Robert Bosch (Australia) Pty Ltd and Secretary, Department of Innovation, Industry, Science and Research
[2010] AATA 983
•8 December 2010
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2010] AATA 983
ADMINISTRATIVE APPEALS TRIBUNAL )
) No V2006/478
GENERAL ADMINISTRATIVE DIVISION ) Re Robert Bosch (Australia) Pty Ltd Applicant
And
Secretary, Department of Innovation, Industry, Science and Research
Respondent
DECISION
Tribunal Mr G L McDonald, Deputy President
Mr C Ermert, Member
Date8 December 2010
PlaceMelbourne
Decision The Tribunal:
(i) sets aside the decision under review for the period 1 January 2001 to 3 May 2001 and substitutes a decision that the applicant is entitled to be allocated duty credits under the Automotive Competitiveness and Investment Scheme for that period in respect of the application;
(ii) affirms that part of the decision that relates to the applicant's claim under the Scheme in so far as it relates to the Iveco-MUX project for the period 4 May 2001 to 30 June 2005; and,
(iii) adjourns the balance of the application for a directions hearing before the Tribunal at a date and time to be notified, though not before Tuesday, 1 February 2011.
......(sgd G L McDonald)......
Deputy President
CATCHWORDS
Automotive Competitiveness and Investment Scheme – Whether overseas research and development qualified as allowable research and development – Whether conducted by the participant – Whether conducted on behalf of the participant t– Entitlement to duty credits – Unearned credit liability – Whether mistake of fact – Whether inaccurate information
Administrative Appeals Tribunal Act 1975, s 37
Automotive Competitiveness and Investment Scheme Administration Act 1999 (Cth), ss 3, 6, 6A (2), 17, 37(1)(f), 74A, 75, 94(1), 95, 97 and 98
ACIS Administration Amendment Act 2000
ACIS Administration Regulations 2000, rr 13G (5)(a), 13G (5)(c) and 13H (6)
ACIS Amendment Regulations 2001 (No 1)
Secretary, Department of Industry Tourism & Resources v Spicer Axle Structural Components Australia Pty Ltd (2007) 98 ALD 264
REASONS FOR DECISION
8 December 2010 Mr G L McDonald, Deputy President
Mr C Ermert, Member
Background
1. The applicant is applying for the review of a decision of the respondent dated 10 May 2006 to cancel duty credits previously awarded for investment in overseas research and development (R and D), that was carried out during the period 1 January 2001 to 30 June 2005 (the relevant period). The duty credits were awarded under the Automotive Competitiveness and Investment Scheme (the Scheme)[1]. The Scheme was established pursuant to the provisions of the eponymous Automotive Competitiveness and Investment Scheme Administration Act 1999 (the Act) and Automotive Competitiveness and Investment Scheme Administration Regulations 2000 (the regs). Participants in the scheme receive payments in the form of duty credits, which can be used to offset customs duty payable on certain imports, transferred to another entity or offset against an amount of unearned credit liability (UCL)[2].
[1] The respondent advised the applicant that, it was “not entitled to 6,750,825 duty credits that were issued in respect of certain investments claimed by [it] in its ACIS quarterly returns”: T Documents, T 12, p 200.
[2] Ss 74A, 75, 97 and 98 of the Act.
2. The applicant (RBAU) is a diversified designer, manufacturer, importer and exporter of a range of products, relevantly including electronic control units (ECUs) for the Australian and international automotive markets. The applicant is a wholly owned subsidiary of Robert Bosch GmbH (RBG). The duty credits claimed by the applicant relate to R and D carried out by the staff of RBG in Germany or under contracts let by RBG to European contractors (together, the overseas R and D). There are different projects in respect of which the applicant has made claims. The project which is the subject of this application relates to the development of automotive units to be installed in an Italian manufactured truck, which is called the Iveco-MUX project. However, depending on the Tribunal’s decision in this review, other pending applications may fall to be determined.
The Issues
3. The issues in this review concern the interpretation of regs 13G (5)(a) and 13G (5)(c), and s 94(1) of the Act. On behalf of the applicant, it is submitted that regs 13G 5(a) and (c) concern who undertakes (referring to the definition of “Australian-based research and development” in reg 3) or conducts the R and D, not where the R and D occurs. The overseas R and D carried out in the relevant period did qualify as it was ”conducted by” the applicant, which entitled the applicant to receive the duty credits pursuant to reg 13G (5)(c). The applicant submitted that the construction of “conducted” should focus on who did the directing or managing of the R and D, rather than actually who did the activity of R and D. Alternatively, the applicant submitted that the R and D is ”Australian-based” pursuant to reg 13G (5)(a): the R and D was controlled by RBAU and undertaken on its behalf pursuant to a contract with “another person”[3]. It is further submitted that even if the Tribunal does not find in the applicant’s favour on these issues, the applicant is nevertheless entitled to retain the duty credits as none of the five listed disentitling factors in s 94(1) of the Act are applicable. In particular, neither RBAU nor the Department made a mistake, as the information asked for in the form was complete, and any error made was a legal error and, thus, not inaccurate. Consequently, the applicant would not have to pay a UCL to the Commonwealth pursuant to s 95 of the Act.
[3] In its Closing Submissions, the Applicant argued that, “[i]f the relevant research and development was conducted by Robert Bosch GmbH, on behalf of and under a contract with the applicant, then that research and development was “Australian based”, which is defined in the Regulations as being “undertaken in Australia”.“: at para 22.
4. The respondent submits that, with respect to reg 13G (5)(c), the overseas R and D was ”conducted by” RBG, or overseas contractors appointed by RBG. Additionally, the respondent submits that the alternative reliance on reg 13G (5)(a) is unsustainable, because the claimed R and D was carried out by RBG, or its overseas contractors, and, therefore, cannot be categorised as ”Australian-based” R and D. The respondent submits that the word ”conducted” as used in reg 13G (5) (a) and (c) should be read in context as meaning ”to do”. In ascribing that meaning, it is submitted that any element of direction or management of offshore activities by the applicant does not arise. If the Tribunal accepts the respondent’s submission, then the whole of the application before it cannot succeed and the Tribunal need not further determine the alternative submission, which relates solely to that part of the application addressing the Iveco-MUX project. Alternatively, the respondent contends that if the word ”conducted” involves an element of management or direction from the applicant as well, the evidence pertaining to the Iveco-MUX project does not demonstrate that that element has been established[4].
[4] The respondent in its Closing Submissions stated that, “there is no sound basis on which it would be open to the Tribunal to conclude that the nature and extent of the management and direction that RBAU exercised over RBG engineers in relation to the Iveco MUX project can be taken as representative of the manner in which such management and direction was exercised over RBG engineers in connection with RBAU’s body electronics projects generally”: at para 88.
5. Moreover, the respondent submits that the provisions of s 94(1) of the Act apply as the Secretary was ‘mistaken’ in using the information on the claim form submitted by the applicant to calculate the credit, because the information provided by the applicant was inaccurate. If the respondent is correct, this would result in the applicant having to pay a UCL under s 95 of the Act.
The Hearing
6. There was written and oral evidence presented to the Tribunal. The applicant was represented by Graeme Uren, QC, Michael Fleming and Patrick Noonan, all of counsel. The respondent was represented by Peter Hanks, QC, and Tom Clarke, both of counsel. Witness statements made by the following were accepted into evidence on behalf of the applicant:
·Mr Guenter Kaes, the then Executive Vice President of the applicant who, until his retirement in December 2003, was responsible for all of the technical aspects relating to the development and manufacturing of automotive components of the applicant;
·Mr Anthony McDonald, the Financial Controlling Manager for Automotive Original Equipment Division Financial of the applicant between June 2001 to April 2003 and then the Controller for Body Electronics Business units in RB Germany between June 2003 and December 2008;
·Ms Julie McCallum, General Manager Controlling from 1 December 2003 and prior to that was the Trade Sales Controller of the applicant;
·Mr Stephen Evans, the project manager for the Iveco-MUX project between 1997 and January 2000. Mr Evans had both participated in and managed the development of ECU projects within the applicant;
·Mr Martin Ziegler, the Vice President of finance and control in the applicant between March 2003 and 31January 2007; and
·Stephen Haywood, commenced as a Plant Controller with the applicant in 2001 before becoming the Manager, Research and Development, Controlling on 15 October 2004.
For the respondent, Ms D Robinson, the Customer Service Manager/Authorised Officer in the AusIndustry Automotive team provided two witness statements and also gave oral evidence. Ms Robinson undertook an audit of the applicant’s credit claims. The Tribunal had the documents filed for purposes of s 37 of the Administrative Appeals Tribunal Act 1975, witness statements and other exhibits tendered during the course of the hearing. The Tribunal also had before it the AusIndustry’s Guide to Completing Quarterly Return Forms, Customer Guidelines Section 5, published in July, 2001 (Guidelines).
The Facts
7. There is little controversy about the relevant facts and the Tribunal is satisfied that they are as follows. After the introduction of the Scheme in 2001, the applicant became a registered participant as an Automotive Components Producer (ACP)[5]. Sometime in 1996, a decision was made that the applicant would develop ECUs for installation in motor vehicles. Mr Evans described the ECUs as ”…custom designed computer systems that control certain functional aspects of the vehicle operation (for example, vehicle lighting, wipers, keyless entry, immobilisation, diagnostics, power distribution, sensor management) incorporated into a modern vehicle”[6]. He stated that the ECUs consisted of an integrated system of three elements. They are as follows:
(a)the mechanical components;
(b)the hardware, including Printed Circuit Board and electronic components; and
(c)the software loaded in the microcontroller, consisting of the application software and operating software.[7]
[5] S 17 of the Act.
[6] Exhibit A1, para 4.
[7] Ibid, para 5.
The ECUs were designed so as to be compatible with the purchasers’ vehicle design. The purchasers were the manufacturers of different brands of vehicles. The bulk of the orders were from car manufactures from countries within the European Common Market (for example, Porsche, Volkswagen, Audi and Daimler Chrysler). ECUs are designed, developed and sold to the automotive industry as integrated units.
8. The R and D process would be commenced by the manufacturers submitting detailed specifications for the ECUs to the applicant. According to Mr Evans, there are 32 steps between the time the specifications are provided to the commencement of production, collectively referred to as the New Product Introduction Development and Release Process[8]. It is not necessary for the Tribunal to list those steps here. A project manager, usually with a strong technical background and located in Victoria, would be appointed. The project manager’s role was to administer all of the developmental aspects of a project. The project manager reported to a Project Steering Board, consisting of senior managers also located in Victoria. The Tribunal accepts that, regardless of the location of any particular R and D, all of the management and control of the projects, including the Iveco-MUX project, was undertaken in Australia[9].
[8] Ibid, paras 11 and 12.
[9] Ibid, para 44.
9. Part of the budgetary process, associated with the projects, was to determine which component parts would not be the subject of R and D undertaken in Australia. Mr Evans stated that, in general, the type of activity which required customer interaction, and which could not be practically or economically carried out in Australia, was undertaken overseas. He listed the following as primarily falling into that category:
(a) application engineering, which involves interacting with the customer in relation to the technical requirements for the vehicle and ECU, including the original requirements and further changes to those requirements;
(b) obtaining specialist knowledge and information, including from the vehicle manufacturer itself, other component suppliers, other divisions in the Bosch Group and materials suppliers, that is necessary for RBAU’s ECU Development program;
(c) development of software that relates to the ECU and interacts with vehicle systems other than the ECU (for example, the particular application software module in an immobiliser that communicates with the engine management system), particularly functional or application software;
(d) development of technologies for which there is no expertise available in Australia;
(e) vehicle integration (or in-vehicle testing) to ensure that the ECU operates effectively in the vehicle;
(f) customer liaison, meetings, transfer of documentation and knowledge, negotiation, first tier interaction between customer and Bosch project team; and
(g) team coordination and line level support function[10].
[10] Exhibit A2, para 7.
10. Once it was determined which components could not be developed in Australia, it was then ascertained whether RBG had staff capable of doing the required R and D in Germany or by staff located in other European cities. The responsibility for resourcing and training employees and the technical quality of their work, when it was carried out by RBG employees engaged in Europe, remained with the line managers in the country of their location[11]. If RBG staff could carry out the R and D required, then an hourly rate was set, depending on the level paid to the particular staff member, and an estimate of the time needed made so that a figure could be budgeted. A monthly payment was made from RBAU to RBG, which was adjusted quarterly to reflect the actual expenditure. An annual review of the budget was also undertaken. If the R and D could not be carried out by the RBG staff, then an overseas contractor would be engaged by RBG and the costs included in the budget.
[11] Transcript, p 52.
11. The vast bulk of the claimed overseas R and D was carried out by RBG staff, including for the Iveco-MUX project. Mr Evans stated that the R and D activities formed part of an integrated process, rather than a set of discrete tasks[12]. In respect of the Iveco-MUX project, six RBG staff, each with a two- or three- year time commitment, and one overseas contractor unrelated to RBG, with a six months time commitment, were identified for the first stage of the project[13]. In his oral evidence, Mr Evans dated the first stage of the project as finishing shortly after January 2000[14], but subsequently he stated that it finished at about the time that production had commenced in 2002[15]. The Tribunal is satisfied that the latter date is more likely to be correct, otherwise the manufacturing would have commenced earlier. Mr Evans referred several times to his role as one of ‘management’ before listing, in respect of the Iveco-MUX project, 17 of the key RBG staff (including some from RB Hungary) and a contracting company, which undertook the overseas R and D for the project[16]. There were, he told the Tribunal, about 10 engineers working in Australia on that project.
[12] Ibid at p 3.
[13] Exhibit A1, para 38.
[14] Transcript, p 35.
[15] Ibid, pp 36 and 45.
[16] Ibid at p 4.
12. Mr Evans maintained that the offshore team involved with the Iveco-MUX project was subsequently expanded to 13 individuals and one business after the customer requested a redevelopment of the product[17]. According to him, while the updated hardware design was largely carried out in Victoria, a hardware engineer in Hungary was engaged to support the technical interface to vehicle loads[18]. In addition, while the software team coordination was located in Victoria, the software team was expanded in Hungary to develop the application software at a base closer to the customer and to carry out software verification testing on the customer’s site[19]. It was not altogether clear from his oral evidence that his first estimate of the date for the commencement of the redevelopment project, 2003-2004, was in fact accurate or whether October 2004 was more accurate.[20]
[17] Exhibit A1, para 41.
[18] Ibid, para 40.
[19] Id.
[20] Transcript, p 39.
13. The RBG staff were directed in their R and D by RBAU staff, but they at all times remained the staff of RBG and would be responsible to the line manager of their particular department for the technical quality of their work[21]. The accounting records clearly distinguish between expenditure incurred on overseas R and D (including distinguishing between that carried out by RBG and that carried out by European contractors) and that undertaken within Australia[22].
[21] Exhibit A3, further witness statement of Stephen Evans, dated 29 January 2010, Tab 2, para 9(b).
[22] Exhibit A1, attachment AM-5.
14. It is understandable that in an internationally operating company, of which the applicant is part, that there may not be the need for a formalised contract for each process of R and D carried out by different entities within the company structure. It was Mr McDonald’s evidence, confirmed by Mr Ziegler, that the existence of a broadly worded contract between the applicant and RBG, relating to the sale of the end product based on the R and D work entered into in 1996, provided the framework governing the relationship between the two entities[23]. That contract was replaced by an updated version entitled, ”License and Technical Assistance Agreement” dated 6 May 2005[24]. Although not apparent from its terms, it was common ground that the latter contract did not become operative until after the expiration of the applicable period, and that its terms dealt with subject matter unrelated to that necessary to be considered by the Tribunal in this application.
[23] Ibid, attachment AM-1.
[24] Ibid, attachment AM-2.
15. According to Mr McDonald’s evidence, there were two possible business models in use between RBAU and RBG in the period 2001-2005. An original 1996 agreement is stated to address the distribution in Europe of RBAU manufactured goods and the provision of application and management services. The transfer price paid to RBAU was to be the price paid to RBG less any duty payable (imposed by the German Government). A commission, to cover imputed costs (along with a margin) was also payable from RBAU to RBG[25]. It was his evidence that profits were reported in the RBAU results with RBG reporting a break-even result[26]. There was no apparent separate agreement dealing with funding for the R and D activity carried out by RBG on behalf of RBAU. It was Mr McDonald’s evidence that RBAU reimbursed RBG for actual expenditure incurred (including administrative costs, but not including any profit margin, and in the case of sales made from Germany, less tax), and that RBAU billed the full (including profit margin) amount to the customer[27]. It was also his evidence that business changes introduced in 2003 would have had no impact on RBAU’s claims.[28]
[25] Exhibit A7, attachment AM 1.
[26] Exhibit A7, para 15.
[27] Ibid, paras 15 and 16.
[28] Ibid, para 17.
16. The Tribunal accepts that there was a clearly identifiable process between the applicant and RBG, which governed the management and budgetary relationship. The Tribunal accepts that the process was such that it amounted to a contract between the applicant and RBG: there was an offer to RBG to undertake R and D on behalf of the applicant; there was consideration, that is, an agreed price which the applicant would pay for the work carried out; and there was acceptance by RBG to undertake the work at the agreed price. The evidence of Mr A McDonald leaves the Tribunal satisfied that the applicant reimbursed RBG for the work carried out by the latter’s employees and contractors. The reimbursement costs were calculated pursuant to an agreement between the applicant and RBG dated 18 December 1996, which operated until it was replaced by a new agreement from 5 June 2005[29].
[29] Exhibit A7, paras 11 and 12.
17. The Tribunal also accepts that the applicant’s project manager, based in Australia, was responsible for the overall management of the R and D, regardless of the geographical location of where the R and D was performed. RBG was responsible for the cost and management of those European contractors, which it engaged to undertake R and D on behalf of RBAU. Overall, the amount expended on the overseas R and D was claimed to be $74,681,070[30]. The Tribunal accepts the evidence of the methodology adopted by the applicant in the performance of its R and D activities, and in respect of the Iveco-MUX project that that methodology was followed. The contractual arrangements between RBG and RBAU are commercial in nature.
[30] Exhibit R2, para 16.
18. Ms Robinson undertook an audit of the applicant’s activities between the 1 December 2004 and the 5 December 2004 and between the 8 March 2005 and the 10 March 2005. It was her evidence that the audit was carried out by examining the applicant’s expenditure in the first two quarters of the calendar year 2004. The results were then applied to all of the quarters in the relevant period. Ms Robinson told the Tribunal that her team had interpreted the Act and Regulations as meaning that the R and D carried out overseas was not allowable expenditure under the Scheme. According to Ms Robinson, there were no guidelines to which she could refer that clarified the extent of the operation of the Act. A number of questions were posed to her during the hearing about her approach to undertaking the audit and the consequent reports. Since the Tribunal must reach its own decision on the material before it, there is no need to comment on this aspect of the evidence.
(a) The Scheme
19. The Scheme is based on self-assessment monitored by the respondent undertaking retrospective audits. Registered ACPs are required to submit quarterly returns[31], which set out, among other things, particulars of the ”expenditure on eligible investments” undertaken in that quarter[32]. It is uncontroversial that the eligible investment in this case relates to ”type E investment”’ as defined by s 6 of the Act, that is, the ”approved R and D” is directed to the production of automobile components. Approved R and D is defined in s 6A (2) of the Act as ”allowable R and D” of the kind declared in the Regulations. Section 6A (4) of the Act authorises the Regulations to provide for “the kinds of research and development that are allowable research and development under this Act”. The Regulations in force at the outset of the period in which the applicant submitted its first return were amended on 3 May 2001. The respondent concedes that, under the Regulations in force until 3 May 2001, the applicant’s claim qualifies, subject to the application of the 20% quantative limit[33]. The Tribunal accepts that as being appropriate and so restricts its consideration to the period post-3 May 2001.
[31] S 35 of the Act.
[32] S 37 of the Act.
[33] Former Reg 5(7) and discussed below.
The Regulations
20. Regulation 3, relevantly for both the pre- and post- amendment periods, defines the following terms:
Australian-based research and development means research and development undertaken in Australia; and
offshore research and development means research and development that is not Australian-based research and development.[34]
[34] Original emphasis.
21. The Regulations in force until 4 May 2001 governed the claim until amended with effect from 4 May 2001 (by ACIS Amendment Regulations 2001 (No 1)). The amended regulations followed the legislative amendment to the ACIS scheme (ACIS Administration Amendment Act 2000). As it may assist in the determination of the scope of the amending regulations, consideration will now be given to the then relevant regulation. Regulation 5(7) is as follows:
Further, for a participant, research and development of a kind mentioned in subregulation (2) does not include offshore research and development unless:
(a) the offshore research and development is also of a kind that:
(i)is necessary:
(A) to tailor the participant’s Australian-based research and development to a particular market; or
(B)to lever the participant’s Australian-based research and development off an offshore research and development program; and
(ii)is limited to a proportion, not exceeding 20%, of the value of the investment in Australian-based research and development; and
(b) if sub-subparagraph (a) (i) (B) applies:
(i)the offshore research and development contributes directly to the offshore research and development program; and
(ii)the participant contributes to the direction and management of the offshore research and development program, and has a proportionate share in any intellectual property resulting from the program.
22. For the purposes of this review, it is the intended scope of reg 13G (with effect from 4 May 2001) which must be addressed for the balance of the period ending on 30 June 2005. There are three essential issues in reg 13G, namely, what constitutes R and D[35]; who conducts the R and D; and where the R and D occurs[36]. Regulation 13G is relevantly for ACPs in the following terms:
[35] Reg 13G (2)(a) and (b), 13G (3) and 13G (4)(d).
[36] The criteria for who does the R and D and where the R and D occurs are covered by reg 13G (5) and 13G (6).
(1)For paragraph 6A (4)(a) of the Act, the kind of research and development mentioned in subregulation (2) is allowable research and development under the Act.
(2)For subregulation (1), the kind of research and development is research and development activities that are:
(a) directly related to the design, development, engineering or production of motor vehicles, engines, engine components, automotive components, automotive machine tools or automotive tooling; and
(b) undertaken for the purpose of:
(i)acquiring new knowledge; or
(ii)creating new or improved materials, products, devices, production processes or services.
…
(5)Also, for a participant, research and development of the kind mentioned in subregulation (2):
(a) includes research and development conducted by another person (other than a Co-operative Research Centre) on behalf of the participant under a contract with the participant only if:
(i)the research and development is Australian-based research and development; and
(ii)the participant contributes to the direction and management of the research and development; and
(iii)the participant has a proportionate share in any intellectual property resulting from the research and development; and
(iv)the participant is not required to conduct the research and development on behalf of:
(A)another person under a contract with the other person; or
(B); and
(b) …
(c) includes offshore research and development conducted by the participant only if:
(i)the requirements mentioned in subregulation (6) are met; and
(ii)the participant is not required to conduct the research and development on behalf of:
(A)another person under a contract with the other person; or
(B); and
(d) includes Australian-based research and development conducted by the participant only if the participant is not required to conduct the research and development on behalf of:
(i)another person under a contract with the other person; or
(ii).
(6)For subparagraph (5)(c)(i), the requirements are:
(a) the offshore research and development is necessary to tailor the participant’s Australian-based research and development to a particular market; or
(b) all of the following:
(i)the offshore research and development is necessary to lever the participant’s Australian-based research and development off an offshore research and development program;
(ii)the offshore research and development contributes directly to the offshore research and development program;
(iii)the participant contributes to the direction and management of the offshore research and development program, and has a proportionate share in any intellectual property resulting from the program.
23. The respondent points out in its submission that, under the repealed reg 5(7), there was no requirement that the ACP undertake the offshore R and D: simply that it be undertaken to tailor or to lever its Australian-based R and D. Whereas, under the current reg 13G (5)(c), the R and D must be “conducted by the applicant”[37]. It is the meaning to be ascribed to these introduced words, which the parties have treated as the threshold question and has given rise to one of the major differences between them in this review.
[37] Respondent’s Closing Submissions, dated 16 March 2010, para 22.
24. The respondent maintains that the amendment to the Act and the introduction of reg 13G is intended to limit the type of allowable offshore R and D. Correctly understood, it is submitted that the amending provisions are consistent with the purpose of the Act: namely, to encourage investment and activity in the Australian automotive industry. Inherent in the respondent’s submission is the restriction of R and D conducted “by”, rather than ”for”, the Australian automotive industry.
25. The applicant, by contrast, maintains that the phrase ”conducted by” should be given a broad interpretation, that is, that the ACP “has directed, managed or controlled the relevant activities rather than having personally performed the activities itself”[38]. The applicant maintains that:
(a)the Act has a beneficial purpose and it, and the regulations, should be construed broadly so as to ensure that the purpose is achieved;
(b)in calculating the amount payable for offshore R and D, reg 13H (6)(c) recognises an amount paid to a person contracted by the participant for an activity. It is submitted that any such amount must arise in the context of the participant ”controlling, directing or managing” such a contractor. If this is so, then ”conducted” must have a broader meaning than that suggested by the respondent;
(c)Regulation 3 defines Australian-based R and D by reference to R and D ”undertaken” in Australia, whereas reg 13G (5)(a) and (5)(c) refer to R and D ”conducted by” another person or the participant, respectively. It is submitted that the difference in wording indicates that Parliament intended to distinguish between physical performance (that is, undertaking) from the broader meaning attaching to ”conducted”. Similarly, the use of the term ”carried out ”in reg 13H (6)(c) denotes a distinction between activities constituting performance and those involved in conducting R and D;
(d)the purpose of the Scheme is to promote competitive investment and innovation, and it is inconsistent with that purpose to provide a concession based on a particular business structure (that is, employing staff directly, rather than engaging under contract). The object of the Act is to encourage investment, it is not about encouraging the employment of Australians; and
(e)“to require the direct employment of all researchers and engineers engaged in eligible R & D and only allow participants to take advantage of… [their] work…is needlessly at odds with common business practice and…[be] at odds with contemporary norms of efficient management”[39].
[38] The Applicant’s Statement of Facts and Contentions, para 56 (original emphasis).
[39] Applicant’s Closing Submissions, dated 15 March 2010, para 12; and Applicant’s Statement of Facts and Contentions, para 67.
26. There is no dispute that the applicant is entitled to claim R and D for qualifying activities carried out in Australia. That part of the applicant’s claim was not challenged in the audit, and it is not part of the review before the Tribunal. The issue is whether the activities undertaken overseas by RBG (and it’s contractors) can, in the context of the Act and Regulations, be said to be ”conducted by” the applicant. It was submitted by the Applicant that, since the R and D carried out overseas was being directed from Australia, it was R and D conducted by the applicant within the terms of reg 13G (5)(c). The applicant submits that a liberal interpretation of the Act should be adopted. The reasons advanced for this are:
(i)it would be consistent with the purpose of the Act to “…encourage competitive investment and innovation in the Australian automotive industry in order to achieve sustainable growth, both in the Australian market and internationally, in the context of trade liberalisation”. That is, the Act expressly extends to embrace investment made from Australia at an international level and to a contextual reference to trade liberalisation indicative of a broadening, rather than a narrowing, of the contextual understanding;
(ii)coupled with the previous argument, it is submitted that the legislation is beneficial in nature; and so it should be accorded a broad, rather than a narrow, interpretation;
(iii)the definition of ”Australian-based” R and D in reg 3 does not apply in interpreting reg 13G (5)(c). This is submitted to arise because, instead of using wording consistent with that used in reg 3 to define “Australian -based R and D” as being R and D “undertaken” in Australia, different wording is used, namely ”conducted by”. It is submitted that the change of wording is indicative of Parliament’s intention to convey a much broader connotation than denoted by ”undertaken”. It is submitted that the words ”conducted by” extend to include organising and directing, whereas this connotation does not arise in the use of the more limited word ”undertaken”;
(iv)the facts support the applicant’s contention as the evidence demonstrates that the R and D carried out overseas was not only directed by RBAU, but it formed part of an integrated whole with the R and D carried out in Australia; and
(v)the evidence does not support that RBAU contracted with RBG for the latter to undertake R and D on its behalf, but that RBG released selected employees to carry out R and D under direction from RBAU staff; moreover, the employees of RBG doing the R and D for RBAU were agents of RBAU under an implied contract[40].
[40] The applicant relied on: Homecare Direct Shopping Pty Ltd and CGU Workers Compensation (Vic) Ltd v Gray [2008] VSCA 111 (Homecare).
27. The respondent agrees that the legislation is beneficial in nature, but it submits that:
(a)a purposive interpretation of the Act and Regulations would replace the weak presumption, advanced by the applicant in paragraphs (i) and (ii) above, is to be preferred. Such an interpretation would be consistent with the terms of the Act and Regulations, which draw a distinction between R and D carried out in Australia and that carried out overseas;
(b)while acknowledging that different wording is used in the definition of “Australian-based” R and D in reg 3 and the reference to R and D in reg 13G (5)(c), there is no intention evident that Parliament meant to support the contention advanced by the applicant for a different interpretation to be applied;
(c)while appreciating that there are a number of meanings attributable to the word ”conducted”, the most appropriate in this context is “to do”; and such an interpretation would result in an interpretation consistent with the wording used to define Australian-based R and D in reg 3; and
(d)the evidence supports a finding that RBAU contracted with RBG for RBG staff to carry out R and D on behalf of RBAU, rather than RBAU directing those staff in carrying out the R and D[41].
[41] In the Respondent’s Closing Submissions, counsel argued that Homecare was irrelevant.
28. The Tribunal is in no doubt that ”conducted” is a word of broad ambit in ordinary usage. The meaning provided in the Oxford English Dictionary Online is “[t]he action or manner of conducting, directing, managing, or carrying on (any business, performance, process, course, etc.); direction, management”. Similarly, in the Macquarie Dictionary (Revised Third Edition), this word is defined as, “to direct in action or course; manage; carry on…to direct as leader”. The question, however, is whether this word is to be given its ordinary broad meaning or a texturally constrained meaning when used in relation to reg 13G (5)?
29. Where, as here, a word is capable of more than one meaning, statutory interpretation favours a purposive examination of the Act and regulations[42]. A starting point, therefore, is to examine the purpose of the legislation. Here, the purpose of the Act “is to provide transitional assistance to encourage competitive investment and innovation in the Australian automotive industry in order to achieve sustainable growth, both in the Australian market and internationally, in the context of trade liberalisation”[43].
[42] Newcastle City Council v GIO General Ltd(1997) 191 CLR 85 at 109, per McHugh J.
[43] ACIS Administration Act 1999, s 3.
30. The Tribunal is unable to accept that the parameters of the Act are expanded by the reference in s 3 of the Act to the international market or by the reference to ”trade liberalisation”. R and D undertaken in the Australian market will, as the facts of this case demonstrate, be marketed internationally - as is the case with the components utilised in the Iveco-MUX trucks. ”Trade liberalisation” is not a term defined in the Act and is not referred to in the regulations. It is a term associated with the removal of tariff barriers and subsidies attaching to product sales, rather than being associated with R and D functions. The Scheme is aimed at promoting competitiveness and investment in the Australian automotive industry, and it is a temporary measure introduced to achieve that end. Once the stated purpose of achieving sustainable growth, through R and D carried out by Australian corporations is attained, then the Scheme will be discontinued. Against that background, the references to the international market and to trade liberalisation should not be taken to expand the circumstances when R and D undertaken or conducted by Australian based corporations qualify for Australian duty credit concessions.
31. The amendments to the ACIS legislation in 2001 are aimed at increasing the capacity of the regulations to define what is to be constituted by R and D for the purposes of granting the benefits envisaged by the Act[44]. A similar motive was repeated in relation to the regulations[45]. Neither the memorandum for the Act nor the statement for the regulations, however, identify any intended specific change –both refer only to the general aspiration of what is sought to be achieved, without providing any specificity. They, therefore, do not provide assistance in interpreting what was intended as the scope of the legislative provisions.
[44] ACIS Administration Amendment Bill 2000, Revised Explanatory Memorandum, p 3.
[45] ACIS Administration Amendment Regulations 2001 (No. 1) 2001 No. 82, Explanatory Statement.
32. There is, in the Tribunal’s view, a clear distinction between just directing or managing R and D and the wider concept of the carrying out or conducting of R and D. Directing the R and D, in the sense of determining what needs to be researched and developed and setting the terms and conditions pursuant to which that R and D is to be carried out, including the cost, is one part of the conduct of R and D. The conduct of R and D involves both direction and activity. It is a collaborative process, which can only be performed by a person directly engaged in doing the R and D. “Allowable research and development” in reg 13G (5) arises in three instances: when the Australian-based R and D is conducted by the participant, when the Australian‑based R and D is conducted by another person on behalf of the participant and when the offshore R and D is conducted by the participant. While the conduct of (Australian-based) R and D can be performed by another person, reg 13G (5)(a) requires the ACP to contribute to the “direction and management” of the R and D[46]. This indicates that the other person both directs and performs the R and D, while the ACP contributes to that direction. This interpretation of reg 13G (5) is consistent with the intention of the Act: that is, to give credits for R and D carried out by Australian corporations regardless of whether the R and D is carried on within or outside Australia.
[46] Regulation 13G (5) (a) (ii).
33. The Tribunal accepts that a presumption may arise when different words are used in different parts of an Act of Parliament or in regulations as descriptors of what otherwise appears to be the same thing or the same process. This presumption will only arise when it is evident that there is an intention to convey a different meaning. The Tribunal is satisfied that no such intention is evident in the use of the words ”undertaken in” as used in the definition of “Australian-based research and development” in reg 3 and ”conducted by” as used in reg 13G (5)(a). R and D, even when the overall direction or management may remain with an Australian company, is not “conducted by” that company when it is carried out by an overseas entity, regardless of any corporate relationship which may exist between them. The R and D in the Iveco-MUX project was carried out by the personnel of RBG, or those European contractors it engaged, and, as such, it could not be said to have been ”conducted by” the applicant.
34. The intention of the Act is not to reward R and D conducted by non-Australian corporations, whether acting in their own right or under contract with Australian corporations. The term ”Australian-based research and development” is defined in reg 3 to mean R and D ”undertaken” in Australia. In this context, the appropriate meaning to ascribe to ”undertaken” is “engaged in”[47]. The definition of Australian‑based R and D is in contradistinction to ”offshore research and development”, which is defined as ”not Australian–based research and development”. It is not to the point that, on behalf of the applicant, other subparagraphs in reg 13G (5)(a) may be met by the applicant, because success depends on all of the subparagraphs being satisfied.
[47] Shorter Oxford English Dictionary.
35. Moreover, the Tribunal is of the opinion that the interpretation of reg 13G (5)(a) does not require reference to the definition of “Australian‑based research and development” in reg 3 for it finds this subregulation to be self‑contained. The regulations provide that when an ACP conducts “Australian‑based research and development”, this is allowable provided the ACP is not required to do this pursuant to a contract with “another person”[48]. The criterion of where the R and D occurs in this regulation is self-evident, and there is no need to refer to reg 3. An ACP can also claim for R and D that is conducted by another person on its behalf pursuant to a contract, provided the conduct of the R and D and the content of the contract meet certain requirements[49]. The conduct of the R and D is to be “Australian-based”[50], and this term should be interpreted consistently with when an ACP conducts its own R and D. For the reasons stated, the Tribunal is not satisfied that the R and D carried out on behalf of the applicant by RBG, or by RBG’s contractors, can be classified as Australian-based R and D. The Tribunal is not satisfied that reg 13G (5)(a) is able to be met by the applicant in respect of the Iveco‑MUX project.
[48] Regulation 13G (5)(d).
[49] Regulation 13G (5) (a) (i) to (iv).
[50] Regulation 13G (5) (a) (i).
36. The criteria to be met in reg 13G (5)(c) as to when an ACP claims for R and D conducted overseas are similar to the extent of that set for an ACP conducting R and D in Australia[51]. There are additional criteria to be satisfied: either the R and D is necessary to tailor the ACP’s Australian-based R and D to a particular market, or the ACP is involved in an off-shore R and D program that satisfies certain criteria (such as, that the ACP contributes to its direction and management[52]). Argument before the Tribunal again focused on the interpretation of “conducted by”; and the parties provided written submissions directed specifically to the application of reg 13G (6) after the close of the hearing. The applicant submitted that the phrase “conducted by” was met if the R and D “is under the participant’s direction or control”[53]. Thus, the respondent was wrong to conclude that RBAU’s use of RBG staff for conducting overseas R and D amounted to R and D by RBG[54]. Indeed, the applicant asserted that, “[n]one of the evidentiary material shows an involvement of Robert Bosch GmbH as a corporation having any role in the relevant undertakings of the applicant except that of allocating its staff and contractors, and performing an ancillary service of ascertaining third party product suitability”[55]. By contrast, the respondent submitted that, “the evidence adduced by RBAU… in relation to the Iveco‑MUX project does not establish that RBAU exercised direct management, involving technical supervision and resource-allocation responsibility, over the R & D activities that the RBG engineers carried out in connection with the project”[56]. The Tribunal is of the opinion that the phrase “conducted by” should be interpreted throughout reg 13G (5) in the same way, regardless of who conducts the R and D or where the R and D occurs. Thus, this phrase is to be interpreted as involving the twin elements of direction and activity. Based on this interpretation and its findings of fact, the Tribunal finds that RBAU did not conduct the offshore R and D as required by reg 13G (5)(c).
[51] Regulation 13G (5)(c) and 13G (6).
[52] Regulation 13G (6)(a) or (b).
[53] Applicant’s Statement of Facts and Contentions, para 57.
[54] Ibid, para 51.
[55] Applicant’s Closing Submissions, para 15 (footnote omitted).
[56] Respondent’s Closing Submissions, para 78.
37. The parties presented opposing views as to the application of reg 13G (6) in this review. The applicant argued that it met the requirements of either reg 13G (6)(a) or reg 13G (6)(b). The applicant stated that, “RBAU is clearly in a market of a particular description as a designer, producer, manufacturer and seller of bespoke ECUs”; that the overseas R and D was necessary in terms of being reasonable for the local R and D as shown by the facts; and, in terms of tailoring to the Australian R and D, the “Australian based research and development was adapted or fitted to the requirements of a particular transaction because the overseas research and development was applied to it, so that the entire and finished product matched what the particular transaction required”[57]. In relation to reg 13G (6)(b), the applicant submitted that there was an offshore R and D program as “it could not be disputed that the relevant offshore research and development was done to a plan for the development and production of ECUs”[58], which also met the three specified requirements[59].
[57] Applicant’s Submissions on Reg. 13G(6), paras 10, 16 and 25.
[58] Ibid, para 28.
[59] Ibid, paras 33-36.
38. The respondent countered with the principal argument that reg 13G (6) need not be considered as none of the offshore R and D activities were conducted by RBAU[60]. If, however, the Tribunal found otherwise, the respondent also submitted that the interpretation of the word “necessary” in reg 13G (6)(a) should be “whether it is practically or commercially necessary” for RBAU to conduct offshore R and D so as to tailor its Australian-based R and D[61]. The respondent argued that the applicant also failed to establish that it had an offshore R and D program that met the requirements[62].
[60] Respondent’s Supplementary Submissions Regarding Reg 13G (6), para 5.
[61] Ibid, para 19 (original emphasis).
[62] Ibid, paras 25, 26 and 28. In addition, the respondent argued that there was insufficient evidence to establish that the program of component release and certification activities was conducted by RBAU or that the program satisfied reg 13G (6): Ibid, paras 31 to 34.
39. The Tribunal does not interpret the term “conducted by” as representing a threshold question, but rather it is one criterion to satisfy along with those requirements specifically mentioned in the sub-regulation. It finds that the evidence presented by the applicant in relation to the Iveco-Mux project does not bring its offshore R and D within the ambit of reg 13G (6).
(B) Section 94
40. The applicant submits that, even if there is no allowable R and D, the credits were not received due to a situation set out in s 94(1) of the Act[63]. This section relevantly provides that:
[63] Applicant’s Closing Submissions, paras 23 and 24.
(1)A person who has or had duty credit is not entitled to the credit if the person received the credit for any of the following reasons:
(a) because of the making of an error in calculating the duty credit (including during the modulation process) or a mistake of fact;
(b) because information given to the Minister, the Secretary or a delegate of the Secretary was inaccurate or incomplete;
(c) because of a clerical error or mistake in the ledger;
(d) because the credit:
(i)was entered in respect of a transaction to which the person was a party that was not at arm’s length within the meaning of section 9; and
(ii)is referrable to a production value, sales value or investment to which the transaction relates that has not been determined as if the parties were at arm’s length
41. Registered participants are required to submit information on a quarterly basis by completing and forwarding ”approved forms”[64]. Returns are then processed by AusIndustry, the number and value of the credits determined (including modulation carried out to ensure a set cap is not exceeded) and entered on the participant’s register. Retrospective audits are undertaken by AusIndustry. If, as the Tribunal has found in the instant case, the R and D claimed should be disallowed, then there arises an issue as to whether the participant is entitled to retain the credits. The Full Court of the Federal Court held in Secretary, Department of Industry Tourism & Resources v Spicer Axle Structural Components Australia Pty Ltd[65], that Part 9 of the Act constitutes a code dealing with the circumstances in which the duty credits can be received[66]. Duty credits can be retained unless one of the situations identified in s 94 of the Act is satisfied.
[64] Section 35 of the Act.
[65] (2007) 98 ALD 264.
[66] Ibid at p 269.
42. Section 37 of the Act sets out what must be contained in a quarterly return by the ACP, including the particulars of expenditure on eligible investments that have been undertaken. Section 37 (1)(f) of the Act requires that a participant provide “any other particulars required by the form”. Regulation 16 specifies how the completed form is to be lodged. A copy of the relevant ”approved form” is attached to Ms Robinson’s supplementary statement[67]. The introduction to the form refers the participant to the Guidelines. The person who signs the form is required to declare that he/she has read the Act, the Regulations and the Guidelines and to certify the accuracy of the contents of the completed form.
[67] Exhibit R3, Tab DR-13.
43. The question put on behalf of the respondent is: was the information relayed by the applicant in the approved form inaccurate? The respondent submitted that s 94 (1)(b) applied, because “RBAU’s statement that the value of allowable offshore R & D was the amount entered in answer to question 17 was, objectively, not correct and therefore inaccurate - whether or not RBAU knew of its erroneous character”[68]. Relevantly, the applicant answered the Type E Investment Claims questions in its Quarterly Return as follows for the quarter ending 31 December 2003[69]:
15What is the total claimable value of your Type E investment in approved research and development, excluding contracted and overseas R & D, in the specified quarter?
$9,682,874
16What is the total claimable value of your Type E investment in Australian based contracted Research and Development, in the specified quarter?
$0
17What is the total claimable value of your Type E investment in overseas Research and Development, in the specified quarter?
$5,355,860
[68] Respondent’s Closing Submissions, para 106.1.
[69] Id.
No issue is taken with the answers to questions 15 and 16. It is submitted that the answer to question 17 is inaccurate, because the specified amount does not represent the ”total claimable value” in overseas R and D as the sum is not claimable.
44. The term ”total claimable value” is not defined by the Act or by the Regulations. It is a term appearing in the Guidelines under the heading ”Determining claimable value”. That part of the Guidelines deals with three scenarios - R and D conducted wholly in Australia; Australian-based contracted R and D and overseas R and D. The Tribunal accepts that ”Australian-based” and “overseas” R and D are references to the definitions contained in reg 3.
45. The word ”inaccurate” does not necessarily convey a pejorative connotation. ”Inaccurate” is the opposite of accurate. The latter has the meaning of “[e]xact, precise, correct, as the result of care”[70]. Nor does it involve the person, who conveyed the information, as engaging in an intentional process of deception. Inaccuracy can simply be found as matter of fact and, in the context of s 94 of the Act, the Tribunal is satisfied that this is how it ought to be approached in this review. Given the finding of the Tribunal in respect of how the claim should be characterised, the information conveyed in answer to question 17 of the Quarterly Return is found to be inaccurate. It follows that s 94 (1)(b) of the Act is engaged, and the applicant is not entitled to retain the benefit of the duty credits.
[70] Oxford English Dictionary Online
46. The parties also presented differing views as to whether there was a mistake of fact. The respondent submitted that s 94 (1)(a) of the Act applied, as “RBAU received the duty credit in respect of its offshore R & D because of a mistake of fact on the part of the Secretary [of the respondent]”[71]. The applicant asserts that if there was any error, it can only be categorised as a mistake of law[72]. Section 94 (1)(a) of the Act refers to the “making of an error in calculating the duty credit (including during the modulation process) or a mistake of fact”, all of which indicates that it is the error of the Secretary based on the information supplied by the ACP. Thus, the Tribunal finds that s 94 (1)(a) of the Act is also satisfied and provides further reason for the applicant not to be able to retain the benefit of the duty credits.
[71] Respondent’s Closing Submissions, para 108.
[72] Applicant’s Closing Submissions, para 24.
Decision
47. The Tribunal:
(i)sets aside the decision under review for the period 1 January 2001 to 3 May 2001 and substitutes a decision that the applicant is entitled to be allocated duty credits under the Automotive Competitiveness and Investment Scheme for that period in respect of the application;
(ii)affirms that part of the decision that relates to the applicant's claim under the Scheme in so far as it relates to the Iveco-MUX project for the period 4 May 2001 to 30 June 2005; and,
(iii)adjourns the balance of the application for a directions hearing before the Tribunal at a date and time to be notified, though not before Tuesday, 1 February 2011.
I certify that the 47 preceding paragraphs are a true copy of the reasons for the decision herein of
Mr G L McDonald, Deputy PresidentMr C Ermert, Member
Signed: ..(sgd D De Andrade)....................
Personal AssistantDates of Hearing 9 and 10 March 2010, 17 March 2010
Date of Decision 8 December 2010Counsel for the Applicant Mr G Uren QC, Mr M Fleming SC and
Mr P Noonan
Solicitor for the Applicant Ms S Draganich, Minter Ellison
Counsel for the Respondent Mr P Hanks QC and Mr T Clarke
Solicitor for the Respondent Mr J Cranston, Australian Government Solicitor
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