Alcoa of Australia Ltd and Commissioner of Taxation (Taxation and business)
[2025] ARTA 482
•30 April 2025
Alcoa of Australia Ltd and Commissioner of Taxation (Taxation and business) [2025] ARTA 482 (30 April 2025)
Applicant/s: Alcoa of Australia Limited
Respondent: Commissioner of Taxation
Tribunal Numbers: 2022/3549 - 3564
Tribunal:Deputy President G Lazanas, Deputy President P Britten-Jones and Senior Member R Olding
Place:Melbourne
Date:30 April 2025
Decision:The Tribunal sets aside the Commissioner’s objection decision dated 1 April 2022 and substitutes it with a decision that each of the applicant’s objections is allowed in full.
.................[SGD].......................................................
Deputy President G Lazanas
Deputy President P Britten-Jones
Senior Member R Olding
Catchwords
TAXATION – transfer pricing and arm’s length consideration provisions – Division 13 of the Income Tax Assessment Act 1936 (Cth) – interpretation of s 136AD(1) – burden of proof - sales of alumina to independent parties overseas – no profit shifting within the taxpayer group of companies – relevance of bribery and corruption admissions in United States proceedings as to whether the parties were dealing at arm’s length – relevance of price negotiations to whether the parties were dealing at arm’s length – tripartite international agreement under s 136AC – consideration of what property was supplied under an international agreement for the purposes of s 136AD(1)(a)) – whether satisfied, having regard to any connection between 2 or more of the parties or to any other relevant circumstances, that the parties to the agreement were not dealing at arm’s length with each other in relation to the supply for the purposes of s 136AD(1)(b) – relevance of supply of property to another party – whether consideration received by the taxpayer was less than arm’s length consideration under s 136AD(1)(c) – extent of depersonalisation required for a hypothesised agreement for the purpose of determining arm’s length consideration under s 136AA(3)(c) – where experts adopted different approaches – whether to determine that
s 136AD(1) applies in relation to the taxpayer – finding that Tribunal not satisfied parties were dealing at arm’s length with each other in relation to the supply but satisfied the consideration received by the taxpayer was not less than arm’s length consideration in respect of the supply – decision to set aside the decision of the Commissioner disallowing taxpayer’s objections against assessments and substitute it with a decision allowing each of the applicant’s objections in fullLegislation
Administrative Review Tribunal Act 2024 (Cth), s 52
Administrative Review Tribunal (Consequential and Transitional Provisions No. 1) Act 2024 (Cth)
Foreign Corrupt Practices Act of 1977 (USA)
Income Tax Assessment Act 1936 (Cth), former ss 136AA, 136AC, 136ADTaxation Administration Act 1953 (Cth), s 14ZZK
Cases
Binetter v Commissioner of Taxation (2016) 249 FCR 534
Chevron Australia Holdings Pty Ltd v Federal Commissioner of Taxation (2017) 251 FCR 3940
Collis v Commissioner of Taxation (1996) 33 ATR 4
Copperart Pty Ltd v Commissioner of Taxation (1993) 26 ATR 327
Copperart Pty Ltd v Commissioner of Taxation (1994) 50 FCR 345
Federal Commissioner of Taxation v AXA Asia Pacific Holdings Ltd (2010) 189 FCR 204
Federal Commissioner of Taxation v Glencore (2020) 281 FCR 219
Federal Commissioner of Taxation v SNF (Australia) Pty Ltd (2011) 193 FCR 149
Granby Pty Ltd v Federal Commissioner of Taxation (1995) 30 ATR 400
Millar v Federal Commissioner of Taxation (2015) 101 ATR 827
R v Jacobs Group (Australia) Pty Ltd (2023) 411 ALR 202
San Remo Macaroni Co v Commissioner of Taxation (1999) 43 ATR 53
Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation (2024) 302 FCR 192
Trustee for the Estate of the late AW Furse No 5 Will Trust v Federal Commissioner of Taxation (1990) 21 ART 1123
WR Carpenter v Commissioner of Taxation (2006) 63 ATR 577Secondary Materials
Australian Taxation Office, Transfer pricing, (Web Page, 15 July 2020) < Memorandum to the Income Tax Assessment Amendment Bill 1982 (Cth)
OECD, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, July 1995
Taxation Ruling TR 94/14: Income tax: application of Division 13 of Part III (international profit shifting) - some basic concepts underlying the operation of Division 13 and some circumstances in which section 136AD will be applied (Australian Taxation Office, 14 December 2011)
TABLE OF CONTENTS
INTRODUCTION
GLOSSARY, APPLICATION BOOK AND OTHER DOCUMENTS
THE DECISIONS UNDER REVIEW
THE ISSUES FOR DETERMINATION
RELEVANT STATUTORY PROVISIONS AND PRINCIPLES
Operative Provision – s 136AD(1)
Supply of property under international agreement – s 136AD(1)(a)
Not dealing at arm’s length in relation to the supply – s 136AD(1)(b)
Consideration received was less than arm’s length consideration – s 136AD(1)(c)
Commissioner determines subsection should apply – s 136AD(1)(d)
Commissioner’s determination and application of s 136AD(1)
Burden of Proof
Interpretation and Application of s 136AD(1)
The objects of Division 13
Contentions of the parties as to the construction of s 136AD(1)
Tribunal’s construction of s 136AD(1)
Not dealing at arm’s length – s 136AD(1)(b) - relevance of corrupt payments
Arm’s length consideration – s 136AD(1)(c) and s 136AA(3)(c) – depersonalisation and relevance of prices charged for Formula Tonnage
THE FACTUAL BACKROUND AND EVIDENCE
Documentary Evidence
Lay and Expert Evidence
Mr Pizzey
Cross-examination of Mr Pizzey
Mr Harris
Harris First Report
Harris Second Report
Harris Third Report
Cross-examination of Mr Harris
Dr Williams
Williams First Report
Williams Second Report
Cross-examination of Dr Williams
Mr Meurer
Meurer Report
Cross-examination of Mr Meurer
Dr Korenko
Korenko Report
Cross-examination of Dr Korenko
Evaluation of Experts’ Evidence
Price premiums
Spot pricing, other pricing benchmarks and longer term contracts
Use of intermediaries
Annual price reviews
THE BRIBERY AND CORRUPTION ALLEGATIONS
Some Background regarding Mr Dahdaleh
The Bribery Allegations and the Contentions of the Parties
The Tribunal’s Findings in relation to the Bribery and Corruption Allegations
FINDINGS FOR YEARS 1993 to 1995 – application of the law to the facts
The Agreement by which Property is Supplied under s 136AD(1)(a) – 1993 to 1995
The international agreement for 1993 to 1995
What was the supply of property by Alcoa under the international agreement for 1993 to 1995?
Conclusion as to the Agreement for the Supply of Property under s 136AD(1)(a) for 1993 to 1995
Dealing at Arm’s Length for the Purposes of s 136AD(1)(b) – 1993 to 1995
Evidence of negotiations relating to the price of Market Tonnage for 1993 to 1995
Conclusion as to evidence of negotiations and bribes
Was the Consideration Received by Alcoa in respect of the Supply Less than Arm’s Length Consideration in 1993 to 1995 – s 136AD(1)(c)?
Contentions of the Commissioner
The transaction for the supply of alumina from 1993 to 1995
Conclusion as to s 136AD(1) for 1993 to 1995
FINDINGS FOR YEARS 1997 to 2001 – application of the law to the facts
The Agreement by which Property is Supplied under s 136AD(1)(a) – 1997 to 2001
Dealing at Arm’s Length for the Purposes of s 136AD(1)(b) in 1997 to 2001
Evidence of negotiations relating to the price of Market Tonnage from 1997 to 2001
Was the Consideration Received by Alcoa in respect of the Supply Less than Arm’s Length Consideration in 1997 to 2001 – s 136AD(1)(c)?
The transaction for the supply of alumina for 1997 to 2001
A comparison of prices
Conclusion as to s 136AD(1) for 1997 to 2001
FINDINGS FOR YEARS 2002 to 2009 – application of the law to the facts
The Agreement by which Property is Supplied under s 136AD(1)(a) – 2002 to 2009
Dealing at Arm’s Length for the Purposes of s 136AD(1)(b) – 2002 to 2009
Evidence of negotiations relating to the price of alumina from 2002
Conclusion as to negotiations and bribery from 2002 to 2009
Was the Consideration Received by Alcoa in Respect of the Supply Less Than Arm’s Length Consideration in 2002 to 2009 – s 136AD(1)(c)?
Conclusion as to s 136AD(1) for 2002 to 2009
DECISION
Annexure A – GLOSSARY
Annexure B – ACTUAL CONSIDERATION & DETERMINED CONSIDERATION
Statement of Reasons
Deputy President G Lazanas
Deputy President P Britten-Jones
Senior Member R OldingINTRODUCTION
This case concerns whether the Commissioner of Taxation was entitled to apply the transfer pricing provisions in the former Division 13[1] of the Income Tax Assessment Act1936 (Cth) (ITAA 1936) to certain sales of smelter grade alumina (alumina) by the applicant (Alcoa).[2] Alcoa claimed that the transfer pricing provisions did not apply and that the Commissioner’s assessments were excessive.
[1] Subsequent references to Division 13 and its provisions are to the former Division 13 of the ITAA 1936.
[2] Although Alcoa exercised its right to a private hearing, senior counsel for Alcoa accepted that it would not be practicable for the Tribunal to seek to anonymise these reasons. Accordingly, contrary to the usual course when a taxpayer requests a private hearing, the Tribunal has not allocated a pseudonym for the applicant or otherwise modified its description of the evidence in these reasons.
In the periods before the Tribunal[3] for review, Alcoa sold alumina that was shipped directly from its Australian refinery to a smelter in Bahrain operated by Aluminium Bahrain B.S.C (Alba). Some of the alumina for some of the periods was invoiced to Alba. However, Alcoa also issued invoices for the alumina to a company (the Dahdaleh Entity, collectively, the Dahdaleh Entities) associated with an intermediary, Mr Victor Philip Dahdaleh (Mr Dahdaleh). The Dahdaleh Entity in turn invoiced Alba at marked-up prices.
[3] Since the filing at the Administrative Appeals Tribunal (AAT) of the applications for review and the hearing, the Administrative Review Tribunal (Tribunal) has been established by the Administrative Review Tribunal Act 2024 (Cth). Broadly, transitional provisions under the Administrative Review Tribunal (Consequential and Transitional Provisions No. 1) Act 2024 (Cth) provide that unfinalised proceedings in the AAT must be continued and finalised by the Tribunal in a manner that is efficient and fair. No practical issue arises from the AAT being replaced by the Tribunal.
Alcoa had no association by way of shareholdings or common directorships with Alba or the Dahdaleh Entity. The Commissioner accepts they were arm’s length parties. However, the Commissioner maintains that Alcoa and the Dahdaleh Entity were not dealing at arm’s length. The Commissioner says that conclusion emerges from bribery and corruption arrangements that were the subject of proceedings brought in the United States. These included allegations of corrupt payments by Mr Dahdaleh to Alba executives and Bahraini officials.
Ultimately, the resolution of the dispute turns on two main issues arising under s 136AD of the ITAA 1936, namely, whether Alcoa was dealing at arm’s length with the Dahdaleh Entity and whether Alcoa received less than arm’s length consideration for the supplies it made to the Dahdaleh Entity.
There are some curious and interesting features of the case which it is necessary for us to set out upfront.
First, the Commissioner says the purpose of Alcoa selling the alumina through the Dahdaleh Entity was to set lower than commercial prices for the alumina to facilitate payment of the bribes. In other words, based on the arm’s length consideration he determined, the Commissioner’s case is that Alcoa colluded to reduce the consideration it otherwise would have received over the period by some USD420M. There is no allegation that Alcoa or any entity or person associated with the Alcoa group received any side payment or any other commercial benefit from the arrangements. No explanation for such uncommercial conduct, other than facilitating the bribes, is suggested by the Commissioner.
Secondly, for some of the earlier periods under review, Alcoa also transacted with and invoiced Alba directly for alumina. There is substantial evidence suggesting the combined amounts – that is, the total of the amounts invoiced to Alba and the amounts invoiced to the Dahdaleh Entities – were arrived at following genuine negotiations between the representatives of Alcoa and Alba. Alcoa maintains, once the prices achieved are considered together, namely, for the direct and indirect sales, the total amounts received by Alcoa represent arm’s length consideration. However, the Commissioner says whether the prices invoiced to the Dahdaleh Entities are arm’s length prices must be determined without regard to the amounts received for alumina invoiced directly to Alba. The Commissioner maintained this stance even though the alumina was intermingled and shipped in the same vessel directly to Alba’s refinery. Moreover, there was no suggestion that the Dahdaleh Entities sourced the alumina from any other entity other than Alcoa nor sold the alumina to any entity other than Alba.
Thirdly, for some of the periods under review, the Commissioner assessed Alcoa on the basis of arm’s length consideration he determined which is significantly higher than the range of the arm’s length consideration assessed by one or both of the Commissioner’s own expert witnesses. Indeed, for some of the income years, the actual prices achieved by Alcoa were higher than the arm’s length consideration determined by one of the Commissioner’s experts. Nevertheless, the Commissioner did not concede the assessments for those years were excessive and persisted with his position.
Fourthly, we are not aware of, and the Commissioner did not cite, any other tribunal or court decision which accepted that the transfer pricing provisions had been applied correctly where, as in this case, there is no allegation of profit shifting within the relevant corporate group.
Fifthly, because of the absence of profit shifting within the Alcoa group, the consequence of the Commissioner’s assessments is that Alcoa has been assessed to tax on a substantial amount – AUD643,982,008 – which has not been received or otherwise derived by Alcoa or any Alcoa group entity.
Sixthly, as referred to above, there were criminal proceedings brought by the US Department of Justice against Alcoa’s related company, Alcoa World Alumina LLC (AWA), in the United States District Court. Relevantly, AWA agreed a Statement of Facts[4] and entered a plea agreement[5] in January 2014 by which it pleaded guilty to one count of violating the anti-bribery provisions of the Foreign Corrupt Practices Act 1977 (USA). There were also administrative proceedings before the US Securities and Exchange Commission (SEC) in which Alcoa’s parent company, Alcoa Inc, made an offer to settle (Alcoa Inc’s Offer of Settlement)[6] and consented to findings to be made by the SEC (SEC Findings).[7] Additionally, AWA settled civil proceedings Alba instituted in the United States seeking to recover what it claimed were overpayments it made in respect of alumina supplied to it by the Dahdaleh Entities. Without admission of liability, AWA agreed to pay Alba USD85 million in settlement of the claim. The Commissioner relied on the admissions made by AWA and Alcoa Inc in the criminal and administrative proceedings (collectively, US proceedings), including that Alcoa knew or consciously disregarded that Mr Dahdaleh was inserted into the Alba supply chain and imposed a markup on sales of alumina by Dahdaleh Entities to Alba, and used the markup from those sales to enrich himself and pay bribes to senior Bahraini government officials.
[4] AB0689, pp 3067 - 3080, [20].
[5] AB0689.
[6] AB0692.
[7] AB0693.
The case also gave rise to some controversies regarding the construction and application of Division 13. There are significant differences regarding the approach to the construction of the key operative provisions. Additionally, and contrary to both the Explanatory Memorandum regarding the introduction of Division 13[8] and his own public ruling on transfer pricing,[9] the Commissioner maintains that, once it is established that the three key statutory integers for the application of Division 13 are satisfied, there is no overarching discretion as to whether Division 13 should be applied in the particular circumstances of the case.
[8] Explanatory Memorandum to the Income Tax Assessment Amendment Bill 1982 (Cth).
[9] Australian Taxation Office, Income tax: application of Division 13 of Part III (international profit shifting) - some basic concepts underlying the operation of Division 13 and some circumstances in which section 136AD will be applied (TR 94/14, 14 December 2011), [114] - [117].
As these reasons explain, we were not persuaded that, for the purposes of Division 13, the parties to the relevant international agreements were dealing at arm’s length with each other in relation to the supplies of alumina. On the other hand, we have decided the consideration received by Alcoa for the supplies made under the relevant international agreements was not less than the arm’s length consideration for the supplies of alumina. In the circumstances, it was unnecessary for us to decide the issue of whether there is an overarching discretion as to whether Division 13 should be applied. It follows that Alcoa discharged the burden of proving that the assessments issued to it were excessive and what was its taxable income for each of the income years.
GLOSSARY, APPLICATION BOOK AND OTHER DOCUMENTS
For ease of reference, we have included, as Annexure A to these reasons, a glossary of terms and dramatis personae used in these reasons.
All references to documents in this decision are to the document number and page numbers (where appropriate), unless stated otherwise, of the Application Book (AB) filed by Alcoa. This was in both hard copy and electronic format comprising over 30,000 pages. The AB included the reviewable objection decisions, certain T-Documents, the respective Statements of Facts, Issues and Contentions of the parties,[10] as well as the voluminous evidence filed on behalf of each of the parties to which we will come shortly. Alcoa’s Statement of Facts, Issues and Contentions attached a ‘Statement of Facts’[11] which canvassed the various supply arrangements between Alcoa, Alba and the Dahdaleh Entities, as well as a large number of written communications in chronological order.
[10] AB0051; AB0052.
[11] AB0054.
The Commissioner filed additional documents in both hard copy and electronic format referred to as the ‘Supplementary Application Book’. These included further T-Documents, the formal notices and requests for information issued by the Commissioner as well as Alcoa’s responses. Helpfully, these materials continued the numbering system in the AB so that, in total, there were 56 hard copy volumes of materials, totalling in excess of 33,000 pages before us at the hearing which took place over four weeks.
There were 18 additional documents that were relied on by the parties and which were marked as numbered exhibits at the hearing. Separately, the parties filed comprehensive written opening and closing submissions.
It is convenient to first set out the decisions under review, followed by the issues for determination and the relevant statutory provisions and principles. We then turn to the evidence of the parties and deal with this at some length noting that the experts adopted differing approaches. Alcoa also relied on one lay witness.
THE DECISIONS UNDER REVIEW
The applications before the Tribunal seek review of the Commissioner’s objection decision dated 1 April 2022 which disallowed Alcoa’s objections against assessments for the 1993 to 2009 income years, excluding 1996 in which Alcoa sold no alumina to the Dahdaleh Entities (collectively, the Relevant Years or Relevant Period).[12]
[12] For taxation purposes, Alcoa had a substituted accounting period. When we refer to an income year or a Relevant Year or Relevant Years, we mean the substituted accounting period ending on 31 December. For example, a reference to the 1993 income year means the substituted accounting period ending 31 December 1993. For ease of reference, we sometimes refer to the calendar years.
For each Relevant Year, the Commissioner made a determination under s 136AD(1) of the ITAA 1936 to the effect that the consideration for Alcoa’s supplies to the Dahdaleh Entities is taken to be the amounts set out in an appendix to the determination. The determinations adjusted the consideration from the actual consideration to the amounts[13] set out in Annexure B to these reasons.
[13] Exhibit 18.
The assessments issued to give effect to these determinations resulted in an aggregate adjustment to Alcoa’s taxable income across the Relevant Years of AUD643,982,008 and an aggregate adjustment to tax payable resulting in a tax shortfall of AUD213,613,594 as set out in the Tax Adjustment Table below:[14]
[14] Exhibit 1.
Income Year Pre-audit Alcoa Taxable Income
AUD
Adjustment
AUD
Post-audit Taxable Income
AUD
Total Tax Shortfall
AUD
1993 548,073,073 4,076,050 552,149,123 1,345,096.50 1994 379,022,900 32,199,273 411,222,173 10,625,760.09 1995 415,892,947 72,195,164 488,088,111 25,990,259.04 1996 513,010,354 - 513,010,354 - 1997 572,066,931 67,779,020 639,845,951 24,400,447.20 1998 566,603,915 58,068,109 624,672,024 20,904,519.24 1999 615,817,354 70,277,332 686,094,686 25,299,839.52 2000 1,242,419,591 80,788,867 1,323,208,458 27,468,214.78 2001 1,264,139,081 89,718,584 1,353,857,665 26,915,575.20 2002 934,499,407 35,589,270 970,088,677 10,676,781.00 2003 881,935,921 44,788,252 926,724,173 13,436,475.60 2004 990,215,627 62,838,689 1,053,054,316 18,851,606.70 2005 1,069,167,752 3,323,172 1,072,490,924 996,951.60 2006 2,099,769,524 7,412,698 2,107,182,222 2,223,809.40 2007 1,562,997,339 3,619,686 1,566,617,025 1,085,905.80 2008 1,474,945,063 7,489,271 1,482,434,334 2,246,781.30 2009 351,216,269 3,818,571 355,034,840 1,145,571.30 TOTALS: 15,481,793,048 643,982,008 16,125,775,056 213,613,594 THE ISSUES FOR DETERMINATION
There are three key issues for determination in these proceedings:
Issue 1 - what are the “international agreements” under which property was supplied by Alcoa in each Relevant Year and what was the relevant supply of property (s 136AD(1)(a))?;
Issue 2 – for the supplies in each Relevant Year, were the parties to the international agreement not dealing at arm’s length with each other in relation to the supply of alumina in each Relevant Year (s 136AD(1(b))? Since, as discussed below, Alcoa bears the burden of proof, this effectively requires the Tribunal to determine whether Alcoa has proved the parties were dealing at arm’s length.
Issue 3 – for the supplies in each Relevant Year, was the consideration received by Alcoa in respect of the relevant supply less than the arm’s length consideration (s 136AD(1)(c)), being the consideration that might reasonably be expected to have been received or receivable as consideration in respect of the supply if it had been supplied under an agreement between independent parties dealing at arm’s length with each other in relation to the supply (s 136AA(3)(c))? This requires the Tribunal to determine whether Alcoa has proved that the consideration received for the relevant supplies is not less than what might reasonably be expected to have been received in an arm’s length dealing between independent parties.
It is appropriate, based on the agreements and relationships over the Relevant Period (to which we will return in greater detail), to consider the above issues with respect to three separate periods, as follows:
Calendar years 1993 to 1995 - During the period 1993 to 1995, Alcoa was supplying alumina under a contract between Alcoa and Alba known as the 1990 Supply Agreement[15] which provided for pricing of annual quantities of alumina:
· up to and including 600,000 metric tonnes per year (described as Formula Tonnage and invoiced to Alba); and
· in excess of 600,000 metric tonnes per year (described as Market Tonnage and invoiced to a Dahdaleh Entity).
Calendar years 1997 to 2001 - During the period 1997 to 2001, Alcoa was supplying alumina to Alba by way of:
· Formula Tonnage directly by invoice to Alba pursuant to the 1990 Supply Agreement (as amended);[16] and
· Market Tonnage indirectly by invoice to a Dahdaleh Entity under a contract between Alcoa and Alumet Ltd known as the 1996 Alumet Supply Agreement.[17]
Calendar years 2002 to 2009 - During the period 2002 to 2009, Alcoa was supplying all of Alba’s requirements of alumina to a Dahdaleh Entity pursuant to two distribution agreements executed in 2002 and 2005 respectively.[18]
RELEVANT STATUTORY PROVISIONS AND PRINCIPLES
[15] AB0898.
[16] AB0900.
[17] AB0903.
[18] AB0905 and AB0906.
Operative Provision – s 136AD(1)
The key operative provision in Division 13 is s 136AD(1) which states, as follows:
Section 136AD Arm's length consideration deemed to be received or given
(1) Where:
(a)a taxpayer has supplied property under an international agreement;
(b)the Commissioner, having regard to any connection between any 2 or more of the parties to the agreement or to any other relevant circumstances, is satisfied that the parties to the agreement, or any 2 or more of those parties, were not dealing at arm's length with each other in relation to the supply;
(c)consideration was received or receivable by the taxpayer in respect of the supply but the amount of that consideration was less than the arm's length consideration in respect of the supply; and
(d)the Commissioner determines that this subsection should apply in relation to the taxpayer in relation to the supply;
then, for all purposes of the application of this Act in relation to the taxpayer, consideration equal to the arm's length consideration in respect of the supply shall be deemed to be the consideration received or receivable by the taxpayer in respect of the supply.
There are fundamental differences in the approaches of the parties to the construction of this section which we address below. First, though, we set out the statutory definitions relevant to the elements of s 136AD(1).
Supply of property under international agreement – s 136AD(1)(a)
The first element requires that a taxpayer has ‘supplied property under an international agreement’: s 136AD(1)(a).
The expression ‘international agreement’ is defined in s 136AC which states:
Section 136AC International agreements
For the purposes of this Division, an agreement is an international agreement if:
(a) a non-resident supplied or acquired property under the agreement otherwise than in connection with a business carried on in Australia by the non-resident at or through a permanent establishment of the non-resident in Australia; or
(b) a resident carrying on a business outside Australia supplied or acquired property under the agreement, being property supplied or acquired in connection with that business; or
(c) a taxpayer:
(i) supplied or acquired property under the agreement in connection with a business; and
(ii) carries on that business in an area covered by an international tax sharing treaty.
‘Agreement’ is defined in s 136AA(1), unless the contrary intention appears, in the following terms:
agreement means any agreement, arrangement, transaction, understanding or scheme, whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings.
The expression ‘supply’ is defined inclusively in s 136AA(1), as follows:
supply includes:
(a) supply by way of sale, exchange, lease, hire or hire-purchase; and
(b) provide, grant or confer;
Under s 136AA(3), unless the contrary intention appears:
a reference to the supply … of property includes a reference to agreeing to supply property’ (s 136AA(3)(a)).
It is uncontroversial that alumina is ‘property’ for the purposes of s 136AD(1)(a). The parties also agreed that Alcoa, to the extent it supplied alumina to the Dahdaleh Entities, did so under an ‘international agreement’ as defined. However, there was a dispute regarding identification of the relevant supplies and which particular international agreements are relevant.
Not dealing at arm’s length in relation to the supply – s 136AD(1)(b)
The second element under s 136AD(1) is that the Commissioner is satisfied that parties to the agreement are not dealing with each other at arm’s length in relation to the supply:
s 136AD(1)(b).In determining whether to be so satisfied, the Commissioner must have regard to:
any connection between any 2 or more of the parties to the agreement or to any other relevant circumstances.
The disjunctive ‘or’ indicates either any relevant connection or any other relevant circumstances may be sufficient to establish the state of satisfaction required by s 136AD(1)(b).
Consideration received was less than arm’s length consideration – s 136AD(1)(c)
The third element of s 136AD(1) requires that the amount of consideration received by the taxpayer was less than the arm’s length consideration in respect of the supply: s 136AD(1)(c).
Under s 136AA(3)(c), unless the contrary intention appears, a reference to the arm’s length consideration in respect of a supply of property is a reference to:
the consideration that might reasonably be expected to have been received or receivable as consideration in respect of the supply if the property had been supplied under an agreement between independent parties dealing at arm’s length with each other in relation to the supply.
(Emphasis added.)
Thus, s 136AD(1)(c) requires consideration of whether the actual consideration received was less than the consideration that might reasonably be expected to have been received or receivable under an agreement between independent parties dealing at arm’s length in relation to the relevant supply.
Commissioner determines subsection should apply – s 136AD(1)(d)
The fourth element of s 136AD(1) is that the Commissioner determines that subsection 136AD(1) should apply in relation to the taxpayer in relation to the supply: s 136AD(1)(d).
However, s 136AD(4) relevantly states:
For the purposes of this section, where, for any reason (including an insufficiency of information available to the Commissioner), it is not possible or not practicable for the Commissioner to ascertain the arm's length consideration in respect of the supply …, the arm's length consideration in respect of the supply … shall be deemed to be such amount as the Commissioner determines.
The Commissioner applied s 136AD(4) to determine the arm’s length consideration for Alcoa’s supplies of alumina invoiced to the Dahdaleh Entities in the Relevant Years.
Commissioner’s determination and application of s 136AD(1)
If the three elements in ss 136AD(1)(a), (b) and (c) are satisfied and the Commissioner determines, under s 136AD(1)(d), “that this subsection should apply", s 136AD(1) operates to deem the arm’s length consideration determined by the Commissioner as the consideration for the supply, rather than the actual consideration received.
As set out in the Tax Adjustment Table earlier in these reasons, the Commissioner made a determination under s 136AD(1)(d) in respect of each Relevant Year, such that the consideration the Commissioner determined to be the arm’s length consideration in respect of the supply was deemed to be the consideration received for Alcoa’s supplies to the Dahdaleh Entities. Having made those determinations, the Commissioner issued amended assessments, increasing Alcoa’s assessable income in accordance with the determined amounts of consideration. Those amended assessments are the subject of the decisions under review.
For the 1993 to 1995 and 1997 to 2001 periods, the Commissioner’s determinations of arm’s length consideration and corresponding adjustments relate only to the supplies of alumina Alcoa invoiced to the Dahdaleh Entities. During those periods, Alcoa also made direct sales of alumina to Alba, however the Commissioner has not sought to adjust those amounts invoiced to Alba.
The Commissioner says the relevant supplies for those periods are the supplies of alumina to the Dahdaleh Entities and that the subject of the inquiry under s 136AD(1) must be whether those invoiced prices are arm’s length prices. Further, the Commissioner says the determination of the arm’s length consideration for the Market Tonnage alumina invoiced to the Dahdaleh Entities must occur without reference to the Formula Tonnage alumina invoiced by Alcoa to Alba.
Alcoa maintained that the relevant supplies to be considered are the entirety of the alumina delivered to Alba, including the alumina supplied to the Dahdaleh Entities – that is, supplies of both Formula Tonnage and the Market Tonnage. Alternatively, Alcoa says consideration of whether the prices for the Market Tonnage are at arm’s length consideration must account for the context of higher prices charged by Alcoa to Alba for the Formula Tonnage.
In the period 2002 to 2009, all of the supplies of alumina delivered to Alba were invoiced to the Dahdaleh Entities under the Distribution Agreements entered into between Alcoa and the Dahdaleh Entities. The Commissioner’s determinations deemed an arm’s length consideration for all of the supplies in this period, being all (indirect) supplies to Alba via the Dahdaleh Entities.
Burden of Proof
Under s 14ZZK of the Taxation Administration Act 1953 (Cth) (TAA 1953), the taxpayer in an application for review of a taxation decision relating to an assessment has the burden of proving the assessment is excessive. Unless the Commissioner confines the issues in dispute, this requires the taxpayer to also prove the amount of their taxable income.
In this case, the Commissioner has confined the issue in dispute to the application of Division 13 to Alcoa’s sales of alumina invoiced to the Dahdaleh Entities. Accordingly, Alcoa will succeed if it proves any of the elements for the application of Division 13 to those sales are not satisfied. This is because each and all of the elements of s 136AD(1) must be met for the application of Division 13 in this case.
One aspect of the burden of proof warrants particular mention. As noted above, s 136AD(1)(b) applies where the Commissioner is “satisfied” parties to a supply were not dealing at arm’s length in relation to the supply. Because of the burden of proof borne by Alcoa, the Commissioner says that to succeed on the basis that s 136AD(1)(b) is not satisfied, Alcoa must positively prove that the parties to the relevant supplies were dealing with each other at arm’s length in relation to the supplies.
Alcoa maintains this is erroneous and that the correct approach is for the Tribunal to determine whether it has reached the state of satisfaction stipulated in s 136AD(1)(b). In that regard, Alcoa relied on observations by Hill J at first instance and approved on appeal in Copperart Pty Ltd v Commissioner of Taxation[19] which concerned provisions in the former sales tax law. Those provisions analogously provided for adjustment of the sale value for sales of goods where the Commissioner was “satisfied” the parties were not dealing at arm’s length. His Honour stated: [20]
At all times it is true the onus of proof will lie upon the taxpayer to show the excessiveness of the assessment. But in conducting a review of the Commissioner's assessment, the Tribunal is required to put itself in the same position as the Commissioner and to determine whether or not the Tribunal has reached the necessary satisfaction. Whether it does will no doubt depend upon the facts adduced in evidence. To the extent to which the exercise of discretion may operate in favour of the taxpayer, the failure to prove facts that might be relevant to the exercise of that discretion will result in the taxpayer losing. No doubt if the Tribunal, in exercising its discretion, does not reach the relevant satisfaction, in a matter at least where the exercise of the relevant discretion will favour the taxpayer, the taxpayer will also lose. The discretions exercisable under s.4(2) or s.4A(5) are somewhat different. They are in essence discretions adverse to the taxpayer, not discretions favourable to him. The state of satisfaction to which each section refers is a condition precedent to the alteration of sale value and ultimate increase in a taxpayer's liability. The Tribunal must consider all the facts before it and, if it reaches the relevant state of satisfaction, will itself determine to alter the sale value, that is to say, the taxpayer will lose and the Commissioner will succeed. It is not for the taxpayer first to show some error by the Commissioner in the exercise of the discretion before the Tribunal commences itself to exercise that discretion afresh.
(Emphasis added.)
[19] (1993) 26 ATR 327.
[20] (1993) 26 ATR 327, 345.
Although the decision of Hill J was overturned on appeal to the Full Federal Court, Alcoa submitted that the Full Court expressed agreement with these observations.[21] However, the Full Court’s endorsement of Hill J’s observations is limited to the statement that discharge of the burden of proof does not require the taxpayer to first show some error before exercising the discretion afresh.[22] That is, of course, consistent with the role the Tribunal must pursue, being the objective of providing an independent mechanism of review rather than conducting judicial review. However, there remains the question of whether the taxpayer bears the burden of proving the Tribunal should not reach the requisite state of satisfaction.
[21] Applicant’s Closing Submissions, [279], footnote 677.
[22] Copperart Pty Ltd v Commissioner of Taxation (1994) 50 FCR 345, per Davies J at 352, Gummow and French JJ agreeing. Hill J at first instance and the Full Court referenced the exercise of a ‘discretion’ rather than achievement of the requisite state of satisfaction.
In our view, to approach the matter on the footing that the taxpayer must succeed unless the Tribunal is satisfied the parties were not dealing at arm’s length would be to reverse the statutory burden of proof cast upon taxpayers by s 14ZZK of the TAA 1953. Rather, Alcoa must prove the conditions for the making of a determination – including satisfaction that the parties were not dealing at arm’s length – are not satisfied.
That approach is consistent with the reasoning of the Full Federal Court in Binetter v Commissioner of Taxation.[23] The Binetter case concerned a provision permitting the Commissioner to issue an amended assessment at any time, unconstrained by the usual period of review time limits, where the Commissioner “is of the opinion that there has been fraud or evasion”’. Perram and Davies JJ (with whom Siopis J agreed) stated:[24]
In cases where the amendment power depends on the formation of an opinion by the Commissioner of fraud or evasion, the difference between merits review by the Tribunal and an appeal to the Court is that the Tribunal re-considers whether, on the evidence before it, there was an avoidance of tax due to fraud or evasion, whereas the Court will only interfere with the Commissioner’s exercise of the amendment power if the Commissioner did not form the requisite opinion or the Commissioner’s opinion that there was fraud or evasion is vitiated by some error of law . . . Although the Tribunal re-examines whether, on the evidence before it, there was an avoidance of tax due to fraud or evasion, and is able to substitute its opinion for that of the Commissioner, the issue for the Tribunal is whether the taxpayer has discharged the onus of showing that the opinion that there was fraud or evasion should not have been formed, and therefore, that the statutory condition for the power to amend is not satisfied. Unless the taxpayer discharges that onus, the assessments are not shown to be excessive . . .
(Emphasis added.)
[23] (2016) 249 FCR 534.
[24] (2016) 249 FCR 534, [93].
Perram and Davies JJ also referred to the decision of Millar v Federal Commissioner of Taxation[25] and stated “[i]n Millar Griffiths J correctly held that on a merits review before the Tribunal, the onus of proof imposed by s 14ZZK places on the taxpayer the burden of disproving fraud or evasion.”[26]
[25] (2015) 101 ATR 827.
[26] (2016) 249 FCR 534, [93].
In the current context, the Commissioner in the decisions under review was satisfied that the parties were not dealing at arm’s length. Applying the reasoning of the Full Court in Binetter means that, to succeed in showing the statutory condition in s 136AD(1)(b) does not apply, Alcoa must establish that the Commissioner’s opinion that the parties were not dealing at arm’s length should not have been formed. In other words, the issue for the Tribunal on review is whether the taxpayer, Alcoa, has discharged the onus of establishing that the Commissioner should not have been satisfied that the parties were not dealing at arm’s length. It is not for the Commissioner to prove the requisite satisfaction should have been formed. If Alcoa persuades the Tribunal on the evidence before it that the parties were dealing at arm’s length, then Alcoa will have discharged its onus and will succeed.
Alcoa could, of course, succeed by proving that the consideration it received was not less than arm’s length consideration under s 136AD(1)(c). If so, it would prove that the Commissioner’s assessments were excessive to the extent the Commissioner’s determined consideration exceeds the arm’s length consideration.
During the final day of the hearing of the applications for review, the Tribunal raised with the Commissioner’s senior counsel one of the features identified in our introductory remarks above, namely, that the amounts determined by the Commissioner to be the consideration for the sales were higher than his own expert’s assessment of the arm’s length price for the sales in some of the income years under review. That evidence, if accepted, would seem to indicate the assessments for those years were excessive at least to the extent that the Commissioner’s determined prices exceeded the arm’s length consideration determined by the Commissioner’s expert.
Nevertheless, the Commissioner maintained that all the objection decisions should be affirmed. The Commissioner contended that an applicant could not discharge the burden of proving an assessment is excessive by relying on evidence adduced by the Commissioner, rather than proving excessiveness with evidence the applicant adduced, unless the applicant formally relied upon the Commissioner’s evidence. Underlying the concern seemed to be a notion that the applicant’s burden of proof could only be discharged by the applicant adducing its own evidence or formally relying on the Commissioner’s evidence.
We do not share this concern. Under s 52 of the Administrative Review Tribunal Act 2024 (Cth), “the Tribunal is not bound by the rules of evidence, but may inform itself on any matter in such manner as it considers appropriate”. Accordingly, we see no barrier to the Tribunal treating the Commissioner’s expert evidence, if accepted, as supporting a conclusion that Alcoa has to that extent discharged the burden of proving the assessments are excessive. In any case, Alcoa’s submission that the assessments are at least excessive to the extent that the Commissioner’s determined prices exceed his expert’s assessment of arm’s length prices effectively adopted the Commissioner’s evidence in that regard.
Interpretation and Application of s 136AD(1)
The objects of Division 13
Division 13 does not contain an objects provision. Both parties relied on the Explanatory Memorandum to the Income Tax Assessment Amendment Bill 1982 (Cth) (EM) which introduced Division 13 to identify the objects of the Division. That, however, is where their common ground ended.
Alcoa says the Commissioner’s determination, in circumstances where there is no profit shifting between members of the same corporate group, is “fundamentally at odds with [Division 13’s] object and intended operation”[27] which it says is as per the following comment in the EM:[28]
to counter arrangements that result in avoidance of Australian tax through what are commonly referred to as “transfer pricing” or “profit shifting” arrangements.
[27] Applicant’s Closing Submissions, [4].
[28] EM, p 2.
However, the Commissioner says Alcoa’s submission:[29]
… misunderstands the nature of “transfer pricing” which does not require (as [Alcoa] seems to suggest) that profit be shifted to a related company within a corporate group. The concept of “transfer pricing” is instead directed to situations where profits have been shifted overseas, in circumstances where that profit ought to have been taxable in Australia. This is made clear by the Explanatory Memorandum which relevantly stated (emphasis added):
It is not the intention of the proposed Division that it should apply to purely domestic transactions, where both the supply and the acquisition sides of a transaction affect Australian tax. For the division to apply, there will need to be an international element, that is, a situation where, broadly, transfer pricing arrangements result in shifting overseas of profits that would otherwise have been taxed in Australia.
[29] Respondent’s Supplementary Closing Submissions, [3].
As noted, the Commissioner emphasised the final words in this quote referring to the shifting overseas of profits that would otherwise have been taxed in Australia. The Commissioner did not draw attention to the immediately preceding statement that the Division is to apply where there are ‘transfer pricing arrangements’. The difficulty with the Commissioner’s submission in this regard is that, contrary to the Commissioner’s statement, ‘transfer pricing’ does ordinarily refer to arrangements involving the shifting of profits within a corporate group. That is how the expression is defined in various dictionaries and commentaries[30] and, indeed, on the Commissioner’s own website.[31]
[30] For example, Macquarie Dictionary Online definition of ‘transfer pricing’; Australian Tax Handbook, online edition, [37 010].
[31] Australian Taxation Office, Transfer pricing, (Web Page, 15 July 2020) <>
Nevertheless, it is clear from its terms, and confirmed in other statements in the EM, that it is not a condition of the application of s 136AD(1) that the supplier and recipient of a relevant supply must be group members or otherwise commonly controlled. The EM expressly states that Division 13 ‘does not depend on basic tests of control or share ownership’.[32] The issue is addressed in more detail in the EM with the statement that:
there can be cases where formally unrelated parties to an agreement do not deal with one another on an arm’s length basis, viewed simply in relation to a particular supply or acquisition of property. This could be the case where the particular transaction which reduces a taxpayer’s Australian income is offset by benefits under another seemingly unrelated agreement, which may accrue abroad, and perhaps to an associate of the taxpayer.[33]
[32] EM, p 3.
[33] EM, p 66.
One such possibility is postulated where the EM states that:[34]
two completely independent parties may well find it in their mutual interests to arrange matters within Australia so as to reduce tax payable here by one of the parties, and, for example, to split the tax avoided by some offsetting deal abroad.
[34] EM, p 3.
Although these observations provide context for the construction of s 136AD, our task is to construe the legislation, not the EM. Additionally, they are expressed at such a level of generality that they are of limited benefit in determining whether Division 13 was intended to apply in a case such as this where the supplier and recipient are unrelated and there is no suggestion of splitting of tax savings, as postulated in the example in the EM referenced above, nor evidence of any other identified benefit to the taxpayer.
Contentions of the parties as to the construction of s 136AD(1)
The parties’ submissions approach s 136AD(1) in fundamentally different ways.
Alcoa says the decision-maker is required to:
(a)identify the relevant supply under an international agreement (s 136AD(1)(a)) - which it says is the total volume of alumina supplied by Alcoa under each international agreement which in turn is not necessarily limited to a single agreement and under the broad definition of ‘agreement’ in s 136AA(1) could, for example, in respect of the 1997 to 2001 periods, include Alcoa’s supply agreements with Alba and distribution agreements with the Dahdaleh Entities);
(b)determine whether the parties were dealing at arm’s length in relation to the supplies so identified (s 136AD(1)(b)); and
(c)determine whether the consideration received for those supplies was less than arm’s length consideration (s 136AD(1)(c)),
Further, if each of the above three requirements is satisfied, the decision-maker has to decide, as a matter of discretion under s 136AD(1)(d), whether to make a determination that s 136AD(1) is to apply in relation to the identified supplies.
Under Alcoa’s approach, the relevant supply is first identified under s 136AD(1)(a) and then that supply is tested against the requirements of s 136AD(1)(b) and (c).
The Commissioner, on the other hand, said in oral closing submissions that the term ‘supply’ takes a different meaning in ss 136AD(1)(a), (b) and (c):[35]
Paragraphs (a), (b) and (c) of subsection (1) specify a cascading sequence of requirements which must be satisfied in order for the section to apply to a supply. They have the consequence that the meaning of the expression “the supply” is not fixed, but changes as one progresses through the provisions of paragraphs (a), (b), (c) and (d).
[35] Transcript, p 1185.
According to the Commissioner, the first requirement – contained in s 136AD(1)(a) – serves to immediately narrow the scope of supplies to supplies under an international agreement. However, in applying s 136AD(1)(a), one does not start by testing whether Alcoa’s sales to Alba or the Dahdaleh Entities involve property supplied under an international agreement. Rather, the contention is that s 136AD(1)(a) is expressed in general terms that encompass all of Alba’s sales under international agreements whether to Alba or any of its other non-resident alumina customers. Then the concept of supply progressively narrows as paragraphs (b) and (c) are applied.
Thus, the Commissioner says, application of paragraph (b) will further narrow the range of supplies to which s 136AD(1) may apply to those where the decision-maker is satisfied the parties are not dealing with each other at arm’s length in relation to the supply. Paragraph (c) further narrows the class of supplies to which s 136AD(1) may apply by eliminating those for which the consideration is not less than the arm’s length consideration.
Referring to the supplies of Formula Tonnage to Alba, the Commissioner then submits that:[36]
There was no contention by either party that the supplies to Alba were not made at arm’s length, and there are no contentions that the supplies direct to Alba were not made for arm’s length consideration. As a consequence, those two matters take them right out of the potential operation of Division 13.
[36] Transcript, p 1191.
Importantly, on the premise that the direct supplies of Formula Tonnage to Alba are taken outside the potential operation of Division 13, the Commissioner goes on to submit that ‘they are not relevant to the determination of arm’s length consideration pursuant to paragraph (c).[37]
[37] Transcript, p 1191.
Tribunal’s construction of s 136AD(1)
In our view, the natural reading of s 136AD(1) is that the expression ‘in relation to the supply’ in paragraph (b) must refer to the supply of property referenced immediately above in paragraph (a) and the expressions ‘in respect of the supply’ and ‘in relation to the supply’ in paragraphs (c) and (d) respectively must refer to the same supply.[38]
[38] Underlining added.
Support for our view is found in R v Jacobs Group (Australia) Pty Ltd:[39]
... a construction of a provision that it is consistent with the language and purpose of all the provisions of the statute is ordinarily one in which the same meaning is given to the 'same words appearing in different parts of a statute'. At the least, it is accepted that there needs to be a reason not to give the same words in the same statute the same meaning.
[39] (2023) 411 ALR 202, [25] (Kiefel CJ, Gageler, Gordon, Steward, Gleeson and Jagot JJ).
We are unable to identify any reason for not giving ‘supply’ the same meaning in the different paragraphs of s 136AD(1).
However, it does not follow that Alcoa’s submission that the relevant supplies are both the direct and indirect supplies to Alba must be accepted. That will depend on a careful analysis of the relevant agreements and transactions which we address below.
Further, even if the Commissioner is correct in identifying the relevant (ultimate) supplies as being those limited to the Market Tonnage alumina invoiced to the Dahdaleh Entities, it does not follow that the prices Alcoa received for direct supplies of Formula Tonnage to Alba are necessarily irrelevant to whether the consideration received for Market Tonnage invoiced to the Dahdaleh Entities was arm’s length consideration. Whether that consideration received in associated transactions is relevant to determining whether the consideration for the Market Tonnage was arm’s length consideration requires the identification and application of the principles relating to the nature of the hypothesis required under s 136AA(3)(c), as discussed below.
For completeness, we note it appears to be common ground that for any dealing there may be a range of arm’s length prices that might reasonably be expected and, if there are, then each would be a reliable hypothesis.[40]
[40] Respondent’s Outline of Opening Submissions, [108].
Not dealing at arm’s length – s 136AD(1)(b) - relevance of corrupt payments
An inference that parties are not dealing at arm’s length will be more readily drawn in relation to dealings between related parties than unrelated parties.[41] Nevertheless, unrelated parties may, in respect of particular dealings, be taken to be dealing with one another other than at arm’s length. That is clear from the terms of s 136AD(1)(b) and relevant authorities.[42]
[41] Granby Pty Ltd v Federal Commissioner of Taxation (1995) 30 ATR 400 (Granby).
[42] San Remo Macaroni Co v Commissioner of Taxation (1999) 43 ATR 53; Collis v Commissioner of Taxation (1996) 33 ATR 438.
The Commissioner submits that an inference should be drawn from the admissions in relation to the bribery arrangements and other evidence, that Alcoa and the Dahdaleh Entities were not dealing at arm’s length. More precisely, in view of the burden of proof borne by Alcoa, the question for the Tribunal is whether Alcoa has proved it was dealing with the Dahdaleh Entities at arm’s length.
The Commissioner makes two primary submissions in that regard. First, the Commissioner refers to principles enunciated in the cases, particularly Granby Pty Ltd v Federal Commissioner of Taxation.[43] Secondly, because the circumstances of the bribery arrangements were not explained in evidence, the Commissioner says the Tribunal could not be satisfied the parties were dealing at arm’s length.
[43] (1995) 30 ATR 400.
Alcoa also relies on statements in Granby and other authorities in support of its submission that the parties were dealing at arm’s length. It emphasises that it is ‘nonsensical’ to suggest Alcoa colluded to achieve lower prices than it might achieve in an arm’s length dealing. Further, Alcoa submits that, regardless of how the bribery arrangements may be judged, it does not follow that the parties were not acting commercially and at arm’s length, noting that even illegal transactions may be conducted at arm’s length.
In Granby, the issue for determination was whether a financier company and lessee had dealt with each other at arm’s length in relation to the lessee’s acquisition of assets at the end of the leases for their agreed ‘residual value’. The main principle to emerge from the case was the rejection of the taxpayer’s submission that because there had been no ‘real bargaining’ between the finance company and the lessee regarding purchase of the assets at their residual values, it must follow they had not dealt with one another at arm’s length.
The notion of arm’s length dealings requiring ‘real bargaining’ has its genesis in the judgment of Hill J in Trustee for the Estate of the late AW Furse No 5 Will Trust v Federal Commissioner of Taxation[44] where his Honour stated that determination of the manner in which parties have dealt with each other in respect of a dealing requires:
an assessment whether in respect of that dealing they dealt with each other as arm's length parties would normally do, so that the outcome of their dealing is a matter of real bargaining.
[44] (1990) 21 ATR 1123, 1132.
That statement was cited with approval in the joint judgment in Federal Commissioner of Taxation v AXA Asia Pacific Holdings Ltd[45] and also in Granby.[46]
[45] (2010) 189 FCR 204.
[46] Granby, 403.
However, the Court in Granby went on to state that: [47]
If the parties to the transaction are at arm’s length it will follow, usually, that the parties will have dealt with each other at arm’s length. That is, the separate minds and wills of the parties will be applied to the bargaining process whatever the outcome of the bargain may be.
That is not to say, however, that parties at arm’s length will be dealing with each other at arm’s length in a transaction in which they collude to achieve a particular result, or in which one of the parties submits the exercise of its will to the dictation of the other, perhaps, to promote the interests of each other.
However, there was no evidence that the lessor corporations and the [taxpayer] acted in concert with an ulterior purpose . . .
(Emphasis added.)
[47] Ibid 404.
The Commissioner emphasised the highlighted words in support of a submission that, in view of the admissions by Alcoa Inc and AWA in the US proceedings relating to corrupt payments, Alcoa and the Dahdaleh Entities colluded for corrupt purposes and thus could not be said to have dealt with each other at arm’s length.
The issue as to whether to characterise bribery and corrupt dealings as non-arm’s length dealings is a difficult one, especially given our findings later in these reasons that the parties negotiated in their own respective commercial interests. On the one hand, the negotiations as to price for the alumina supplied by Alcoa suggest the parties were dealing at arm’s length. On the other hand, colluding to facilitate corrupt payments would not be described as something parties dealing at arm’s length “would ordinarily do”.[48] Whether Alcoa can discharge the burden of proving it was dealing at arm’s length with the Dahdaleh Entities will substantially depend on the evidence regarding the circumstances in which the corrupt payments came to be made, which we address later in these reasons.
Arm’s length consideration – s 136AD(1)(c) and s 136AA(3)(c) – depersonalisation and relevance of prices charged for Formula Tonnage
[48] See Trustee for the Estate of the late AW Furse No 5 Will Trust v Federal Commissioner of Taxation (1990) 21 ATR 1123.
This part of our reasons is concerned with the periods 1993 to 1995 and 1997 to 2001 when Formula Tonnage was invoiced to Alba, and not to the period 2002 to 2009 when Alcoa invoiced all of the alumina destined for Alba to the Dahdaleh Entities.
The statutory question raised by the s 136AA(3)(c) definition of “arm’s length consideration” is:
What is the consideration that might reasonably be expected to have been received or receivable as consideration in respect of the supply if the property had been supplied under an agreement between independent parties dealing at arm’s length with each other in relation to the supply?
That, in turn, raises a question regarding the nature of the hypothesised dealing at arm’s length required by s 136AA(3)(c); in particular, the extent to which the hypothesis should reflect the circumstances in which the actual supplies occurred. Contextualising the question to the current dispute: Would the hypothetical sale have the feature that the supplier, in addition to making the relevant supplies to the entity invoiced for the supply, also supplied other alumina to another entity at higher prices, where the prices of the supplies were negotiated collectively, and all of the physical product was delivered directly to that other entity?
Dates of hearing: 3 – 28 June 2024 Date of last submissions: 4 July 2024 Counsel for the Applicant: Mr J de Wijn KC, Ms M Baker KC, Ms C Horan Solicitors for the Applicant: Jones Day Counsel for the Respondent: Mr B Sullivan SC, Mr R Jedrzejczyk, Ms N Gollan Solicitors for the Respondent: Australian Government Solicitor ANNEXURE A – GLOSSARY
Name/Term/
AbbreviationMeaning/ Full Name/ Known Roles AB Application Book filed by Alcoa and Supplementary Application Book filed by the Commissioner. Alba Aluminium Bahrain B.S.C. It operates a smelter in Bahrain to which alumina the subject of these proceedings was delivered. Alcoa The applicant, Alcoa of Australia Ltd Alcoa Inc Parent company of Alcoa based in the United States Alcoa Inc’s Offer of Settlement[429] Offer of settlement by Alcoa Inc made on 27 December 2013 in the administrative proceedings before the United States Securities Exchange Commission Alumet A Dahdaleh Entity AMC Amalgamated Metals Corporation AWA Alcoa World Alumina LLC, a related company of Alcoa based in the United States Dahdaleh Entities Companies associated with Mr Dahdaleh including Alumet, Rawmet, Dadco, A A Alumina Chemicals Ltd Dr Korenko George Korenko, expert engaged by the Respondent Dr Williams Philip Williams, expert engaged by the Applicant Isa Bin Ali Al-Khalifa Isa Bin Ali Al-Khalifa, Bahraini Minister of Oil and Chairman of Alba Kwinalum Trading Pte Ltd A Dahdaleh Entity LME London Metals Exchange Mr Belda Alain Belda, Chairman and CEO of Alcoa Mr Burgess Peter Burgess, AWA and Alcoa
Mr Dahdaleh Victor Philip Dahdaleh, Owner and Chairman of Dadco Group Mr Harris Greg Harris, expert engaged by the Applicant Mr Holmes Kenneth Holmes, Commercial Manager at Alcoa Mr Kandiah Rajakumar (Raj) Kandiah, Marketing Manager (Alumina) at Alcoa Group Mr Meurer Markus Meurer, expert engaged by the Respondent Mr Pizzey John Pizzey, lay witness relied upon by the Applicant and Vice President at Alcoa Mr Renouf Luan Paul Renouf, CEO of Alcoa Group Mr Rice William (Bill) Rice, Vice President (Marketing) at Alcoa Group Mr Tofte Gudvin Tofte, CEO of Alba Rawmet A Dahdaleh Entity Relevant Years 1993 to 2009 income years (excluding 1996) SABIC SABIC Industrial Investments, a Saudi Arabian entity that held a minority shareholding of about 20% in Alba SEC Securities and Exchange Commission, United States SEC Findings[430] Findings made on 9 January 2014 by the Securities and Exchange Commission as part of the order instituting cease-and-desist proceedings US proceedings Criminal and administrative proceedings involving AWA and Alcoa Inc. 1990 Agency Agreement Agency Agreement between Alcoa and Alumet dated 1 January 1990 1990 Supply Agreement[431] Agreement between Alcoa and Alba dated 1 January 1990 1990 Supply Agreement as amended[432] The 1990 Supply Agreement amended as of 1 January 1994 1991 Agency Agreement[433] Agency agreement dated 1 January 1990, between Alcoa and Alumet covering supplies of alumina to Alba under the 1990 Supply Agreement for the period 1 January 1991 to 31 December 2000. 1996 Alumet Supply Agreement[434] Agreement between Alcoa and Alumet dated 11 December 1996 2002 Distribution Agreement[435] Agreement between Alcoa & Alumet and A A Alumina Chemicals Ltd dated 14 February 2002 2005 Distribution Agreement[436] Agreement between Alcoa & Alumet, A A Alumina Chemicals Ltd and A A Alumina Chemicals SA dated 14 February 2002 [429] AB0692.
[430] AB0693.
[431] AB0898.
[432] AB0900.
[433] AB0191.
[434] AB0903.
[435] AB0905.
[436] AB0565 and AB0906.
ANNEXURE B – ACTUAL CONSIDERATION & DETERMINED CONSIDERATION
Income Year Actual consideration
USDCommissioner’s determined consideration
USDAdjustment
USD1993 17,280,000 20,057,705 2,777,705 1994 22,941,000 46,805,853 23,864,853 1995 32,883,570 86,269,859 53,386,289 1997 20,063,680 70,175,685 50,112,005 1998 30,595,740 66,938,065 36,342,325 1999 26,756,879 72,086,423 45,329,544 2000 43,160,481 89,816,248 46,655,767 2001 47,322,702 93,153,752 45,831,050 2002 146,537,756 165,961,853 19,424,097 2003 163,412,795 193,133,512 29,720,717 2004 174,186,099 220,275,265 46,089,166 2005 363,253,443 365,770,526 2,517,083 2006 573,673,661 579,300,422 5,626,761 2007 397,356,506 400,459,526 3,103,020 2008 447,186,566 453,807,715 6,621,149 2009 284,380,706 287,407,377 3,026,671 TOTALS: 2,790,991,584 3,211,419,786 420,428,202
0
4
0