Genex Corporation Pty Ltd v Commonwealth of Australia
[1991] FCA 387
•11 JULY 1991
Re: GENEX CORPORATION PTY LIMITED; RABBIT PHOTO (SA) PTY LIMITED and RABBIT
PHOTO (WA) PTY LIMITED
And: THE COMMONWEALTH OF AUSTRALIA and THE COMMISSIONER OF TAXATION
No. N G541 of 1990
FED No. 387
Sales Tax
22 ATR 178/91 ATC 4564/101 ALR 161
30 FCR 193
COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Beaumont(1), Burchett(2) and Hill(3) JJ.
CATCHWORDS
Sales Tax - whether the developer of exposed films, on delivery of the negatives processed by it together with prints sold to a customer produced by the use of the negatives, is liable in respect of those negatives to pay sales tax - whether the films lodged by customers and thereafter processed by the developer are "goods" for sales tax purposes - whether exposed films processed by the developer for customers and then used to produce photographic prints for sale to the customers (a) go into use or consumption in Australia at the time they are so used, and (b) cease to be "goods" for sales tax purposes - whether such exposed films so used to produce photographic prints are sold to the customers or deemed to be sold within s. 17A(1) of the Sales Tax Assessment Act (No. 1) 1930 - whether such exposed films are "aids to manufacture" within items 113B and 113C of the Sales Tax (Exemptions and Classifications) Act 1935 - observations concerning the scheme of the sales tax legislation and the taxing points for which it provides - the meaning of "goods", "manufacture" and "sale" for the purposes of the sales tax legislation - discussion of the history and meaning of s. 17A - discussion of the extent to which the cataloguing of goods in the schedules to the Exemptions and Classifications Act assists in the construction of "goods" - discussion of the meaning of "apply to own use".
Sales Tax Assessment Act (No. 1) 1930, ss. 3(1), 17, 17(A) and 18
Sales Tax (Exemptions and Classifications) Act 1935, First Schedule, clause 1 and items 113B and 113C
HEARING
SYDNEY
#DATE 11:7:1991
Counsel and Solicitors for applicant: D.H. Bloom QC and B.J. Sullivan
instructed by Blake Dawson Waldron
Counsel and Solicitors for respondent: I.V. Gzell QC and A.H. Slater
instructed by the Australian Government Solicitor
ORDER
1. The questions asked in the special case be answered as follows:
(a) Are the films lodged with the applicants by their customers, which have been exposed by the customers and are processed by the applicants, (i) before, or
(ii) after, the point of processing, "goods" within the meaning and for the purposes of the Sales Tax Assessment Act (No. 1) 1930 or the Sales Tax Act (No. 1) 1930?
ANSWER: (i): No
(ii): Yes
(b) If the answer to either part of question (a) is in the affirmative, do the goods being the exposed films processed by the applicants for their customers which are thereafter used by the applicants to produce photographic prints for sale by it to those customers:
(i) go into use or consumption in Australia at the time at which they are used by the applicants to produce such photographic prints? and
(ii) cease to be "goods" within the meaning and for the purposes of the Sales Tax Assessment Act (No 1) 1930 or the Sales Tax Act (No. 1) 1930 by virtue of such use or after they are used to produce such photographic prints?
ANSWER: (i): Yes
(ii): Yes
(c) Whether exposed films processed by the applicants for their customers, and used by the applicants to produce photographic prints for sale to those customers, are either:
(i) sold; or
(ii) deemed by section 17A(1) of the Sales Tax Assessment Act (No. 1) 1930, to be sold; by the applicants to their customers?
ANSWER: (i): No
(ii): No
(d) Whether exposed films processed by the applicants for their customers, and used by the applicants to produce photographic prints for sale, by the applicants to those customers, are "aids to manufacture" within the meaning and for the purposes of items 113B and 113C of the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935?
ANSWER: It is unnecessary to answer this question.
(e) Whether exposed films processed by the applicants for their customers, and used by the applicants to produce photographic prints for sale to those customers, are exempt from sales tax pursuant to section 5 of, and items 113B and 113C of the First Schedule to, the Sales Tax (Exemptions and Classifications) Act 1935?
ANSWER: No
(f) Whether upon the facts stated, and under the provisions of the Sales Tax Assessment Act (No. 1) 1930 and the Sales Tax Act (No. 1) 1930 as in force at the date of commencement of this action-
(i) on the delivery by the applicants to their customers of the negatives processed by the applicants for their customers; or
(ii) at some earlier time, and if so when; the applicants are in respect of those negatives liable to pay sales tax?
ANSWER: (i): Yes, but only where the contract between
the applicants and their customers is for the developing of the film without printing.
(ii): No
2. The respondents pay the applicants' costs of the special case.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
The applicants, who carry on the business of developing exposed photographic film and printing photographs, commenced proceedings in the High Court seeking judicial declarations concerning certain matters relating to their business of developing exposed film on which their liability to sales tax, if any, depended. These proceedings were, by consent, remitted to this court pursuant to s.44(2A) of the Judiciary Act 1903.
In the meantime the Court of Appeal of the Supreme Court of New South Wales had delivered judgment in the matter of Kodak (Australasia) Pty Ltd v Commonwealth (1990) 98 ALR 685, which concerned an action for the recovery of sales tax paid by the appellant upon the developing of exposed photographic film, claimed to have been paid under protest. The Court of Appeal found that the appellant was liable to pay the sales tax in fact paid and dismissed the appellant's appeal against a decision to like effect of McInerney J. at first instance. An application for special leave to appeal to the High Court against the decision of the Court of Appeal was adjourned to enable the decision of this court to be considered.
All parties agreed, the facts not being in dispute, that the appropriate course would be for a special case to be stated to the full court for determination. Accordingly, Burchett J., before whom the matter came at first instance, stated a special case raising six questions for determination. These questions, and the answers which I propose, are set out at the end of this judgment.
The agreed factsThe applicants operate through what are termed "mini-labs" placed on site in retail complexes. A mini-lab store consists of a retail shop at which are operated developing machines for the development of exposed films. Separate machines are used in the printing of photographs from the developed negatives.
The majority of customers who come into the stores request that their films, which have been exposed, be developed and prints made. Some customers present negatives for the purpose of having prints made from them. There are very few requests for the development of film without prints. A customer is charged according to the service performed.
There are two main types of film in general use, cassette film (110mm or 126mm) and 35mm film. Of these two kinds the 35mm film is the more popular. In the case of the former, the cassette is broken on a cracking bench in a light proof box and the film is fed into a special container, with the start of the film or the tongue projecting. In the case of the latter, the start of the film or the tongue must be located and pulled out by special tongue pullers. Both types of film are then put onto a leader which drags the film through the developing machine. The processes involved in development occur in the machine, which is light proof. There are six processes in all carried out in the machine, and the time taken ranges from 12 to 23 minutes depending on the chemistry or on the type of developing machine. Further films can be fed into the loading box once the film has travelled part of the way into the developing machine.
A colour film is made up of a number of different layers. These layers consist of:-
(a) a plastic film base;
(b) a stubbing layer which allows emulsions to stick to the plastic film base;
(c) light-sensitive emulsions. (The light-sensitive emulsions include a blue sensitive layer, a blue/green sensitive layer and a blue/red sensitive layer. The number of layers of light-sensitive emulsions varies according to the type of film. Each layer of light-sensitive emulsion is made up of silver halide crystals (which are sensitive to light) together with chemical compounds known as "couplers");
(d) an ultra violet filter layer and a yellow filter layer; and
(e) a protective layer.
When a photograph is taken, the film is exposed to light through the camera lens. The light affects the silver halide crystals on the film, creating a latent image. The process of developing converts that latent image into a stable negative one. The film is first placed in a chemical developer solution which converts any silver halide crystals affected by light to black silver. The black silver, in turn, affects the couplers converting them to a coloured dye. This dye acts as a colour filter in the film during the printing process. The film is then placed in a chemical called "bleach" which converts the black silver back to silver halide. Next, the film is transported into a wash tank where the bleach is washed out of the film. The film is then transported into a chemical tank containing fixer where all the silver halide crystals are removed from the film. Thereafter the film is insensitive to light. It is transported into a wash tank where the fixer is washed out. The final chemical treatment is with a stabiliser, which stabilises the dye so as to reduce the tendency to fade. The film is then dried in a drier, which is attached to the developing machine. The leader and the dry film next come out of the developing machine and drop into a holding bin. The film is then cut off the leader. Each frame of the film is at this stage commonly referred to as a negative.
Printing is carried out in a printing machine. Some machines have an automatic feed; in others the negatives must be pulled through manually. The negatives are put through brushes to remove dust and then fed into the printing machine. The operator views each frame of the negative film through a viewfinder to determine the density at which each print should be printed. The printing machine has a keyboard to control the colour and density of the print, and the operator pushes a button to make the appropriate exposure. A shutter within the printing machine opens and the negative is exposed onto photographic paper within the machine. The paper advances automatically, after each exposure. The paper is light sensitive and forms a latent image. The exposed paper is then fed into a developer solution where all silver halide crystals affected by light will be converted to black silver upon contact with the solution. The black silver in turn affects couplers in the paper's emulsion coating. The black silver converts the surrounding couplers to dye. The paper is next placed in a chemical called "bleach/fix" which converts the black silver back to silver halide and removes the silver halide crystals. Thereafter the paper is insensitive to light. The paper then goes into a wash to remove all traces of the bleach/fix.
As the prints are made, a small hole is inserted into the roll of paper by the printing machine. Sensors within the machine pick up this hole and cut the individual prints accordingly. The printing process for each individual print takes 5 to 18 minutes from the time the operator has pushed the print button in respect of the frame from which that print is produced. Should something go wrong in the printing process, then any individual print or prints with imperfections may be redone. If everything is satisfactory, an employee of one of the applicant companies will take the processed exposed film and cut it up on a negative cutter, into "slices" of negatives. At the same time the negative cutter sleeves the slices of negatives in protective plastic sleeves, which, together with the prints, (where prints have been ordered), are placed in a photographic folder for delivery to the customer.
The scheme of the sales tax legislationAs the competing submissions of counsel require to be evaluated against the scheme and policy of the sales tax legislation, it is convenient first to refer briefly to those matters.
The sales tax legislation presently comprises 27 separate Acts, which together with Regulations form a statutory scheme to which all are, as Dixon J. observed in the pivotal judgment of Deputy Federal Commissioner of Taxation v Ellis and Clark Ltd (1934) 52 CLR 85 at 89, "necessary". Although that comment was made in the context of the legislation and Regulations then in force, and although both legislation and Regulations have undergone substantial change, this observation and indeed his Honour's analysis of the basic legislative scheme, still remains true.
The apparent complexity of the legislation is reduced when it is realised that the legislation comprises now eleven separate machinery Acts (the Assessment Acts), fourteen separate taxing Acts, an Act dealing with exemptions and classification of goods for the purposes of the differential rates of tax payable, and an Act dealing with procedural matters. For ease of discussion, each of the Assessment Acts is referred to as Assessment Act with the appropriate number. Thus the Sales Tax Assessment Act (No. 1) 1930 is hereafter referred to as Assessment Act No. 1. The Sales Tax (Exemptions and Classifications) Act 1935 is hereafter referred to as the Exemptions and Classifications Act.
For the purposes of the present case it is sufficient to note that the first eight Assessment Acts fall into two groups; those concerned with goods which are manufactured in Australia (Assessment Acts Nos. 1 to 4) and those concerned with goods which are imported into Australia (Assessment Acts Nos. 5 to 8). The remaining Assessment Acts concern specific problems not relevant to the present issues between the parties.
The legislative policy was described by the full High Court in Brayson Motors Pty Limited (In Liq) v Federal Commissioner of Taxation (1984-5) 156 CLR 651 at 657 in the following terms:
"That general policy was and is to levy a tax upon all goods after they are imported into or produced in Australia and before they reach the consumer. It was not intended that the retail price of goods should be increased by the incorporation in it of more than one amount of tax or that the retail sale itself should attract tax. It was, however, intended that they should be taxed at their full wholesale value. That being so, the policy of the legislation was and is that sales tax should in the ordinary case, be a tax upon the last wholesale sale."
In accordance with this policy, where goods are sold by a manufacturer or a wholesale merchant in the last wholesale sale, the sales tax will be levied by reference (subject to anti-avoidance provisions not presently material) to the amount for which the goods are sold. It is this amount which becomes the "sale value" to which the rate of tax is applied in calculating the ultimate liability. (see eg Assessment Act No. 1, s.18(1)(a)). Although the tax is in terms of policy a wholesale sales tax, it is obvious that if it were confined in its operation to wholesale sales many goods would escape the tax altogether.
A manufacturer, or wholesale merchant who had acquired the goods free of sales tax prior to the making of a wholesale sale, might in fact sell the goods in a retail sale. In such a case the legislation operates to ensure that a liability for sales tax arises on the making of the retail sale, but the sale value is determined by reference to the amount which a wholesale sale might be expected to have realised; cf Assessment Act No. 1, s.18(1)(b). Likewise, a manufacturer or a wholesale merchant who had acquired goods in circumstances where no tax had been payable might, rather than sell the goods, make some business use of those goods; in legislative terms, might "apply the goods to his own use". In such a case the legislation operates to impose a liability to tax at the time of application to own use, but ensures that the sale value will be again a wholesale sale value: cf Assessment Act No. 1, s.18(3). Finally, a manufacturer who sells goods by retail may appropriate goods manufactured by him into his retail stock. Without special legislative provision such a manufacturer would have a commercial advantage over other retailers, for retailers not manufacturers will have acquired their retail stock in a prior wholesale sale upon which sales tax has already been levied. Accordingly, the legislation operates to ensure that when a manufacturer brings his manufactured goods into retail stock, (in legislative terms, treats "the goods as stock for sale by retail"), sales tax will be payable, but again only on a notional wholesale value: cf Assessment Act No. 1, s.18(2).
The occasions of sale, application to own use and treating as stock for sale by retail are commonly referred to as the "taxing points" at which the legislation operates. These taxing points are, so far as concerns the liability of "manufacturers", a matter dealt with exclusively in Assessment Act No. 1 (and its corresponding Taxing Act), reflected in the terms of s.17(1) of that Act, which provides:
"Subject to, and in accordance with, the provisions of this Act, the sales tax imposed by the Sales Tax Act (No. 1) 1930 shall be levied and paid upon the sale value of goods manufactured in Australia by a taxpayer and sold by him or treated by him as stock for sale by retail or applied to his own use."
The taxing points correspond with the stages necessary to ensure that the tax is applied at some ascertainable time whether on import or after manufacture and at the latest at the time when the goods go into use and consumption in Australia.
Ellis and Clark (supra) concerned the liability of a registered person to sales tax upon dealings with second-hand goods, in the sense of goods which had already gone through a process of retailing into use or consumption in Australia. The legislation at that time, in s.3(1) defined "goods" merely as including "commodities". A literal reading of the legislation, without regard to the legislative scheme or policy, permitted the conclusion to be drawn that sales tax was exigible on sales by registered persons of second-hand goods: cf In Re Searls Limited (1932) 33 SR (NSW) 7. Nevertheless, the High Court in Ellis and Clark was unanimously of the view that second-hand goods did not attract the tax. Legislative recognition of the decision was subsequently given by an amendment to the definition of "goods". The expression is now defined in s.3(1) of Assessment Act No. 1, in a definition incorporated by reference into Assessment Acts 1 to 8, as follows:
"`Goods' includes commodities, but does not include-
(a) goods which have, either through a process of retailing or otherwise, gone into use or consumption in Australia; or
(b) goods which are sold as second-hand goods and are manufactured exclusively or principally from goods which-
(i) have, whether alone or as parts of other goods, gone into use or consumption in Australia; and
(ii) in the opinion of the Commissioner, in their condition as parts of the goods so manufactured, retain their character as goods or parts of goods which have gone into use or consumption in Australia."
By amending the definition of "goods" the legislature did more than give legislative recognition to the decision in Ellis and Clark. As Dixon J. said in Federal Commissioner of Taxation v Jack Zinader Proprietary Limited (1949) 78 CLR 336 at 346:
"...since that decision, the Parliament has reduced the principle judicially discovered in the legislation to statutory expression. That statutory expression should therefore afford the measure of the application of the principle".
For there to be a liability to sales tax arising under Assessment Act No. 1 and its corresponding Taxing Act, it is clear from the provisions of s.17 set out above that there must be a conjunction of three factors: there must be "goods", those goods must have been "manufactured" by the taxpayer in Australia, and one of the taxing points must have been crossed.
The legislation, when introduced in 1930, defined "manufacture" merely as including "production". Save in a case which concerned "production", the meaning of the word was left to be found in ordinary English usage: cf Adams v Rau (1931) 46 CLR 572 at 577-8; Federal Commissioner of Taxation v Rochester (1934) 50 CLR 225 at 227; The Commissioner of Taxation of the Commonwealth of Australia v Totalisator Administration Board of Queensland (1990) 170 CLR 508 at 511. As experience with the legislation grew, whether as a result of court decisions or administrative difficulties encountered, the definition of "manufacture" was expanded. In 1986, by Act No. 99 of that year, the definition, which by then comprised "production" (para (a) of the definition) and two other lettered paragraphs, was amended to add three new paragraphs. Relevantly to the present case, paragraph (d) of the definition includes within the meaning of "manufacture" the following:
"(d) the processing or treatment of exposed photographic or cinematographic film to produce a negative, transparency or film strip.".
At the same time paragraphs (e) and (f) were added to the definition to treat the copying or reproduction of computer programmes and the copying or reproduction of visual images and sounds as "manufacture".
It appears from the Explanatory Memorandum which accompanied the Sales Tax (Exemptions and Classifications) Amendment Bill 1986, and the Sales Tax Laws Amendment Bill 1986, introduced at the same time, that the developing of exposed film was not regarded as "manufacture" for wholesale sales tax (WST) purposes. The explanatory memorandum, referring to the introduction of paragraph (d) in the definition of "manufacture", continued:
"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 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."
Thus, it was clear, at least after the 1986 amendments, that the processing of exposed film as carried out by the applicants was, even if not "manufacture" in the ordinary sense of the word, nevertheless "manufacture" for the purposes of s.17.
As indicated above, one of the taxing points, indeed the most usual, is "sale" of the goods. That expression also has its ordinary meaning, and involves a bargain and sale at a price and a transfer of title to the goods. Benjamin on Sale, 8th ed., 1950 at 1 et seq discusses the elements of sale as being parties competent to contract, mutual assent, a thing, the absolute or general property in which is transferred by the seller to the buyer and a price in money paid or promised. What is essential for present purposes is that a sale involves a passing of title to goods. Hence, as title to the film in the present case remains throughout in the customer, and never passes to or from the applicants, it is obvious that there can be no sale of the film in the ordinary sense of that expression.
The Assessment Act No. 1 does, however, deem certain transactions to be a sale. So, for example, if title to goods passes under the terms of a contract, not being a contract for the sale of goods, the contract being one pursuant to which the person deemed to have sold the goods received or became entitled to receive consideration, there will be a deemed sale: s.3(4) of Assessment Act No. 1. Thus, a contract for work and labour, if it results in title to goods passing, will amount to a sale of goods, and, unless a relevant exemption applies, sales tax will be exigible.
Another provision deeming a sale is s.17A of Assessment Act No. 1. I shall explain the historical background of that section later. Section 17A provides:
"Where-
(a) goods have been manufactured in Australia by a person for another person (in this subsection referred to as the `customer'); and
(b) the goods were manufactured in whole or in part out of materials supplied by the customer, the manufacturer of the goods shall, for the purposes of this Act, be deemed to have sold the goods to the customer at the time when the goods were delivered to the customer, or were delivered under an agreement with the customer to some other person, and the customer shall, for the purposes of this Act, be deemed to be the purchaser of the goods."
As an integral part of the legislative policy is to ensure that sales tax is paid once and once only in respect of goods manufactured in Australia, component parts of goods manufactured, including raw materials and the underlying machinery used in the manufacture, are generally speaking excluded from liability to sales tax. This is achieved by a combination of provisions relating to quotation of certificates and exemptions. As Dixon J. pointed out in Ellis and Clark (supra at 89-90), a fundamental feature of the sales tax legislation is the system of quotation of certificates. Manufacturers (and although not relevant for present purposes, wholesale merchants) are required to register: s.11 of Assessment Act No. 1. They are required, in circumstances set out in the Regulations to Assessment Act No. 1 ("the Regulations"), to quote a certificate and forbidden otherwise so to do: s.12 of the Assessment Act No. 1. The effect of the quotation of a certificate is that the transaction to which the certificate relates has no sale value. Put simply, there is thus no liability to sales tax.
Among the circumstances prescribed in the Regulations as involving the requirement to quote a certificate, is the purchase by a registered person of goods for use by him as aids to manufacture or auxiliaries to aids to manufacture: Regulation 12(1)(c). For the purpose of this Regulation the expression "aids to manufacture" is defined in Regulation 4(1).
Where no certificate may be quoted because, for example, there has been no purchase, but the goods have been applied by the manufacturer to his own use in circumstances where otherwise sales tax would be exigible (lease and entry for home consumption are also dealt with in Regulation 12(1)(c)), double taxation in the relevant sense is avoided by exempting "aids to manufacture" from sales tax through the Exemptions and Classifications Act. Items 113B and C of that Act thus provide for an exemption, applicable in the case of item 113B only to Assessment Act No. 1, and in the case of item 113C to that Act, among others, for:
"ITEM 113B Goods (other than lubricants) manufactured by any person and applied by him to his own use as aids to manufacture or as auxiliaries to aids to manufacture. ITEM 113C Goods (other than lubricants) applied by a registered person to his own use as aids to manufacture (as defined by regulations made under the Sales Tax Assessment Acts) or as auxiliaries to aids to manufacture (as so defined)."
It is unnecessary for the present case to distinguish between items 113B and 113C. Although item 113B refers to the definition of "aids to manufacture" contained in Assessment Act No. 1, and item 113C is to be understood by reference to the definition of the same term in the Exemptions and Classifications Act, both definitions are for present purposes identical. It is, therefore, sufficient to refer only to the definition of that expression in Clause 1 of the First Schedule to the Exemptions and Classification Act. Relevantly that definition provides as follows:
"`aids to manufacture' means goods for use by a manufacturer in the course of carrying on a business (where that use is exclusively, or primarily and principally, for the purposes of that business), being-
(a) machinery, implements and apparatus for use exclusively, or primarily and principally-
(i) in the actual processing or treatment of goods to be used in, wrought into or attached to goods to be manufactured by him;
(ii) in any processing or treatment by which the goods to which that processing or treatment is applied are used in, wrought into or attached to goods to be manufactured by him;
...
(d) goods (other than those specified in paragraph (a) or (b) or those excluded from this definition by paragraph (f) or
(k) for use as specified in paragraph (a). but does not include the following goods...:...
(k) goods for use in connection with the manufacture for sale of goods, if the first-mentioned goods are to be sold to the purchaser of the goods to be so manufactured, except where the goods to be so manufactured
(i) are covered by an item in this Schedule; or
(ii) are to be sold by the manufacturer to a person who quotes his certificate of registration in respect of the purchase of those goods and who furnishes to the manufacturer a certificate in writing that the first-mentioned goods are not for resale to a person to whom the goods to be so manufactured are also to be sold ..."
The issues between the parties and the competing submissions
To enable the questions to be answered it is necessary to isolate the real issues between the parties. These issues, in turn, depend upon the answers to the following questions:
1) Is the process of developing exposed film in the machine,
"manufacture" in the ordinary sense of the word?
2) If the process is not manufacture in the ordinary sense of
the word, are the negatives nevertheless "goods" for the purposes of the sales tax legislation?
3) If the answer to either of the first two questions is in the
affirmative, do the applicants apply those goods to their own use, so as to give rise to a liability to sales tax, subject to any applicable exemption?
4) If the answer to question 3, be yes, then are the goods
"aids to manufacture" so that the transaction is exempt pursuant to the Sales Tax (Exemptions and Classifications) Act, 1935 (items 113B or 113C)?
5) If the answer to question 3 be no, are the negatives deemed
to have been sold by the applicants pursuant to s.17A of the Sales Tax Assessment Act (No. 1) 1930?
Neither side contended that there was an actual sale of the negatives.
For the applicants it was contended that the first two questions should be answered no, but that if either were answered yes, question three should be answered in the negative. For the respondent Commissioner it was submitted that either question one or question two should be answered in the affirmative, and that question three should be also answered in the affirmative. The applicant then submitted that if question three were answered in the affirmative the negatives were "aids to manufacture". The Commissioner submitted that the definition of "aids to manufacture" operated to exclude the negatives from its terms, with the consequence that no exemption was applicable. Finally the applicants submitted that s.17A was inapplicable, and there being no actual sale, no liability for sales tax arose. The Commissioner submitted that s.17A applied, if otherwise the negatives were not goods applied by the applicants to their own use, so that sales tax was exigible.
Is the process of developing exposed film "manufacture" in the ordinary sense of the word?While it is clear that the word "manufacture" as used in the sales tax legislation should receive its natural and ordinary meaning (Adams v Rau (supra)), resort to dictionary meanings of the word affords little assistance. The Macquarie Dictionary (2nd Revision) contains the following definition:
"1. the making of goods or wares by manual labour or by machinery, esp. on a large scale.
2. the making of anything. 3. the thing or material manufactured, vt. 4. to make or produce by hand or machinery, esp. on a large scale. 5. to make anything. 6. to work up
(material) into form for use. 7. ..."
The reference to "manual labour" is, of course, a reference to the latin root of the word, but the everyday usage of the word, in a technologically advanced society, has long since departed from the concept of cottage industry which the origin of the word suggests.
The "essence" of the concept of manufacture, as was pointed out in McNicol v Pinch (1906) 2 KB 352 at 361, (in a passage approved by the High Court in Federal Commissioner of Taxation v Jack Zinader Pty Limited (supra at 343)) is:
"that what is made shall be a different thing from that out of which it is made."
The actual facts of McNicol v Pinch are instructive. A product, known as "330 saccharin", being saccharin 330 times as sweet as sugar, was subjected to a chemical process, the result of which was to produce a mixture sweeter than 330 saccharin, indeed in some cases "550 saccharin". The process involved the elimination of para saccharin from the original "330 saccharin". Although "550 saccharin" was a commercially distinct product from "330 saccharin", it was held that no manufacture occurred. The process had started with saccharin and finished with saccharin. No new product had been produced.
As Lockhart J. pointed out in Commissioner of Taxation v Jax Tyres Pty Limited (1984) 5 FCR 257 at 262, it is unhelpful to analyse the facts of the numerous authorities, all dependent upon their facts, in which a particular process has been held to be or not to be manufacture. The best known of those cases, with a short statement of their facts, are catalogued by his Honour on the same page. To that list may be added Jax Tyres itself, where the process of retreading tyres was seen as a process of repairing the tyres and not as manufacture; Ready Mixed Concrete (Victoria) Pty Limited v Commissioner of Taxation (1969) 118 CLR 177, where the mixing of concrete in a mobile concrete mixer was held to result in the mixers being "machinery for manufacture",and the wet concrete to be a "new substance" from the ingredients which were mixed; Federal Commissioner of Taxation v Utah Development Co (1976) 9 ALR 660, where the process of deriving coking coal from coal won by mining was held to be manufacture, and the coking coal "manufactured goods"; and the most recent case, WEA Records Pty Limited v Federal Commissioner of Taxation (1990) 90 ATC 4779.
The WEA Case concerned the duplication of video cassettes from a master tape. The case was decided on facts which arose prior to the 1986 amendments specifically dealing with the duplication of video cassettes. The argument in that case turned on whether the duplicated cassettes were different goods from the blank cassettes present at the commencement of the dubbing process. In the course of his judgment Davies J. (at 4783) referred to a passage in the judgment of Windeyer J. in M.P. Metals Pty Ltd v Federal Commissioner of Taxation (1968) 117 CLR 631 at 638, in which his Honour had pointed out the difficulty inherent in the concept of new or different goods as the outcome of the manufacturing process. Windeyer J. said:
"But what is a different thing? Various paraphrases were offered to me, such as a 'substantially different thing', not merely an `altered thing'; `a new entity'; `a distinct commodity'. But these are all pregnant with ambiguity. Identity and difference, as concepts, must always be related to some quality of the thing or things in respect of which identity or difference is to be determined. It may be colour, shape, chemical composition or any other quality. To speak of `substantial differences', as distinct from small differences, means little or nothing, unless some quality of the thing is postulated as its essential. And whether a thing is so different a thing from the thing or things out of which it was made as to be properly described as a new commodity may depend not only upon physical characteristics but also on differences in its utility for some purpose."
Davies J. was of the view that the duplication process brought into being a commodity different from the blank cassettes on which the videos were recorded. The video recording which was present on the one and absent on the other provided the differentiating factor.
The High Court twice considered photography in Federal Commissioner of Taxation v Riley (1935) 53 CLR 69 and Federal Commissioner of Taxation v Butcher (1935) 53 CLR 82. These cases clearly establish that the making of prints is a process of manufacture. While the facts of each case differ, both seemed to proceed on the basis that the composite activities of developing a film and printing the end photographs were together a process of manufacture. Neither considered the question whether the separate step of developing the film constituted manufacture.
The same may be said of cases in the United States of America: Commonwealth of Pennsylvania v Perfect Photo, Inc (1977) 371 A.2d 580 (Commonwealth Court of Pennsylvania) and Colorcraft Corporation v Illinois Department of Revenue (1985) 482 NE 2d 1038 (Appellate Court of Illinois, 4th District). It is interesting to note that in the former case (at 583) Mencer J., giving the judgment of the court, said:
"Here the taxpayer is engaged in the making of prints, slides, and moving picture films. An essential step in obtaining these final results is the production of a negative which in turn involves a series of chemical reactions in the coating of the film, the first of which is caused by the in-camera exposure of the film to light. The exposed film is the beginning item and the prints, slides and films are the new items, with the negative being the necessary intermediate item. A profound change occurs in the composition and character of the item, exposed film, by the time it finally is returned to the consumer as a print, slide, or moving picture film."
As a matter of ordinary language one does not speak of manufacturing a negative from an exposed film; rather one speaks of "developing" the film. The word "develop" has as its primary meaning, as the Macquarie Dictionary shows:
"to bring out the capabilities or possibilities of; to bring a more advanced or effective state."
In the context of photography, the same dictionary notes the meaning of the word as:
"a. to render visible (the latent image) in the exposed sensitised film of a photographic plate, etc b. to treat (a photographic plate, etc) with chemical agents so as to bring out the latent image".
The film laboratory in developing the film performs for the owner of the film a service, but that service does not amount to the bringing into existence of new goods. It is a service which involves a modification of existing goods, from a film which is still light sensitive to one where the latent image has been brought out and stabilised. To say that a modification is involved is not determinative of the issue of manufacture, for matters of fact and degree may be involved. Nevertheless, as Williams J. said in Jack Zinader (supra at 350):
"Work which could be fairly described as a mere repair or modification of the goods would not affect their original character. But once the work done causes the goods to lose this character, they become goods within the meaning of the Act."
In the end, it is not necessary to come to a final conclusion on the matter. This is because I am firmly of the view that if the developing process is not "manufacture" in the ordinary sense of the word, nevertheless, for the purposes of the sales tax legislation, the outcome of the process which is treated as "manufacture" by force of the extended definition of that word in s.3(1) of Assessment Act No. 1 will be "goods" for the purposes of that Act and the corresponding Taxing Act. However, as presently advised, I am of the view that the developing of a film is not, in the ordinary usage of the term, "manufacture". This conclusion would accord with that reached by the Court of Appeal in Kodak, where Mahoney J.A., with whom the other members of the court agreed, said (supra at 691):
"The description of the goods when purchased was `photographic film'; it was not, I think, `unexposed photographic film'. The goods remain, I think, photographic film, whether they be unexposed, exposed, or so treated that the chemicals upon them disclose in negative form the images to which they were exposed ... ".
Are the negatives, when initially developed, "goods"?
As I have already indicated, the 1986 amendments defined "manufacture" to include film developing. The legislature did not, at the same time, amend the definition of "goods" in s.3(1) to ensure that negatives, being the treated photographic film of which Mahoney J.A. spoke, were "goods". Hence, counsel for the applicants submitted that because the film was itself clearly an item that, when used by the photographer in Australia, had gone into use and consumption in Australia, the outcome of the process of that which the legislature had brought within the definition of "manufacture" was not "goods". The consequence of this argument was that the 1986 amendments failed totally in their legislative purpose.
No doubt there are examples of cases in the books where courts have held that the purpose of the legislature fundamentally miscarried, but such a conclusion is not one which a court will be quick to adopt. The applicable principles of interpretation are dealt with in the judgment of the High Court in Cooper Brookes (Wollongong) Pty Limited v Federal Commissioner of Taxation (1980-1) 147 CLR 297 at 304-5 per Gibbs C.J., 310-311 per Stephens J., 319-321 per Mason and Wilson JJ. Where to apply the literal words of a statute would produce a result which does not conform to the legislative intent as ascertained from the provisions of the statute, where it sets to nought the clear legislative purpose, then the court is not bound to adopt an interpretation which would, in the words of Fry L.J. in Curtis v Stovin (1889) 22 QBD 513 at 519, "defeat its object rather than with a view to carry its object into effect". This is particularly so where an alternative interpretation which gives effect to the legislative policy is available. See too Mills v Meeking (1989-90) 169 CLR 214 at 223 per Mason C.J. and Toohey J., 233-5 per Dawson J., and 242-244 per McHugh J.
It seems to me that the word "goods" as defined in s.3(1) should be given a meaning which includes the product of that which the legislature has defined as "manufacture". It will be noted that the definition does not purport to define "goods" comprehensively. Rather, it seeks to exclude from the category of "goods" in the ordinary sense of the word, those items which fall within paragraphs (a) and (b) of the definition. When, therefore, one comes to read paragraph (a) of the definition, one reads the word "goods" appearing in that paragraph as goods being the outcome of the process of manufacture, including processes which are deemed to be manufacture by definition. In the present case that means one reads the exclusion as relating to negatives which have, either through a process of retailing or otherwise, gone into use or consumption in Australia. So read, there is no difficulty in saying that at the point of time that the film is developed, the negatives fall out of the exclusion provisions and are as a result "goods" for the purpose of the legislation.
This conclusion accords with that reached by the Court of Appeal in Kodak. I would not, however, with respect, base my conclusion on the provisions of the Exemptions and Classifications Act, as at least in part Mahoney J.A. did in that case. There are two reasons. The first is that the cataloguing of goods in the various schedules of the Exemptions and Classifications Act often proceeds with what might be thought to be little logic (cf Adams v Rau (supra at 577-8), albeit in the context of items listed as exemptions; and Ashfield Municipal Council v Joyce (1978) AC 122 at 137; Corporate Affairs Commission (South Australia) v Australian Central Credit Union (1985) 157 CLR 201 at 211, cases decided on different legislation). More importantly, in the present case, the judgment of Mahoney J.A. omits to mention that at least since 1967, item 39 of the Second Schedule to the Exemptions and Classifications Act read relevantly:
"Photographs, including-
(a) negatives;...
(d) transparencies and film strips..."
Goods listed in the Second Schedule of that Act were those which, prior to the 1986 amendments, attracted sales tax at the rate of 30%. The 1986 amendment inserted a new item 2 into the Fourth Schedule reading as follows:
"Item 2. Negatives, transparencies and film strips manufactured from exposed photographic or cinematographic film supplied by the persons for whom the negatives, transparencies or film strips, as the case may be, are manufactured."
Goods classified under the Fourth Schedule attracted sales tax at that time at the rate of 20%. Strangely, item 39 in the Second Schedule was not deleted until 1988, leaving open during the two year interval the problem of determining the appropriate rate of tax exigible. What is of significance for present purposes is that at least since 1967, resort to the Exemptions and Classifications Act would have suggested that the legislature believed that some negatives at least were taxable,ie that they were "goods" and that the 1986 amendments merely altered the applicable rate.
Is there an application by the applicants of the negatives to their own use?
For the Commissioner it was contended that, the negatives being goods, the taxing point arose when the negatives were applied by the laboratory to its own use in the making of prints from those negatives.
It has been said that goods are applied by the manufacturer to his own use when they are employed by the manufacturer for his own purposes; per Gibbs J. in Max Factor and Co Inc v Federal Commissioner of Taxation (1971) 124 CLR 353 at 362. As Gibbs C.J. said in Deputy Commissioner of Taxation v Stewart (1983-4) 154 CLR 385 at 393:
"The word `applied' means `devoted to' or `employed for the special purpose of'..."
Application to own use will, as Max Factor illustrates, include goods given away as samples, or for advertising purposes, as well as goods which are used by the manufacturer more directly, such as the cones upon which yarn was woven the subject of Davies Coop and Co. Ltd. v Federal Commissioner of Taxation (1948) 77 CLR 299, or the ticket machine bailed to public benevolent institutions free of charge in order to promote the manufacturer's business of selling tickets: Stewart (supra).
There is some difficulty, as a matter of language, in speaking of a film laboratory applying negatives which it has developed to its own use in the course of making prints for its customers, in that the negatives are more aptly described as being applied by the owner of them to his use in having prints made from them. But, while I accept that goods may, at a particular point of time, be used as a result of the same transaction by two or more persons (cf Tourapark v Federal Commissioner of Taxation (1982) 149 CLR 176; Stewart (supra at 402)) there is, here, an added difficulty in seeing how the application of goods, the title to which is in some other person, to the printing process, fits within the basic scheme of the sales tax legislation.
The legislation has always been, at least in concept, a tax on sales. It is a necessary prerequisite of a sale that title to the goods sold passes to another person, that is to say that the title is, at the moment before sale, in the person who sells it. Difficult cases where no title then existed but where there is a "feeding of the estoppel" (cf Spencer-Bower, Estoppel by Representation, 2d ed., London, Butterworths, 1966 at para 207) may be put to one side. The case of goods treated by the manufacturer as stock for sale by retail, another taxing point in the case of manufacturers, equally requires title in the goods to be in the manufacturer who is proposing to sell them by retail. The sale deemed to occur by s.3(4) again must be one where title in the goods passes, albeit other than under a contract for the sale of goods. As the earlier discussion of the scheme of the legislation makes clear, it was necessary in ensuring that the taxation base was not eroded, to provide that a liability for sales tax would arise where goods were not sold, but were applied, by the manufacturer or wholesale merchant to his own business use. In other words, the plain legislative purpose of dealing with application to own use was to deal with the case where although title to the goods was held by the taxpayer, he had not subjected those goods to a transaction involving the transfer of title (sale or deemed sale) or prospective sale by treating them as retail stock.
The words "applied to own use", in the context of Assessment Acts Nos. 4 and 8, clearly relate only to goods the title to which has passed to the wholesale merchant, since it is a prerequisite of the operation of each that the goods have been sold to the taxpayer prior to being applied to his own use (see s.3 of these Acts). Assessment Act No. 6, which is concerned with an importer applying goods to his own use, while not quite so explicit, operates only where at the time of import the importer of the goods quoted a certificate. The circumstances in which a certificate can be quoted extend, in effect, only to the case where goods are for sale, lease, or use as aids to manufacture or auxiliaries to aids to manufacture or are to be wrought into the thing which is manufactured. Each of these cases seems to presuppose that title is in the person who applies the goods to his own use.
The Commissioner's submission could result in double taxation arising. Let it be supposed that the negatives are delivered after developing to the customer so that s.17A clearly applies to deem there to be a sale of the negatives. Let it further be assumed that the negatives are then redelivered (the delivery may well be constructive) for the purpose of the manufacturer making prints. Literally, the negatives will not by force of the initial delivery and redelivery have gone into use and consumption in Australia, that is to say they will still be "goods". The negatives will have been manufactured by the manufacturer and on the Commissioner's argument, they will have been applied by the manufacturer to his own use. Such a view would be inconsistent with the legislative policy that sales tax is payable once and once only in respect of the goods; cf Brayson Motors (supra). Consistent with the legislative scheme, I am of the view that there is no relevant application to use by the manufacturer at the time the negatives are developed, such as to create at that time a liability to sales tax.
Although on slightly different grounds, Mahoney J.A. in the Court of Appeal reached a similar conclusion, while expressing some measure of doubt. His Honour said (at 697):
"The essential point is that they are and remain at all times the actual property of the customer. This is so notwithstanding that there may be, for sales tax purposes, a deemed sale of them. As I have said, the negatives are made as part of the process by which prints are produced. They are made in contemplation that they will be used but not consumed in use and that they will be delivered to the owner of the photographic film with the prints. The negatives are `used' by the manufacturer but I do not think that, in the relevant sense, they are `applied to his own use' within the legislation. If a customer lends the customer's goods to the manufacturer so as to help him in the process of manufacture on the basis that the goods are to be returned to the customer after use, I do not think that, within sec. 17 or otherwise, those goods, on return to the customer, can be said to have been `applied' by the manufacturer `to his own use'." With respect, I agree.
Are the negatives "aids to manufacture"?
This question does not arise unless, contrary to my view, the negatives are applied by the laboratory to its own use in the process of printing.
As I have already noted, the legislative scheme is to ensure that goods which are used in the course of manufacture will be freed from sales tax, for their value will be included in the price of the finished goods which will be taken into account in determining the sale value of the finished goods. Thus one would expect that if the negatives are used in the production of the finished prints, which prints as the fruit of the process of manufacture will attract sales tax, the negatives would be exempted from sales tax under the Exemptions and Classifications Act.
The short point of construction which arises is whether the negatives are, in accordance with the language of para (k) of the definition of "aids to manufacture", goods which:
"are to be sold to the purchaser of the goods to be so manufactured".
Clearly there is no actual sale of the negatives to the customer. However, counsel for the Commissioner submitted that if there was an application to own use so as to create a sales tax liability, the reference to "sale" in the definition must be read as including a deemed sale under s.17A. Counsel for the applicants, on the other hand, submitted that the reference in the definition must be read as relating only to an actual sale: there being none, the goods were accordingly "aids to manufacture" and thus exempt from sales tax.
There is much to be said for the submission of the applicants. That the case would fall to be exempted as an "aid to manufacture" accords with the overall scheme of the legislation. The context of paragraph (k) supports the applicants' submission with the reference in sub-paragraph (k)(ii) to sale "to a person who quotes his certificate of registration". Clearly the sale there referred to is a sale in the ordinary sense, both because it must be a sale in respect of which a certificate can be quoted and in the reference to resale there to be found. Support is to be found also in the use of the words "to be sold", words which, whether they refer to intention or mere futurity (cf DKLR Holding Co (No. 2) Pty Limited v Commissioner of Stamp Duties (1982) 149 CLR 431) are difficult to use together with the concept of the deemed sale within s.17A.
However, the Commissioner's argument fails at the threshold if the transaction falls outside s.17A, and it is to that section that I now turn.
Is there a deemed sale within s.17A?Section 17A of the Act is part of a legislative framework to deal with the problem of makers-up, including retail tailors. The difficulty occasioned in dealing with this problem was recognised early by the legislature and was at the background of a series of legislative changes commencing with the amendments to the definition of "manufacturer" and amendments to the sale value provisions made by Act No. 62 of 1930. Two particular problems may be identified. The first was to determine who was, for the purposes of the legislation to be treated as the manufacturer. The second was to ensure there was a taxing point, the legislature proceeding on the basis that the maker-up, albeit a manufacturer, neither sold the product of his labour nor applied it to his own use.
The predecessor to s.17A was introduced into the legislation by Act No. 29 of 1934. As originally enacted the section read:
"Where goods are manufactured for a person wholly or in part out of materials supplied by him, the manufacturer of the goods, whether he makes up those goods himself or procures their making-up by another person, shall, for the purposes of this Act be deemed to have sold the goods to the first-mentioned person, at the time of their delivery to him, for the amount charged to him by the manufacturer in respect of those goods."
The general scheme of the legislation, at that time, in respect of makers-up of goods, was that the maker-up was to be treated as the manufacturer unless the goods were not for the personal use of the person commissioning the making-up ("the customer"). If the customer commissioned the goods for sale the customer was to be treated as the manufacturer. In the usual case where the goods were for the private use of the customer, the sale value was to be determined, on the assumption that the transaction was a retail sale, under s.18(1) of the Act as it then stood, which was in the following terms, relevantly:
"...Provided that where a manufacturer who makes up goods for another person is not the owner of the goods so made up, and charges some other person for making up those goods and for materials (if any) used by him in the making up of the goods, he shall, for the purposes of this subsection, be deemed to have sold those goods, at the time of their delivery to that other person, for the amount so charged."
In his Second Reading Speech to the 1934 amendments, the Assistant Treasurer, Mr Casey, said of the clause introducing s.17A:
"The purpose of this amendment is to clarify the position in regard to goods manufactured out of materials supplied by a customer to a manufacturer. In the tailoring trade, for example, a fairly common practice is that of customers supplying suit lengths to merchant tailors, who, in turn, pass on the material to manufacturing tailors to be made up. Under the existing law, doubt exists as to who is liable to pay the sales tax, the manufacturing tailor or the merchant tailor. In some cases, the man who buys the suit bears sales tax on the cost of the suit as supplied by the manufacturing tailor and, in other cases, on the cost as supplied by the merchant tailor. It is necessary to have uniformity. The law clearly intends that sales tax shall be paid on the suit as it is eventually sold to the customer by the merchant tailor, and the amendment seeks to bring that about. In the majority of cases, the intention of Parliament is being met, but doubt exists as to whether it can be endorsed as the law now stands."
Section 17A was further amended in 1936 by Act No. 78, 1936, s.10, in what would seem to have been merely a formal amendment, by omitting the words "makes up those goods himself or procures their making up" and inserting in their stead the words "manufactures those goods himself or procures their manufacture". Section 17A was in this amended form at the time Jack Zinader was decided, and indeed, remained in that form until the present section was substituted by Act No. 197 of 1978.
The 1978 amendment was passed, as the Explanatory Memorandum issued at the time makes clear, to overcome a problem of avoidance where taxable goods were made from non-taxable components. The Memorandum states:
"The proposed new section 17A is designed to ensure that where goods are manufactured by a manufacturer out of materials supplied to the manufacturer by the customer or purchased by the customer from the manufacturer (or an associate) in a legally separate transaction, sales tax will be payable on a sale value equal to the amount for which the goods could reasonably be expected to be sold by the manufacturer by wholesale if all the materials used in the manufacture of the goods had been purchased by the manufacturer in the ordinary course of his business from a person, other than the customer, with whom he was dealing at arm's length. In practice, this will be the ordinary wholesale selling price of the manufactured goods."
Section 17A, on its face, has clear application to a class of case where the customer supplies materials (eg cloth) to a manufacturing tailor, who makes up goods from that material and then delivers the finished product (eg the suit) to the customer. The manufacturing tailor is then deemed to have sold the finished product to the customer. By virtue of s.18(1B) of Assessment Act No. 1, introduced at the same time as s.17A, the sale value will normally be the making-up fee unless the materials themselves are exempt from sales tax in whole or in part. The finished suit is clearly made in whole or in part out of the materials supplied (the cloth) and is delivered in that form to the customer.
When one seeks to apply s.17A to the present facts there are two difficulties. The first may readily be overcome. There is some oddity of language in describing the negatives as having been manufactured (reading "manufacture" in its defined sense as including the processing or treatment of exposed photographic film to produce a negative) out of the materials supplied by the customer, ie the exposed film. However, mere oddity of language is no impediment to the operation of a statute, if otherwise it applies. Much more difficult is the reference to the time of delivery of the goods to the customer.
For the applicants it was submitted that at the time at which s.17A spoke, that is to say at the time of delivery of the negatives to the customer, the negatives, assuming them to have been "goods" at all, had ceased so to be by virtue of the fact that as negatives they had gone into use and consumption in Australia, ie. that they had been, by then, used in the printing process. For the Commissioner, on the other hand, it was submitted that as a matter of construction it was unnecessary that the negatives be goods at the point of delivery, but even if it were necessary, the negatives were not used in the printing process, that process merely amounting to shining light through them. This last submission, which involves an over simplistic view of the process of making prints, and results in there being no real use at all of negatives, may be immediately rejected.
It is possible to construe s.17A as if it read that there shall in all cases be a sale where goods have been manufactured in whole or in part out of materials supplied by the customer, the reference to delivery being related only to the timing of the deemed sale. But one is still left with the fact that for a taxing point to be crossed there has to be delivery of the goods to the customer. Despite the submission to the contrary, it seems to me as a matter of English, that the section envisages that when the goods to which s.17A refers, being goods which have been manufactured for the customer, are delivered "as goods" to the customer, a liability for sales tax will arise and that that is what the section says. The reference to the delivery of goods is not a reference to delivery of the manufactured item at a time when the item has ceased to be goods because it has been used.
It is not particularly surprising that s.17A is inapplicable to meet the present case, because, as its history discloses, it was never contemplated when the section was introduced that it would operate to deem a sale to arise from the delivery of negatives to a customer after printing from them.
However, this does not mean that the legislative intention has miscarried. Where the contract between the customer and the laboratory is one for developing only, s.17A 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: cf Commonwealth Quarries (Footscray) Pty Limited v Federal Commissioner of Taxation (1938) 59 CLR 111 at 119 per Starke J., at 122 per Dixon and McTiernan JJ., at 123 per Evatt J., but see the reservation of Latham C.J. at 116-7. Reference may also be made to the judgment of Burchett J. in Estee Lauder Pty Limited v Federal Commissioner of Taxation (1988) 80 ALR 314 at 324-5, a case concerned with the construction of s.18(2)(b) of the Act as it then stood. 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 Butcher 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.
The answers to the questions stated in the special case.It follows that I would answer the questions stated in the special case as follows:
(a) Are the films lodged with the applicants by their customers, which have been exposed by the customers and are processed by the applicants, (i) before, or
(ii) after, the point of processing, "goods" within the meaning and for the purposes of the Sales Tax Assessment Act (No. 1) 1930 or the Sales Tax Act (No. 1) 1930?
ANSWER: (i): No
(ii): Yes
(b) If the answer to either part of question (a) is in the affirmative, do the goods being the exposed films processed by the applicants for their customers which are thereafter used by the applicants to produce photographic prints for sale by it to those customers:
(i) go into use or consumption in Australia at the time at which they are used by the applicants to produce such photographic prints? and
(ii) cease to be "goods" within the meaning and for the purposes of the Sales Tax Assessment Act (No. 1) 1930 or the Sales Tax Act (No. 1) 1930 by virtue of such use or after they are used to produce such photographic prints?
ANSWER: (i): Yes
(ii): Yes
(c) Whether exposed films processed by the applicants for their customers, and used by the applicants to produce photographic prints for sale to those customers, are either:
(i) sold; or
(ii) deemed by section 17A(1) of the Sales Tax Assessment Act (No. 1) 1930, to be sold; by the applicants to their customers?
ANSWER: (i): No
(ii): No
(d) Whether exposed films processed by the applicants for their customers, and used by the applicants to produce photographic prints for sale, by the applicants to those customers, are "aids to manufacture" within the meaning and for the purposes of items 113B and 113C of the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935?
ANSWER: It is unnecessary to answer this question.
(e) Whether exposed films processed by the applicants for their customers, and used by the applicants to produce photographic prints for sale to those customers, are exempt from sales tax pursuant to section 5 of, and items 113B and 113C of the First Schedule to, the Sales Tax (Exemptions and Classifications) Act 1935?
ANSWER: No
(f) Whether upon the facts stated, and under the provisions of the Sales Tax Assessment Act (No. 1) 1930 and the Sales Tax Act (No. 1) 1930 as in force at the date of commencement of this action-
(i) on the delivery by the applicants to their customers of the negatives processed by the applicants for their customers; or
(ii) at some earlier time, and if so when; the applicants are in respect of those negatives liable to pay sales tax?
ANSWER: (i): Yes, but only where the contract between
the applicants and their customers is for the developing of the film without printing.
(ii): No
I would, in the circumstances, order that the respondents pay the applicants' costs.
JUDGE2
I agree with Hill J.
JUDGE3
I would answer the questions stated in the special case in the manner proposed by Hill J., for the reasons given by him.
15
0