into account in determining the price. 71 Assessable dealing AD2a is concerned with a retail sale by the manufacturer of the goods. Here there is no wholesale price charged and accordingly the taxable value of the goods is the "notional" wholesale selling price. But it is the notional wholesale selling price that would be charged by the manufacturer of the goods in question, that is, the price that the manufacturer would have charged if the transaction was a wholesale sale. Provided the supposed wholesale sale is on the same terms and conditions as the actual retail sale, the manufacturer, now a deemed wholesaler, would charge a price to derive a reasonable (wholesale) return for the cost, labour and expenditure incurred in all steps in the process of manufacture undertaken by him. It is only on this basis, which appears to me to be the correct basis to adopt, that the taxable value of goods sold by retail will be their true wholesale value; the taxable value will also be substantially the same as the taxable value of the same goods if sold by wholesale. Of course, market forces such as the demand for goods, the nature of competition that exists in a particular market and so on, may produce some differences in the wholesale selling price but that does not affect the general principle. 72 It would be both anomalous and unjust if, in the case of a retail sale by a manufacturer, some part of the manufacturing process could be ignored for the purpose of determining the taxable value of the goods sold and the same position does not apply to the case of a wholesale sale of the same goods. It would be anomalous because there is no reason in principle why the manufacturer of goods who sells by retail should be treated differently from a manufacturer of goods who sells by wholesale. It would be unjust because the taxable value of the goods in question, and therefore the amount of sales tax levied in respect of those goods, will be different. Such consequences should be avoided unless the language of the statute clearly mandates that result. 73 I should say that I have given consideration to a possible construction of the legislation not put forward by the Commissioner but one that would avoid double taxation and support the result for which he contends. The argument is that when one dealing with goods can give rise to two or more assessable dealings (eg AD2a and AD4a) then the taxable value of one of those dealings (eg AD4a) should be deducted from the taxable value of the other dealing (eg AD2a). For such a construction to be adopted it would also be necessary to imply that it is the lowest taxable value that should be deducted from the highest taxable value so that sales tax will be levied upon a value that would approximate the true wholesale value of the goods in question. But, in the end, I can not see any justification for this construction. It would require, by a process of construction or implication, the making of significant amendments to various of the definitions of taxable value appearing in Table 1 and it is by no means apparent to me precisely how those amendments should be formulated so that they would operate sensibly in all cases. 74 Accordingly, I am of the view that the premise upon which the trial Judge has based his decision is false. The taxable value of the prints, if sold by retail by the appellant, is the notional wholesale selling price of those prints determined by taking into account all aspects of the process of manufacture undertaken by the appellant. 75 Now it is necessary to consider whether the appellant is also liable to pay sales tax on the delivery of customer's materials goods (AD4a). The Commissioner's case is that, however anomalous this position may be, it is what the legislation requires notwithstanding that it is the object of the legislation to impose sales tax on only one dealing with respect to goods manufactured in or imported into Australia. The Commissioner says that this anomalous result can only be cured by the parliament. 76 I do not agree. It is the obligation of a court of construction to determine what parliament intended by its legislation so that the legal consequences of what was intended can be put into effect. When legislation uses clear language generally there will be no difficulty. The legislation will be taken to mean what it says. However there are many circumstances where it is appropriate to depart from the literal language of a statute when it is apparent that to give effect to the literal meaning is not to give it its intended operation. 77 Importantly, a court of construction will seek to avoid absurd or unjust consequences that would follow from the literal reading of a statute. It does so on the basis that it is unlikely to have been the intention of parliament that its statutes should give rise to absurd or unjust consequences: Mills v Meeking (1990) 169 CLR 214 at 242; Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297 at 304. In that circumstance the court is entitled to remedy the situation by a strained construction of the words used, or by the addition of words, or by the omission of words: Saraswati v The Queen (1991) 172 CLR 1 at 22. 78 In my view, the unintended imposition of double taxation can be avoided in one of two ways. The first is by excluding as an assessable dealing any dealing in goods where the taxable value of those goods is brought to account as one component in the ascertainment of the taxable value of goods for the purpose of another assessable dealing. To achieve this result would require an implication to be made or, perhaps, but not necessarily, the addition of words to the legislation to avoid the unintended effect that I have identified. The second method is to confine the operation of s 95(2) to those circumstances where double taxation will not be imposed. That is to say, s 95(2) applies when there is "a need to know" how much of a global amount relates to some element of a particular transaction and there is no "need to know" what the amount is in a case where, if that amount is ascertained, double taxation will be imposed. It seems to me that either approach is permissible and will produce the required result in this case. 79 For the foregoing reasons I would allow the appeal, set aside the declaration and orders made by the trial Judge and in lieu thereof would make the following declaration and orders: 1. Declare that in respect of the contracts referred to in the statement of claim the delivery of negatives by the appellant to its customers is not an assessable dealing under Table 1 of Schedule 1 to the Sales Tax Assessment Act 1992. 2. The respondent is to pay the appellant's costs of the appeal and of the hearing below.

I certify that the preceding twenty-eight (28) paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein

Counsel for the Respondent: Mr I V Gzell QC Mr K M Connor

Solicitor for the Respondent: Australian Government Solicitor

Sales Tax Laws Amendment Act 1986(Cth)

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