RCA Ltd v Federal Commissioner of Taxation

[1977] HCA 33

HIGH COURT OF AUSTRALIA

Gibbs, Mason and Aickin JJ.

R.C.A. LTD. v. FEDERAL COMMISSIONER OF TAXATION

(1977) 137 CLR 583

22 June 1977

Sales Tax (Cth)—Copyright

Sales Tax (Cth)—Sale value of goods—Gramophone records manufactured upon orders placed by distributor—Notices given to copyright owner by distributor—Royalties paid by distributor—Sales to public by distributor—Whether sale by manufacturer "subject to royalty"—Whether royalties paid by distributor included in taxable sale value—Whether royalties paid by distributor as agent for manufacturer—Copyright Act 1968 (Cth), s. 55—Sales Tax Assessment Act (No. 1) 1930 (Cth), ss. 3 (3), 17 (1), 18 (1) (a), 42 (6). Copyright—Musical works—Infringement—No infringement if notice of intention to make record given to copyright owner and sale made with licence of owner and royalty paid—Effect of compliance with statutory notice procedure—Notice given by person who orders records from manufacturer—Whether infringement by manufacturer—Copyright Act 1968 (Cth), s. 55.

Decisions

1977, June 22 The following written judgments were delivered:-
GIBBS J. I am in agreement with the reasons prepared by my brother Aickin, and would accordingly answer in favour of the appellant the question referred to us by the stated case. (at p585)

2. I would only add that as at present advised I incline against the view that the appellant would have committed a breach of copyright by manufacturing records in the circumstances discussed in the judgment of my brother Aickin, but do not find it necessary to decide this question for the purposes of the present case. (at p586)

MASON J. I agree with the reasons for judgment which have been prepared by Aickin J. and I would, accordingly, answer in the negative the question asked by the Board of Review. (at p586)

AICKIN J. This matter comes before the Court pursuant to s. 42 (6) of the Sales Tax Assessment Act (No. 1) 1930 (Cth), as amended, by way of a reference by a Board of Review of a question of law arising before it concerning an assessment to sales tax against R.C.A. Ltd. ("the taxpayer"). (at p586)

2. The material facts are set out in pars 1 to 22 of the stated case. There is no need to set out those facts again but it is necessary to refer to some of the documents annexed to the stated case. (at p586)

3. The Reader's Digest Association Pty. Ltd. ("Reader's Digest") made written inquiries of music publishers in Australia to ascertain which of them claimed rights in respect of each of the works proposed to be recorded. Subsequently it sent to all such music houses a notice in a form which bore the heading "The Copyright Act 1912-1950 (Commonwealth of Australia)" and its opening words were as follows:

"The Reader's Digest Association Pty. Ltd. of 86 Stanley Street, East Sydney, N.S.W. in compliance with the Regulations issued under the above Act, hereby give you notice of their intention to make and sell discs reproducing the following musical work(s) (see list below)."
There then followed a list indicating titles, composers, description of the work and the persons controlling the mechanical rights. The document then stated the retail selling price of the disc and the total amount of royalty payable on each disc. Such notices were sent under cover of a letter which read:

"Enclosed please find Statutory Notices covering works
under your control in our new 10 - Record Album '120 Greatest Hit Songs From Broadway'".

Three "typical responses" to such letters are annexed to the stated case. The first of these is on a printed form and by it the addressee Chappell and Co. Ltd., and its subsidiary companies:

"...acknowledge receipt of your Statutory Notices dated 31st May 1966 notifying us of your intention to make and sell records in Australia reproducing the works as listed hereunder, mechanical rights of which come under our copyright control. We hereby grant you our formal permission to make and sell records in Australia reproducing these works, on the understanding that you will pay to us the appropriate amount of royalty due on each contrivance for each work."
The relevant works are then listed. The second of these typical responses simply reads as follows:

"We are in receipt of your Release Notice dated 31/5/66 and
hereby grant permission for the release of the undermentioned titles on record No. RDM/S-18.4 and claim 1.19c x 1 of the total statutory royalty payable on this contrivance."
That is on a printed form and the amounts are filled in and the work in question is then listed. The third of these responses is again on a printed form and reads simply, "We acknowledge herewith your Prescribed Notice No.... of 31st May, 1966 as follows". (at p587)

4. There is then set out the title of the record, serial number, retail selling price, total royalty and royalty for the publisher in question. (at p587)

5. After documents such as those just referred to had been received by Reader's Digest in respect of each work proposed to be embodied in a record or cassette, it prepared a listing notice and a purchase order which was sent to the taxpayer. The listing notices set out particulars of the album title, catalogue numbers and titles of recordings on each side of the record. The purchase order is on a printed form and is addressed to the taxpayer and provides in this example

"Please deliver to Reader's Digest Association, 26-32
Waterloo Street, Surry Hills, N.S.W., complete with delivery
docket or invoice, date of delivery: 1.11.69. Please supply

the following in good order &condition: 1,000 sets of 4

records 'Wishing You a Merry Christmas'."
at the price specified. The form notes that sales tax is chargeable. Reader's Digest did not quote a sales tax certificate to the taxpayer in respect of any such purchase order. (at p587)

6. On receipt of a listing notice and purchase order the taxpayer arranged for Radio Corporation of America Inc. to send to it in Australia the master tape or tapes for the works to be recorded. From that tape it made a "record stamper" and then manufactured the required number of records and cassettes ordered by Reader's Digest and delivered them to that company. (at p587)

7. The taxpayer did not at any material time seek the permission of the owner or owners of the copyright and did not itself give any notice in respect of any such works under s. 19 of the Copyright Act 1911 (Imp.) as in force in Australia by virtue of the Copyright Act 1912 (Cth), or under s. 55 of the Copyright Act 1968 (Cth) after that Act came into force. (at p588)

8. The taxpayer made its returns under the Sales Tax Assessment Act (No. 1) 1930, as amended, and under the Sales Tax Procedure Act 1934, as amended, on the basis that the sale value of the records and cassettes was the amount at which it invoiced those goods to Reader's Digest, and it paid sales tax on that value. By an assessment made on 8th February 1972 in respect of the period from 1st April 1967 up to 30th November 1971, the Commissioner assessed the taxpayer to pay sales tax in respect of such sales on a sale value which included "the amount of royalties payable on those gramophone record pressings". The Commissioner computed "the amount of royalties payable on those gramophone record pressings" in a manner described in the stated case. This mode of calculation is not in dispute and the only question is whether the component of the amount so arrived at which is referable to mechanical copyright royalties has been properly assessed and the question of law asked by the Board of Review is as follows:

"Does the sale value of the goods sold by R.C.A. to Readers
include for the purposes of s. 17 (1) of the Sales Tax Assessment Act (No. 1) 1930 (as amended), when read with s. 3 (3) and s. 18 of the said Act, the amounts in respect of mechanical copyright royalties which are paid by Readers as set forth in this stated case." (at p 588)

9. The essence of the arrangement thus made is that Reader's Digest selects from a catalogue made available to it by R.C.A. (U.S.), the works which it wishes to have reproduced for sale by it, and having made that selection it takes appropriate steps to obtain a right to reproduce those works by pressing records or producing prerecorded cassettes without thereby infringing the "mechanical copyright". Thereafter it places orders for the selected works with the taxpayer upon the basis that the taxpayer will press the records and produce the prerecorded cassettes and sell them to Reader's Digest at the agreed price for resale by it to the public. There is no dispute about the facts or the documents, the only question is the proper characterization of the legal relationships which are brought into existence as between the copyright owners (being or being represented by the music houses), Reader's Digest and the taxpayer, and the effect of the Sales Tax Assessment Act on those facts and relationships. (at p588)

10. It is clear that if Reader's Digest had purchased the relevant mechanical copyright from its owner no infringement would be involved when the taxpayer pressed the records or produced the cassettes pursuant to an order placed with it by Reader's Digest and equally when the taxpayer sold those records and cassettes to Reader's Digest. In such a case it could not be said on any view of the language that the sale was "subject to royalty". The same would be true if Reader's Digest had obtained an exclusive licence, because in the one case the owner and in the other, the exclusive licensee would be entitled to reproduce or authorize reproduction without the payment to it of any further amount in respect of such reproduction. In such circumstances no person would be under any obligation to make any payment which could be described as a "royalty". (at p589)

11. It is of course possible to acquire a copyright from its owner upon terms that periodical payments by way of royalty are to be made thereafter based upon the number of reproductions or some like criterion, and the same is true of an exclusive licence. Thus, though a person may be the owner of the copyright he may be obliged to pay royalty to a former owner. In each case, however, a person authorized by the new owner or exclusive licensee would be under no obligation to make any payment to the former owner or present owner and would not be infringing the copyright by reproducing the works in accordance with those instructions. In such a case it would nonetheless be true to say that the reproduction, or perhaps the sale to that owner, would give rise to a liability for royalty properly so described, i.e. the liability of the owner to make the payment to the previous owner. I do not think, however, that in such cases it could properly be said that the sale by the "manufacturer" to the owner could be "subject to the payment of royalty". (at p589)

12. The taxpayer contends that its position is analogous to that of a person authorized by an owner or exclusive licensee of the copyright to prepare or manufacture the records and cassettes for sale to such owner. (at p589)

13. The Commissioner contends however that the analogy is false and that the taxpayer at best possesses a statutory immunity from liability for infringement by reason of Reader's Digest having taken on its behalf the appropriate steps under s. 55 of the Copyright Act 1968, or the equivalent provisions of the Copyright Act 1912 and the Copyright Act 1911 (Imp.). On this basis it is said that the taxpayer is itself liable to pay the appropriate fees and that Reader's Digest must be taken to have paid them on its behalf. Thus it is said that instead of the taxpayer reimbursing Reader's Digest for the fees paid on its behalf, and increasing the price of the records by addition of such amount, it invoices at a lower cost, the sale being subject to such an implied arrangement, which it is said produces the result that the sale is "subject to payment of royalty" within the meaning of s. 3 (3) of the Sales Tax Assessment Act, or alternatively that it produces the result that the amount of royalty paid by Reader's Digest, or an amount equal thereto, is part of or is included in "the amount for which those goods are sold" within the meaning of s. 18 (1). (at p590)

14. Section 55 forms part of Div. 6 of Pt III of the Copyright Act 1968 which deals with the recording of musical works and for the purposes of that Division a reference to the owner of the copyright in a musical work is to be read as a reference to "the person who is entitled to authorize the making in, and importation into, Australia of records of the work". Section 55 then provides that "the copyright in a musical work is not infringed by a person (in this section referred to as 'the manufacturer') who makes, in Australia, a record of the work" if four specified conditions are satisfied. These conditions are set out in pars (a) to (d) of sub-s. (1) as follows -

"(a) a record of the work - (i) has previously been made in, or imported into, Australia for the purpose of retail sale and was so made or imported by, or with the licence of, the owner of the copyright in the work;

(ii) has previously been made in Australia for use in making other records for the purpose of retail sale and was so made by, or with the licence of, the owner of the copyright in the work;

(iii) has previously been made in, or imported into, a country other that Australia for the purpose of retail sale, being a country that, at the time of the previous making or importation, was specified in the regulations to be a country in relation to which this Division applies, and was so made or imported by, or with the licence of, the person who was, under the law of that country, the owner of the copyright in the work; or

(iv) has previously been made in a country other than Australia for use in making other records for the purpose of retail sale, being a country that, at the time of the previous making, was specified in the regulations to be a country in relation to which this Division applies, and was so made by, or with the licence of, the person who was, under the law of that country, the owner of the copyright in the work;

(b) before the making of the record, the prescribed notice of the intended making of the record was given to the owner of the copyright;

(c) the manufacturer intends to sell the record by retail, or to supply it for the purpose of its being sold by retail by a person other than the manufacturer, or intends to use it for making other records that are to be so sold or supplied; and

(d) where the record is so sold or supplied by the manufacturer - (i) the sale or supply is made with the licence of the owner of the copyright; and

(ii) there is paid to the owner of the copyright, as prescribed by the regulations, a royalty ascertained in accordance with the succeeding sections of this Division." (at p 591)

15. The section is somewhat curiously framed in that it says in substance that the copyright in a musical work is not infringed by a "manufacturer" if, where the record is sold or supplied by the "manufacturer", that is done with the licence of the owner of the copyright and there is paid to the owner of the copyright as prescribed by the regulations a royalty ascertained in accordance with the provisions. Sub-section (3), however, provides that par. (d) (i) of sub-s. (1) does not apply in relation to a record of a work if the sale or supply is made after certain specified intervals after the first making or the first importation of the record or the first supplying of the record in Australia in the circumstances specified. Sub-section (4) makes provision for the prescribing of different minimum periods in relation to different classes of records. Sub-section (5) provides that regulations may be made with respect to payment of royalties and as to the time of payment, including provisions requiring payment of royalties before sale or supply of the records. Section 56 prescribes the means of calculating the royalty. (at p591)

16. Thus s. 55 has a dual operation. It applies in cases where the sale or supply is made with a licence from the owner of the copyright, and in addition it applies to certain kinds of reproduction without the licence of the owner of the copyright if the sale or supply is made after the expiration of specified periods of time. It is to be observed however that in terms s. 55 requires that all the conditions should be complied with in a case where the record is sold or supplied with the licence of the owner, as well as in cases where the section dispenses with the licence of the owner though still requiring payment of royalty to him. It is not to be supposed that the section is intended to make ineffective other forms of licence by a copyright owner, i.e. licences granted without the giving of the "prescribed notice of the intended making of the record". However, this provision may be important in relation to the general effect of s. 55. (at p591)

17. It seems to me that the proper analysis of s. 55 is that what it provides for is the counterpart of a compulsory licence. The procedure for which it provides is the giving of a prescribed notice of intention to make the record and that must be given to the owner of the copyright and save in the cases covered by sub-s. (3) a licence must be obtained from the owner and royalties paid. If the relevant time under sub-s. (3) has expired the licence is not necessary (though it may be granted) but the payment of the royalties is still required. The section thus provides that the "manufacturer" must communicate with the owner, may acquire a licence but in some circumstances has no right to a licence or to manufacture without one. In other circumstances the "manufacturer" may not require a licence from the owner but must still pay the statutory royalty and may be required to pay it before manufacture. In circumstances where the "manufacturer" does not acquire a licence from the owner of the copyright, the effect of the section appears to me to be the same as an application for and grant by the court of a compulsory licence under the Patents Act. In that case the licence is not in fact granted by the patentee. I do not think that the use of the expression "the copyright in a musical work is not infringed" is sufficient to destroy what otherwise appears to be the character of this section. What it does in the appropriate cases is to dispense with the requirement of a licence and thus to grant statutory permission to do that which would otherwise be an infringement. Whether one calls this a compulsory licence or a statutory immunity which becomes operative upon appropriate communication with and payment to the owner of the copyright, does not seem to me to be material because the rights of the parties are the same as if the owner had granted a licence, or as though the applicant had a statutory right which was called a "compulsory licence" or a "statutory licence". (at p592)

"Compulsory licence" is the term used by Copinger and Skone James on Copyright, 11th ed. (1971), Ch. 17, s. 3 entitled "Compulsory Licence to Record" (pars 787 et seq), though the Copyright Act 1956 (U.K.), in the section corresponding to s. 55, makes no reference to actual licences. Such labels may reflect the nature of the rights but in the end the rights themselves must be analysed. (at p592)

19. In cases where s. 55 dispenses with the need for an actual licence from the copyright owner, and no actual licence is granted, the statute grants a liberty to do that which otherwise could be prevented by the copyright owner, but only subject to application being made to the owner and payment to him of the prescribed royalty. Thus the countervailing obligation to the "manufacturer's" liberty is the payment of royalty to the copyright owner. The latter loses his right to sue for infringement but gains knowledge of the identity of the "manufacturer" and a right to receive what the statute calls a "royalty", a term which ordinarily describes a payment for the right to use or for the use of another person's property. If the regulations did prescribe that payment of royalty must be made prior to sale, there would be infringement if payment were not so made. (at p593)

20. The section thus provides for that which is closely analogous to a licence and it uses language appropriate to a licence in describing the payment required. These factors, along with the fact that the same provisions and language expressly apply in cases where the actual licence of the copyright owner is required, show that the "manufacturer" has by statute the same rights as if he had a non-exclusive licence from the owner. He has something quite different from a mere immunity because he remains under a continuing obligation to the copyright owner to pay royalties for his use of his right to reproduce the work. (at p593)

21. In my opinion therefore, the matter must be approached upon the basis that what Reader's Digest obtained by taking the first step in the statutory procedure and subsequently obtaining an actual licence (whether or not such licence was required under s. 55 (1) (d)) does not depend wholly on the statute. It may be called an immunity from liability for infringement but it depends on an actual licence from the copyright owner. However, if one assumes that the application was made after the expiration of the statutory time, then the position would be that no licence was in fact required, although such an actual licence was in fact granted by the first two of the informal instruments referred to above. In the third case the statutory liberty was obtained. All the relevant steps were taken by Reader's Digest and in due course the payments of royalty were made by Reader's Digest. The taxpayer itself made no application and obtained no licence from the copyright owner nor did it pay any royalty. It did not become directly entitled to the protection of s. 55. The taxpayer was aware that Reader's Digest made the appropriate arrangements in respect of copyright both for the master tape itself and for the manufacture of the records and cassettes in Australia by dealing direct with the owners of the copyright. The statement in the letter dated 3rd December 1970 that "Readers Digest shall continue to be solely responsible for the payment of all royalties, if any, arising from the sale by Readers Digest of records purchased by Readers Digest from R.C.A. notwithstanding any provisions of the Copyright Act" certainly indicates that the taxpayer was well aware of the procedure which Reader's Digest was following and of the situation which prevailed at the time of the placing of orders by Reader's Digest for the pressing and manufacture of records and recorded cassettes. In those circumstances it is clear that there can have been no actual agreement that Reader's Digest should act on behalf of the taxpayer, as contended for by the Commissioner. (at p594)

22. I have said above that the first and second responses to Reader's Digest resulted in an actual though non-exclusive licence, whatever the status of the various works, rather than a statutory liberty. The fact that in the absence of such actual licence, and assuming the relevant time to have elapsed, a statutory liberty would have arisen does not destroy the effect of the actual licence, for which no statutory form is prescribed. It is convenient to deal with the third response on the basis that it does not amount to an actual licence but is a mere acknowledgement that the statutory notification has been received. (at p594)

23. The Commissioner relied upon the decision of Windeyer J. in E.M.I. (Australia) Ltd. v. Federal Commissioner of Taxation (1971) 45 ALJR 349 . In that case E.M.I. (Australia) Ltd agreed to press and sell by wholesale to an associated company all the purchasing company's record requirements for a fixed price per record at which the records were invoiced. By arrangement between E.M.I. (Australia) Ltd. and the purchasing company, mechanical copyright royalties payable under s. 19 (2) of the Copyright Act 1911 (Imp.), as well as other royalties, were paid by E.M.I. (Australia) Ltd. but an amount equal to those royalties was paid by the purchasing company in addition to the agreed price per record. It was held that E.M.I. (Australia) Ltd. was the "person who actually made the records" and therefore the person on whom the legislation imposed the primary liability to pay the royalties and that amounts paid by the purchasing company to reimburse it for those amounts were part of "the amount for which the goods are sold" within the meaning of s. 18 (1) (a) of the Sales Tax Assessment Act. The terms of agreement between the two companies in the relevant period were that E.M.I. (Australia) Ltd. would undertake to perform on behalf of World Record Club Pty. Ltd.:

"(1) The fulfilment of all formalities prescribed under the Copyright Act 1912-1950, and the Regulations issued thereunder, in order to permit the Club to make and sell contrivances reproducing works the subject of protection under the abovementioned Act. (2) E.M.I. shall pay on behalf of the Club and for the benefit of the copyright owners concerned, all mechanical copyright royalties due in consequence of such sales."

Windeyer J. said (1971) 45 ALJR, at p 353 :

"... however the matter be regarded as between the taxpayer and World Record Club, the taxpayer was the person who actually made the records. If the royalties had not been paid, it would have been guilty of an infringement of copyright, and all the records it made would have been infringing copies ... The primary liability to pay the royalties, or to provide for their payment, was thus, as I read the Copyright Act, upon the taxpayer. Doubtless World Record Club could be described as the maker, on the principle that qui facit per alium facit per se: but that does not mean that the taxpayer would not have been an infringer if the royalties had not been paid."

The Commissioner seeks to apply that decision to the somewhat different facts of the present case by saying that Reader's Digest must be taken to have paid the royalties to the copyright owners on behalf of the taxpayer. It was said that the immunity obtained was in favour of the maker of the record i.e. the taxpayer and that under the Copyright Act 1968 it was not necessary for the taxpayer to make the appropriate applications on its own behalf as that could be done for it by another. It was thus said that the payments made by Reader's Digest were for the benefit of the taxpayer and made with the knowledge and acquiescence of the taxpayer to enable it to do that which it otherwise could not lawfully do. From this it was sought to infer that the payments were payments made by Reader's Digest as agent for the taxpayer. (at p595)

24. No doubt it would have been possible for Reader's Digest and the taxpayer to make an arrangement by which the taxpayer was no more than an agent employed by Reader's Digest to stamp on materials supplied by Reader's Digest the appropriate pressing to reproduce the music, so that there would not be a sale of the records from the taxpayer to Reader's Digest but merely work done by the taxpayer on behalf of Reader's Digest, rather than work done and materials supplied. In such a case it would have been clear that Reader's Digest was "the maker" because it could only act through servants or agents and there would be no reason why the taxpayer could not be an agent of Reader's Digest in that sense. However, the transaction was not cast in that form and it seems to be clear that the taxpayer was an independent contractor who manufactured the records by pressing its own blanks under a contract by which it was bound to sell such records to Reader's Digest, and Reader's Digest was bound to take them. From the provisions of s. 22 (3) it must follow that the taxpayer was the "person who made in Australia the record of the work" within the meaning of s. 55 of the Copyright Act 1968. That sub-section provides that:

"(3) For the purposes of this Act -

(a) a sound recording shall be deemed to have been made at the time when the first record embodying the recording was produced; and

(b) the maker of the sound recording is the person who owned that record at that time."

It appears to me that, on the basis that the taxpayer is the "manufacturer", it is still not possible to infer either as a matter of law or as a matter of fact that Reader's Digest applied to the copyright owners and obtained the licence or consent of some of them, and paid the royalties, on behalf of the taxpayer or as its agent. No doubt both parties intended and believed that what was done by Reader's Digest would produce the result that the pressing of the records and the recording of the cassettes by the taxpayer would not be an infringement of the mechanical copyright. That however falls far short of supporting the inference of agency and is quite a different relationship from that which existed in the E.M.I. (Australia) Case (1971) 45 ALJR 349 . (at p596)

25. There is no authority on the question whether the statutory right or liberty obtained by giving the appropriate notices and paying the royalties under s. 55 of the Copyright Act is assignable by the person who takes the appropriate steps. Such an actual licence would be revocable on ordinary principles because it is clear that it carries no interest in the copyright itself but that does not necessarily conclude the question of whether it should be regarded as assignable. It is suggested in Copinger and Skone James, 11th ed., par. 387 that a contractual licence would be assignable unless it was shown that the licensee was chosen on account of his personal skill or reputation. It is, however, clear that a bare licensee of a patent cannot assign his rights unless there is some provision in the licence agreement permitting such course. In any event there is nothing in the facts in the present case to suggest an attempt by Reader's Digest to assign its contractual or statutory licence to the taxpayer. (at p596)

26. There is no authority dealing with the question whether a bare licensee or a statutory licensee may sublicense other persons to manufacture the records and cassettes to his order for supply to him by sale. It would however be surprising if it were not possible to do this in the case of a actual licence without making the "manufacturer" liable for infringement, since he acts at all times on the request of a person who may himself manufacture without infringing. However, it may for the purposes of this case be assumed to involve that consequence. It may be observed that Reader's Digest completes all the arrangements with the copyright owners before any order is placed with the taxpayer and that there is no legal obligation to place any such order with the taxpayer. Whatever the expectation of the parties might be as to the facts which may emerge in any particular instance, it may be that Reader's Digest will engage or appoint some other "manufacturer" and this is a further reason for the conclusion that Reader's Digest is not in its dealings with the copyright owners acting as undisclosed agent for the taxpayer. (at p597)

27. We may therefore assume that Reader's Digest, which is not a "manufacturer", does not need a licence to manufacture though it may need a licence to sell the records, and that the taxpayer needs but does not have a licence to manufacture and sell or supply. Thus what it does constitutes an infringement and the records which it manufactures are infringing articles. No doubt neither party intended or contemplated this result, but that is no basis for forcing what they did into some mould other than that which they chose. Reader's Digest would be under an implied obligation to indemnify the taxpayer in respect of any liability for infringement and the fortunate copyright owner might recover twice or thrice over. (at p597)

28. None of this, however, is sufficient to produce the result that the sale by the taxpayer to Reader's Digest must be regarded as a sale "subject to royalty" or that the royalty which Reader's Digest actually pays must be regarded as part of the price or value of the records sold by the taxpayer to Reader's Digest. Upon this basis the parties have proceeded upon an entirely mistaken belief as to their respective positions under the Copyright Act but such mistaken beliefs and action taken upon such beliefs cannot alter the value or price of the goods sold nor force upon the parties a relationship into which they did not enter. (at p597)

29. The situation is one quite different from that which prevailed in the E.M.I. (Australia) Case (1971) 45 ALJR 349 where the purchasing company reimbursed the "manufacturer" for the royalties actually paid by it pursuant to an express agreement by which the "manufacturer" was to be reimbursed an amount equal to all royalties paid by it. (at p598)

30. It must be observed that in the passage quoted above Windeyer J. said (1971) 45 ALJR, at p 353 :

"Doubtless World Record Club could be described as the maker, on the principle that qui facit per alium facit per se: but that does not mean that the taxpayer would not have been an infringer if the royalties had not been paid. Therefore, as I see it, the payments made to the taxpayer by World Record Club to reimburse it for payments it had made to enable the lawful reproduction of records for sale to World Record Club ought to be taken into account as part of 'the amount for which those goods are sold'."

This would seem to indicate that it was contemplated that World Record Club having paid the royalties in fact, E.M.I. (Australia) Ltd. would not have been an infringer, but that was a point with which his Honour was not concerned and it may not be a justifiable inference from the words that he used in this different context. However, he said (1971) 45 ALJR, at p 354 :

"As I read s. 3 (3) it applies in any case in which an obligation by the buyer to pay a royalty to a seller or to provide for the payment of a royalty is an element in the total amount that the buyer must pay to get the property in the goods free of claims by third parties. Whether a royalty forms a part of the price strictly understood or is payable pursuant to a collateral undertaking is, as I see it, immaterial. Payment of a sum described as a royalty may be an additional contractual obligation to payment of the sum called the price."

The payment there referred to, however, is the payment by World Record Club to E.M.I. (Australia) Ltd., not an amount paid by World Record Club to the copyright owner. (at p598)

31. I am therefore of opinion that the decision in the E.M.I. (Australia) Case does not govern the present case. The relationship between the parties in this case is significantly different and the facts here demonstrate that no amount was paid or payable in respect of royalties by Reader's Digest to the taxpayer. I do not see how s. 18 or s. 3 (3) can be made to apply to a situation in which there is one amount paid by Reader's Digest to the taxpayer for the supply of the records, and another amount paid by Reader's Digest to the copyright owners under the belief, even if a mistaken belief, that thereby that which both the taxpayer and Reader's Digest did would not constitute an infringement of copyright. (at p598)

32. I am therefore of opinion that the question asked by the Board of Review should be answered in favour of R.C.A. Ltd., i.e. it should be answered No. (at p599)

Orders

Order that the question referred to this Court by the Board of Review be answered "No".

Order that the respondent pay the appellant's costs of this reference.